CATALYZING SUSTAINABLE INVESTMENT.

AuthorRose, Paul
  1. INTRODUCTION 1222 II. GOVERNMENTAL INTERESTS IN PROMOTING SUSTAINABLE INVESTMENT 1227 A. Governing to Protect the Residual Risk-Bearers 1229 B. Sovereign Investment Time Horizons 1232 III. SOVEREIGN SUSTAINABLE INVESTMENT STRATEGIES 1235 A. Buying in Public and Private Markets 1235 1. Sovereign Wealth Fund Investment in Sustainable Portfolios 1240 B. Sovereigns as Brokers and Cornerstone Investors 1246 1. The Development of Strategic Investment Funds 1250 2. The Legal and Governance Structure of Strategic Investment Funds 1253 IV. OTHER SOVEREIGN MARKET DEVELOPMENT STRATEGIES 1255 A. Bond Offerings 1256 B. Building Green Finance Regulatory Structures 1260 V. RISKS IN SOVEREIGN INTERVENTION IN SUSTAINABLE INVESTMENT MARKETS 1266 A. What Do Sovereigns Seek to Maximize? The Risks of Sovereign Intervention in Markets 1267 B. Applying Multilateral Development Banks Governance Standards to Mitigate Market Risks of Sovereign Investment 1271 VI. CONCLUSION 1275 I. INTRODUCTION

    When the Business Roundtable announced an updated, more stakeholder-oriented "Statement on the Purpose of a Corporation" in August of 2019, it reinvigorated a long-standing debate on the role of business in society. (1) The debate in American academia stretches back at least to the 1930s, as illustrated by a series of articles by Berle and Dodd. (2) The political question of corporate purpose is nearly as old as the republic itself, with Hamilton, Jefferson, and Madison's debate on whether to incorporate a national bank in the 1790s. (3) A central question, then and now, is whether corporations exist for the sole purpose of making profits for their shareholders, or whether the corporation should perform "a social service as well as a profit-making function." (4)

    This debate is not merely an American one, of course, and recently some other jurisdictions have nudged companies toward a more socially-focused, stakeholder-oriented view through their corporate codes. In France, for example, the recently-enacted Plan dAction pour la Croissance et la Transformation des Entreprises requires each French company to be managed "in furtherance of its corporate interest" while also "taking into consideration the social and environmental issues arising from its activity." (5) The United Kingdom, meanwhile, requires medium and large companies to provide a directors' report outlining the company's engagement with employees, suppliers, customers, and other company stakeholders. (6)

    At the same time, some shareholders are calling for an increased focus on higher environmental, social, and governance (ESG) standards for companies. Perhaps most prominently, Larry Fink, the CEO of investment behemoth BlackRock, stated that "[s]ociety is demanding that companies, both public and private, serve a social purpose." (7) Not only should companies provide profits to their shareholders, "but also show how [they] make a positive contribution to society." (8) Companies must benefit not only shareholders but "employees, customers, and the communities in which they operate" as well. (9)

    Despite the Business Roundtable statement and pressure from some shareholders, corporate codes and trust law generally remain focused on promoting shareholder interests over other interests. (10) Thus, 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 (if not always actionable) legal rules and norms. (11) In the United States, for example, corporate law, and especially Delaware law, remains committed to a shareholder wealth-maximizing orientation. (12) Leo Strine, formerly Chief Justice of the Delaware Supreme Court, summarizes Delaware law as requiring "directors of a for-profit corporation" to pursue at all times "the best interests of the corporation's stockholders;" stakeholder "interests can be considered, but only instrumentally, in other words, when giving consideration to them can be justified as benefiting the stockholders." (13)

    Trust law, which provides standards of conduct for many investment intermediaries, including fund managers, also generally requires wealth maximization. (14) Assessing the law and economics of ESG investing by trustees of pensions, charities, and personal trusts, Sitkoff and Schanzenbach show that ESG investing is generally permissible for these fiduciaries only "if: (1) the trustee reasonably concludes that the ESG investment program will benefit the beneficiary directly by improving risk-adjusted return; and (2) the trustee's exclusive motive for adopting the ESG investment program is to obtain this direct benefit." (15) In corporate law and trust law, then, there is a clear disconnect between calls for increased ESG investing--at least to the extent that such investments sacrifice returns--and the legal imperatives and governance norms of wealth maximization. (16)

    Bridging this disconnect is crucial to the achievement of the SDGs in two ways. First, to the extent that business practices and current regulatory structures have created the need for the SDGs, an increased focus on environmental sustainability by businesses may help reduce negative impacts over time. Second--and the focus of this Article--if the SDGs are to be met, private markets must provide the majority of financing for green and sustainable projects. Government efforts alone will not be sufficient to achieve the SDGs. To move from "billions to trillions" in sustainable investment capital, governments must mobilize private capital. (17) Yet, as noted above, legal doctrine in the United States generally disfavors (and for some fiduciaries, completely prohibits) sacrificing private profits for public benefits such as would be achieved under the SDGs. (18)

    Some scholars have suggested bridging this gap by changing the legal obligations applicable to corporate and investment intermediary fiduciaries to allow them to pursue sustainable projects, even if the projects sacrifice some margin of risk-adjusted returns. (19) While reshaping fiduciary duties may be possible, the persistence of wealth-maximization norms, even in the presence of stakeholder-oriented constituency statutes in many jurisdictions, suggests that such a reform would probably not be fruitful. (20)

    This Article describes a different approach: the catalyzation of sustainable capital markets through sovereign investment and market development efforts. (21) Providing the first systematic account of these efforts, this Article shows how governments have tended to assume profit-maximization and are helping to develop sustainable investment markets by directly investing in sustainable projects, absorbing risks in those projects, and supporting the development of legal frameworks that reduce sustainable investment risks. Rather than pushing back on the concept of profit and wealth maximization as the theoretical and practical imperative of firm and fund decision-making, governments tend to take wealth maximization as given, and a review of the strategies used by governments to promote sustainable investment shows that they develop sustainable investment programs around that paradigm. Indeed, in some cases, government investors take on additional risk or sacrifice their own investment returns through "blended finance" schemes that aim to attract the profit-maximizing private investment capital necessary to fund sustainable investment projects. (22)

    This Article proceeds in four Parts. First, this Article explains why governments use and foster investment as a primary tool to achieve the SDGs. This Part also describes the particular advantages sovereign investors bring to sustainable investment markets. Second, this Article describes how sovereign investors directly support sustainable markets through two main mechanisms. One mechanism is typified through sovereign wealth fund (SWF) investment activity, which mobilizes trillions in capital through direct investments. The other mechanism employs a relatively new form of sovereign fund, the strategic investment fund (SIF), to serve as an originator and cornerstone investor in sustainable development projects. Third, this Article describes two other sustainable investment strategies: green and sustainable bond offerings and regulatory infrastructure construction, through which sovereign investors develop and support green finance and markets. Fourth, this Article outlines the risks associated with sovereign investment, including corruption, politicization, and the crowding-out of private investment, and notes the steps sovereign investors and government regulators take to mitigate these risks.

  2. GOVERNMENTAL INTERESTS IN PROMOTING SUSTAINABLE INVESTMENT

    The U.N. Conference on Trade and Development (UNCTAD) estimates that it will take $3.9 trillion each year from 2015 to 2030 to meet the SDGs in developing countries alone. (23) Currently, 36% of this amount is met by public investment plans, leaving a $2.5 trillion "gap that the private sector could potentially help address." (24) These figures highlight both the crucial role that sovereign investment plays in achieving the SDGs, as well as the need for governments to develop creative ways of unlocking private capital to help fund sustainable projects.

    Sovereign investors bring considerable advantages to green financial markets. As further described in this Part, there are several reasons, beyond their standard role as regulators, why sovereign investors are uniquely suited to catalyze sustainable investment. (25) First, governments differ from private investors in that private investors often ignore negative externalities of their economic activity, including pollution, depleted natural resources, or negative health or safety effects because governments will often absorb the costs of such widespread externalities. (26) For funds managing wealth on behalf of other investors, express...

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