Monthly Archives: November 2020

The ESG-Innovation Disconnect: Evidence from Green Patenting

Lauren Cohen is the L.E. Simmons Professor in the Finance & Entrepreneurial Management Units at Harvard Business School; Umit G. Gurun is the Ashbel Smith Professor at the University of Texas at Dallas; and Quoc H. Nguyen is Assistant Professor of Finance at the DePaul University Driehaus College of Business. This post is based on their recent paperRelated research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here);  For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

No firm or sector of the global economy is untouched by innovation. In equilibrium, innovators will flock to (and innovation will occur where) the returns to innovative capital are the highest. In our paper, we document a strong empirical pattern in green patent production. Specifically, we find that oil, gas, and energy producing firms—firms with lower Environmental, Social, and Governance (ESG) scores, and who are often explicitly excluded from ESG funds’ investment universe—are key innovators in the United States’ green patent landscape. These energy producers produce more, and significantly higher quality, green innovation. Our findings raise important questions as to whether the current exclusions of many ESG-focused policies—along with the increasing incidence of explicit divestiture campaigns—are optimal, or whether reward-based incentives would lead to more efficient innovative outcomes.

As of 2019, sustainable investing represents more than 20 percent of the $46 trillion in the U.S. assets under management. Compared to 2015, sustainable and impact investing has increased by more than 40%. A large contributor to this growth has been the 2015 guidance issued by the Department of Labor which allowed fiduciaries to incorporate environmental, social, and governance (ESG) factors into their investment decision. Given this push, flows to ESG increased substantially. Norges Bank, as an illustration, decides on the exclusion of companies from the fund’s investment universe, or to place companies on an observation list. In 2020, out of 167 excluded companies, 76 % of them were either involved in production of coal-based energy, caused severe environmental damage, or emitted unacceptable amounts of green-house gasses.


The Rise of the General Counsel

Amit Batish is Manager of Content and Communications at Equilar, Inc. This post is based on an Equilar memorandum by Mr. Batish, Nathan Grantz, Christy Hershey, Erin Lehr and Samuel Zhu.

Today’s General Counsel (GC) is viewed as much more than a corporate lawyer. Traditionally seen as the top legal officer of a corporation, General Counsel have taken on greater responsibilities that now entail a mix of strategy and risk management. The current business climate and the COVID-19 crisis have further exacerbated this concept. More than ever, corporate boards and executive management teams rely on General Counsel for astute leadership on a host of issues, including crisis management, corporate transactions, regulatory compliance and much more. The General Counsel is no longer limited to the role of the legal watchdog who oversees litigation, but rather plays a pivotal role in corporate decision-making.

The 2020 Equilar publication General Counsel Pay Trends, which features commentary from executive search firm BarkerGilmore, analyzes General Counsel compensation over the last five years across the Equilar 500—the 500 largest U.S. companies by revenue—including how pay compares in regards to gender and tenure. The publication discusses how the role has advanced over the years and become much more critical in the boardroom. This post features highlights from the report and how companies elect to compensate their General Counsel.


The Basel Committee’s Initiatives on Climate-Related Financial Risks

Kevin J. Stiroh is Executive Vice President of the Federal Reserve Bank of New York. This post is based on his recent public statement.

Thank you for the invitation to participate in the 2020 IIF Annual Membership Meeting. I am pleased to share my perspective regarding the current regulatory and policy initiatives in the area of sustainable finance. My remarks are being made in my capacity as co-chair of the Task Force on Climate-related Financial Risks (TFCR), which is part of the work of the Basel Committee on Banking Supervision. I should note that my prepared remarks and subsequent comments made as part of the panel discussion may not necessarily reflect the views of the Basel Committee or its members, or those of the Federal Reserve System or the Federal Reserve Bank of New York.

The Basel Committee’s mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. It is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. As part of its work, the Committee exchanges information on developments in the banking sector and financial markets to help identify current or emerging risks for the global financial system.

The Committee noted that climate change may result in physical and transition risks that could potentially impact the safety and soundness of individual financial institutions and have broader financial stability implications for the banking system.



Hao Liang is Associate Professor of Finance at Singapore Management University; Lin Sun is Assistant Professor at the Fanhai International School of Finance and School of Economics at Fudan University; and Melvyn Teo is Lee Kong Chian Professor of Finance at Singapore Management University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

Responsible investment is an approach to managing assets that sees investors include environmental, social, and governance (ESG) factors in their decisions about what to invest and the role they play as owners and creditors. For investment managers, a popular way to publicly signal one’s commitment to responsible investment is to endorse the United Nations Principles for Responsible Investment (henceforth PRI). Attesting to the spectacular growth in investor interest in responsible investment, the assets under management of PRI signatories have ballooned from US$6.5 trillion in 2006 to US$86.3 trillion in 2019.

Given the unprecedented interest in responsible investment by asset owners, one concern is that some fund managers may deceptively endorse the PRI to attract flows from responsible investors while not honoring their promise of incorporating ESG into their investment decisions. According to a recent KPMG report, hedge fund managers may greenwash due to inadequate expertise, shortage of data, or skepticism about the value of ESG. Such managers could subsequently underperform given their focus on asset gathering as opposed to generating alpha. In that case, greenwashing could be symptomatic of agency problems since such fund managers clearly fall short on their dual mandate of delivering both investment performance and ESG exposure, thereby failing to maximize investor welfare. Despite the concerns voiced by practitioners and regulators about greenwashing, and its potential implications for investor welfare and asset prices, we know little about greenwashing. In this study, we fill this gap by studying greenwashing among hedge fund management companies that endorse the PRI.


Financial Reporting and the Financial Reporting Regulators

Lynn E. Turner is former Chief Accountant at the U.S. Securities and Exchange Commission and currently senior advisor at Hemming Morse LLP. This post is based on a letter to the U.S. Securities and Exchange Commission from the Alliance Of Concerned Investors.

We are a collection of individuals who have worked in the capital markets for multiple decades. Most of us were original members of the Investors Technical Advisory Committee of the Financial Accounting Standards Board. Our functional roles have been as buy-side and sell-side research analysts, accounting standard-setters and regulators, or accounting academics. All of us have one experience in common: we are fundamental investors who believe that all investors are empowered to make useful investment decisions only when they are provided with robust and timely financial information. We joined together because our common beliefs and interests in financial reporting and market regulation led us to bring voice to concerns we share about the current state of financial reporting and the financial reporting regulators.

We support the SEC in its role of protecting investors and maintaining the integrity of the securities markets. The encouragement of capital formation, maintaining orderly and efficient markets, and the promotion of a market that will ensure the public’s trust are all key elements of the SEC’s mission. We support its mission and the premise that all investors should have access to meaningful financial and other information to assess the merit of an investment.


Racial Equity on the Board Agenda

Seymour Burchman and Barry Sullivan are Managing Directors and Julia Thorner, is an associate at Semler Brossy Consulting Group. This post is based on their Semler Brossy memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Calls for racial equity are moving beyond street protests and into corporate boardrooms. Many directors are looking for their companies to do more to support racial equity. This is a complex issue, but here are some different approaches that boards and management teams might pursue.

Weighing a Variety of ESG Goals

Racial justice is now top of mind, but corporations are also expected to address a range of other ESG issues, such as climate change and poverty. Since businesses have finite resources, how should boards of directors proceed, and how might racial justice initiatives fit? Some companies will find these worthy goals more imperative than others.

Directors can employ three criteria in deciding among these environmental, social, and governance aims. First, can the company make a material contribution toward addressing the problem beyond its own walls? This is largely a function of whether the solution fits within the company’s mission or purpose, and whether the company has the competencies to meaningfully address it.


Corporations in 100 Pages

Holger Spamann is the Lawrence R. Grove Professor of Law at Harvard Law School; Scott Hirst is Associate Professor of Law at Boston University; and Gabriel Rauterberg is Assistant Professor of Law at the University of Michigan. This post relates to their recently-published book, Corporations in 100 Pages.

We have just published Corporations in 100 Pages—an introduction to corporate law for students and anyone else interested in the foundations of corporate law. The book provides an accessible, self-contained presentation of the field’s essentials: what corporations are, how they are governed, their interactions with their investors, and other stakeholders, major transactions (M&A), and parallels with other legal entities, including partnerships. Optional background chapters cover the investor ecosystem, contemporary corporate governance, and corporate finance. The book’s exposition of doctrine and policy is nuanced and sophisticated, yet short and simple enough for a quick read.

We hope it will help the struggling student or young professional, but just as importantly, we hope it will allow teachers to spend less time on the basics and more with more complex topics. For those interested, it could be assigned alongside a casebook or simply suggested as a source for those finding difficulty with the material. We provide more information about the book below.


Financial Institution Regulation Under President Biden

Katherine Mooney Carroll is partner and Lauren Gilbert and Zachary Baum are associates at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Carroll, Ms. Gilbert, Mr. Baum, Derek Bush, Colin Lloyd, and Hugh C. Conroy.

Following Vice President Joe Biden’s apparent victory last weekend, attention has now turned to the transition and implications of a change in administration.

The pandemic and related economic downturn will guide the Biden Administration’s immediate priorities for the financial sector, resulting in a focus on economic relief and stimulus, consumer protection and attention to any signs of financial instability. Given these and other priorities, and the relatively modest changes in financial regulation under the Trump Administration, regulatory reform is not likely to be a major area of focus in the early period of the administration. Gridlock in Congress also means that the existing regulatory architecture will remain intact in the short term. The most significant policymaking is likely to occur at the agencies.

A Republican-controlled Senate may result in moderate appointees to lead the Treasury Department and the financial regulatory agencies, although progressives will push hard for nominees reflecting the views of Senators Warren and Sanders. President Biden is also likely to minimize appointees with ties to Wall Street. Achieving racial and gender diversity, including in the key financial posts, is an announced goal of his administration.


ESG Management and Board Accountability

Kosmas Papadopoulos is Senior Director at the Corporate Governance & Activism practice and Rodolfo Araujo is Senior Managing Director and Head of the Corporate Governance & Activism Practice at FTI Consulting. This post is based on their FTI memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

In the world of corporate governance and proxy voting, 2020 has been a remarkable year, not only because annual general meetings took place in the midst of a global pandemic that forced the abrupt transition to a virtual proxy season, but also because this year marked the beginning of the new decade at a time when companies and investors experience a major shift in how they engage on the topic of corporate governance. The scope of corporate governance activities is no longer limited to issues directly linked to routine meeting agenda items, such as director elections, shareholder rights, executive compensation, and audit quality. The definition of governance is expanding to include the management of environmental and social risks and opportunities.

Many investors begin to recognize ESG issues as part of their fiduciary responsibility, and several have committed to using their votes to hold boards and management teams accountable for the potential mismanagement or lack of oversight of material issues. Climate change, employee health and safety, data privacy, and human rights are only a few of the many factors where investor expectations are changing, requiring companies to demonstrate robust management systems, oversight mechanisms, and measurable performance in addressing potential risks and opportunities.


Shareholders’ Rights & Shareholder Activism 2020

Eleazer Klein is a partner at Schulte Roth & Zabel LLP. This post is based on a Chambers Global Practice Guides publication by Mr. Klein, Aneliya CrawfordJohn MahonMichael Swartz and Brandon Gold.

COVID-19’s Impact on Shareholder Rights

As life dramatically changed in 2020, so did shareholder rights. In the United States, we witnessed a dramatic and substantial change to how companies conduct annual meetings, a reignited debate on the purpose of the corporation, new defensive strategies for companies, as well as a reshaping of the shareholder activist model, as some activists adopted tactics historically associated with private equity. Below we note some of the major developments that took place over the past year.

The coronavirus (COVID-19) pandemic that brought much of the world’s economy to a standstill in 2020 also presented new challenges for publicly held companies and shareholders seeking to exercise their rights. Some of the effects of the pandemic were immediate and visible, such as the widespread switch from in-person to virtual annual shareholder meetings. We expect the pandemic will also impact the debate over the purpose of a corporation and the role of shareholders, and provide activist shareholders with new opportunities to campaign for change to unlock shareholder value.

Switch to Virtual Shareholder Meetings and Negative Impact on Shareholder Participation

The premier forum for shareholders to exercise their rights, hold a board of directors and management accountable, and make their voices heard is the annual shareholder meeting. Public companies in the United States are required to hold an annual meeting of shareholders every year to elect directors and conduct other shareholder business. Traditionally, these meetings have been held in person (and often broadcast online) and included opportunities for shareholders to question management and the board. As every voting shareholder, whether holding ten shares or ten million shares, has the right to attend annual shareholder meetings, these meetings provided all types of shareholders the opportunity to participate meaningfully.


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