Catalyzing Sustainable Investment
59 Pages Posted: 9 Aug 2021
Date Written: July 12, 2021
Calls for increased focus on ESG issues—and more particularly, on the kind of sustainable investing that will help achieve the U.N.’s Sustainable Development Goals (SDGs)—run up against durable legal rules and norms of profit maximization. Corporate law, and especially Delaware law, remains committed to a shareholder wealth-maximizing orientation, and corporate directors typically can only consider other parties’ interests to the extent that considering such interests can be justified as benefiting the shareholders. Trust law, which governs the behavior of many investment intermediaries, also generally requires a commitment to wealth maximization, as trustees generally may adopt ESG investing only if doing so will benefit the beneficiary by improving risk-adjusted returns. Thus, there is a tension between directors’ and trustees’ obligations under the law and the need to mobilize the trillions of dollars necessary to achieve the Sustainable Development Goals, at least to the extent that such investments sacrifice returns. Private capital will invest in sustainable projects, but only if the projects provide a market-rate risk-adjusted return.
To direct capital to critical, sustainable projects, some have called for changes in legal doctrine and governance norms that would allow for greater flexibility in investment decisionmaking, such that fiduciaries could invest in ESG projects even if they do not provide an at-market return. This article describes a different approach: the catalyzation of sustainable investment by governments, using unique advantages that enable sovereign entities to directly invest in sustainable projects and broker sustainable investments by taking on deal risk and reducing transaction costs for other investors. Rather than attempting to reform or re-orient market forces, governments can (and do) use existing market strategies that are successfully applied in private contexts. In other words, rather than expecting investors to sacrifice returns to achieve the SDGs or other public ESG benefits, governments are catalyzing sustainable investment by harnessing a profit-maximizing orientation.
Keywords: sustainable investment, ESG, sovereign wealth funds, sovereign development funds, climate finance
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