MEGAN BOWMAN, King's College London - The Dickson Poon School of Law
Email: megan.bowman@unsw.edu.au
MR. DANIEL WISEMAN, Climate Programme, ClientEarth

Climate-related corporate disclosure has become a favoured regulatory tool, aimed at leveraging financial market logics to help mitigate risks associated with climate change. Following the influential industry-led Taskforce on Climate-related Financial Disclosures (TCFD), increased expectations about climate risk reporting are proliferating in legislation and regulatory guidance. Despite these developments, widespread concern remains about the limits of the disclosure paradigm and the quantity and quality of information being disclosed. Questions of accountability and enforcement are now receiving more attention, especially in relation to systemically important financial firms such as banks and insurers. This chapter explores the logic of climate-related disclosure, emerging forms of accountability, and likely future regulatory trends in this area. It does so by using a case study of complaints to the UK Financial Conduct Authority (FCA) against three listed insurance companies by ClientEarth (a civil society organisation). It discusses challenges associated with the contested legal concept of ‘materiality’, which underpins many financial market disclosure frameworks, and identifies the need for robust assurance, accountability and complementary regulatory design for the logic of climate-related disclosure to fulfil its aspirations.

ADI LIBSON, Bar-Ilan University - Faculty of Law, Van-Leer Institute
Email: adlibson@law.harvard.edu
GIDEON PARCHOMOVSKY, Hebrew University of Jerusalem - Faculty of Law
Email: gparchom@law.upenn.edu

Should corporate legal risk be treated similarly to corporate business risks? Currently, the law draws a clear-cut distinction between the two sources of risk, permitting the latter type of risk and banning the former. As a result, fiduciaries are shielded from personal liability in the case of business risk and are entirely exposed to civil and criminal liability that arises from legal risk-taking. As corporate law theorists have underscored, the differential treatment of business and legal risk is highly problematic from the perspective of firms and shareholders. To begin with, legal risk cannot be completely averted or eliminated. More importantly, decisions involving negligible levels of legal risk might yield significant profits for firms. Thus, the outright ban on legal risk-taking harms shareholders, who would have favored a more nuanced regime to legal risk.

DOROTHY S. LUND, University of Southern California Gould School of Law
Email: dorothy.shapiro@gmail.com

The conventional view of regulation is that it exists to constrain corporate activity that harms the public. But amid perceptions of government failure, many now call on corporations to tackle social problems themselves. And in this moment of dissatisfaction with government, powerful asset managers have stepped in to serve as regulators of last resort, adopting rules that bind corporate America on issues of great social importance, including climate change and workplace inequality. This Article describes this radical dynamic—where shareholders have become regulators—which has been made possible by the rise of institutional shareholding (and index investing in particular) and the contemporaneous growth of shareholder power. As a result, the large diversified shareholders that specialize in index funds (the so-called “Big Three”—Vanguard, State Street, and BlackRock) collectively hold nearly controlling stakes across the public equity market. In addition to intervening in traditional areas of corporate governance, they have adopted sweeping board diversity mandates, as well as “ESG” disclosure and carbon emission reduction requirements, and enforced them through their proxy voting policies. And the early consensus is that they have been influential in these areas, driving change where other private (and public) efforts failed.

This Article describes these regulatory interventions in detail, and in so doing, concludes that we are witnessing a novel privatization dynamic. It also offers a theory about the incentives that shape it. Like the market for regulation by government, institutional shareholder regulation is responsive to financial incentives. In particular, institutional investors will only supply regulation if it has a positive impact on their profits. Therefore, client demand will govern the choice of policies and the form of their rules. And given the breadth of the Big Three’s clientele and their interest in avoiding government backlash, their policies are likely to take a large number of interests into account. Nonetheless, serious concerns loom large, including the fact that for-profit institutional shareholders lack accountability and oversight for their policymaking, with no guarantee that it will further the public interest. To the extent that their policies are shaped by the corporate clients that provide the bulk of their AUM, they are unlikely to be as impactful as many believe. In addition, the provision of regulation by asset managers may take pressure off the government to respond to these issues with policies better calibrated toward advancing social welfare. At bottom, understanding the forces that shape (and potential problems that accompany) this new privatization dynamic is of critical importance not just for investors and corporations, but also for the public.

MICHELE BEARDSLEE DESTEFANO, University of Miami - School of Law
Email: mdestefano@law.miami.edu