Catalyzing Sustainable Investment

59 Pages Posted: 9 Aug 2021

See all articles by Paul Rose

Paul Rose

Ohio State University - Moritz College of Law; Bocconi University - BAFFI Center on International Markets, Money, and Regulation; Tufts University - The Fletcher School of Law and Diplomacy; Fundación Instituto de Empresa, S.L. - IE Business School

Date Written: July 12, 2021

Abstract

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

Suggested Citation

Rose, Paul, Catalyzing Sustainable Investment (July 12, 2021). Environmental Law, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3885054 or http://dx.doi.org/10.2139/ssrn.3885054

Paul Rose (Contact Author)

Ohio State University - Moritz College of Law ( email )

55 West 12th Avenue
Columbus, OH 43210
United States

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States

Fundación Instituto de Empresa, S.L. - IE Business School ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

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