Externalities and the Common Owner

Due to the embrace of modern portfolio theory, most of the stock market is controlled by institutional investors holding broadly diversified economy-mirroring portfolios. Recent scholarship has revealed the anti-competitive incentives that arise when a firm’s largest shareholders own similarly sized stakes in the firm’s industry competitors. This Article expands the consideration of the effects of common ownership from the industry level to the market portfolio level and argues that diversified investors should rationally be motivated to internalize intra-portfolio negative externalities. This portfolio perspective can explain the increasing climate change related activism of institutional investors, who have applied coordinated shareholder power to pressure fossil fuel producers into substantially reducing greenhouse gas emissions. While institutional investors have protested their ability to influence firm-level supply and pricing decisions in the service of muting competition, they are more willing to advertise their role in seeking emissions reduction commitments, even admitting they are for the benefit of portfolio returns. These commitments, however, affect product supply and imply market power in much the same way, and provide further evidence that institutional investors are able to influence managerial decisions at the firm level for the benefit of their broader portfolio. This insight requires amendment of the traditional view that diversified investors are “rationally reticent” and lack the incentive to engage in monitoring of firm behavior. It additionally challenges a fundamental norm of corporate governance law: the theory of shareholder primacy rests on the premise that shareholders homogeneously seek to maximize corporate profits and share value. This Article shows that in certain circumstances a majority of minority shareholders may direct the firm away from a profit-maximizing objective

Market Myopia’s Climate Bubble

A growing number of financial institutions, ranging from BlackRock to the Bank of England, have warned that markets may not be accurately incorporating climate change-related risks into asset prices. This Article seeks to explain how this mispricing occurs, drawing from scholarship on corporate governance and the mechanisms of market (in)efficiency. Market actors: (1) Lack the fine-grained asset-level data they need in order to assess risk exposure; (2) Continue to rely on outdated means of assessing risk; (3) Have misaligned incentives resulting in climate-specific agency costs; (4) Have myopic biases exacerbated by climate change misinformation; and (5) Are impeded by captured regulators distorting the market. Further, trends in institutional share ownership reinforce apathy toward assessment of firm-specific fundamentals, especially over longterm horizons. This underpricing of corporate climate risk contributes to the negative effects of climate change itself, as the mispricing of risk in the present leads to a misallocation of investment capital, hindering adaptation and subsidizing future combustion of fossil fuels. These risks could accumulate to the macroeconomic scale, generating a systemic risk to the financial system. While a broad array of government interventions are necessary to mitigate climate-related financial risks, this Article focuses on proposals for corporate governance and securities regulation—and their limits. The Securities and Exchange Commission is currently drafting a rule on mandatory climate risk disclosure. This Article argues that the SEC should seek out climate expertise through interagency collaboration and staff hiring, work with auditors and the Public Company Accounting Oversight Board, and provide guidance on climate risk analytics. This Article argues that climate risk disclosure is necessary, though alone not sufficient, to address the widespread disregard of corporate climate exposure

Using EIAs in our Research

A description of how researchers at the Columbia Water Center use environmental impact assessments in their research projects

Green Corporate Governance

This chapter explores the rise and future of “green” corporate governance, including how concerns about the changing climate are shaping long-extant debates in corporate law.2 This area is difficult to survey in one short chapter, both because it has exploded in importance, and because it intersects in its own way with many of the topics discussed in the above chapters. Compliance, directors’ duties, corporate purpose, corporate groups, and investor stewardship, are just a few of the issues bound up in the rapid and recent shift toward thinking about climate change and its intersection with corporate governance.3 The rise of Environmental Social and Governance (ESG) investing this past decade has been impossible to miss, especially once the practice became a political target for the conservative right in America.4 This chapter will discuss issues related to climate change and corporate governance, which overlap with “ESG” concerns (particularly, of course, the ‘E’), but are not necessarily synonymous with them.5 Though “greening” corporate governance is an all-encompassing strategy, this chapter will focus on the following three areas of recent development: first, climate-related investing, including shareholder stewardship; second, regulatory changes, and third, board duties in the face of climate risk

Externalities and the Common Owner

Due to the embrace of modern portfolio theory, most of the stock market is controlled by institutional investors holding broadly diversified economy-mirroring portfolios. Recent scholarship has revealed the anti-competitive incentives that arise when a firm’s largest shareholders own similarly sized stakes in the firm’s industry competitors. This Article expands the consideration of the effects of common ownership from the industry level to the market-portfolio level, and argues that diversified investors should rationally be motivated to internalize intra-portfolio negative externalities. This portfolio perspective can explain the increasing climate change related activism of institutional investors, who have applied coordinated shareholder power to pressure fossil fuel producers into substantially reducing greenhouse gas emissions.While institutional investors have protested their ability to influence firm-level supply and pricing decisions in the service of muting competition, they are more willing to advertise their role in seeking emissions reduction commitments, even admitting they are for the benefit of portfolio returns. These commitments, however, affect product supply and imply market power in much the same way, and provide further evidence that institutional investors are able to influence managerial decisions at the firm level for the benefit of their broader portfolio. This insight requires the amendment of the traditional view that diversified investors are “rationally reticent” and lack the incentive to engage in monitoring of firm behavior. It additionally challenges a fundamental norm of corporate governance law: the theory of shareholder primacy rests on the premise that shareholders homogeneously seek to maximize corporate profits and share value. This Article shows that in certain circumstances a majority of minority shareholders may direct the firm away from a profit-maximizing objective

China in Africa: What the Policy of Nonintervention Adds to the Western Development Dilemma

Chinese investment activity in Africa has skyrocketed in recent years, outpacing every other nation except South Africa. China finances more infrastructure projects in Africa than the World Bank and provides billions of dollars in low-interest loans to the continent’s emerging economies. These loans and investments are typically made in exchange for securing access to natural resources. Based on its principles of nonintervention and respect for sovereignty, China gives this money with little or no strings attached. The West, which typically conditions its loans on initiatives like democracy promotion and corruption reduction, has labeled China a “rogue donor,” whose actions will be damaging to Africa in the long run. However, Western aid approaches like conditionality have largely been development failures. The Chinese model, with no colonial past or explicit political agenda, is a legitimate challenger to the Western aid status-quo. China is merely the largest and first leader of a growing cohort of developing countries interested in Africa’s commodities. These new investors have the option to adopt wholly China’s unconditioned approach or a more responsible engagement strategy. What all players are beginning to realize is that ultimately Africans themselves must decide what form they want this increased investment attention to take

What’s Scope 3 Good For?

Opposition to the Securities and Exchange Commission’s (“SEC”) new rule on updated climate risk reporting has focused on one category of disclosures as particularly objectionable: Scope 3 emissions.7 Otherwise known as “supply chain emissions,” Scope 3 emissions have been voluntarily reported by a growing number of companies since the term was invented as part of the Greenhouse Gas Protocol in 2001.8 They include all the emissions both up and downstream of a corporations’ own activities: the emissions of the privately-owned factory that produced the shoes Target sells, as well as the emissions you burn while driving to the store to buy them, all count as Target’s “Scope 3” emissions.9 The other two GHG Protocol scopes are less sprawling: Scope 1 emissions include sources the company directly owns and controls — the natural gas to heat buildings and gas-powered delivery vehicles, for example.10 All emissions that come from purchased electricity fall in Scope 2 — this is the bill Target pays for the power from the grid that keeps store lights on.11 While the SEC proposes that all companies be required to report their Scope 1 and 2 emissions, Scope 3 emissions are only mandatory if they are financially material to the company, or the company has publicly set emissions targets.12 Objections to Scope 3 reporting requirements often highlight difficulties in collecting emissions information from third-parties, particularly smaller or private entities.13 Corporations bristle at the idea of being held “responsible” for emissions over which they have no control.14 And market participants that do not object to the concept of supply-chain emissions reporting have enumerated complications that come from applying Scope accounting in practice, anecdotal puzzles abound: “How do you divide up the emissions between” the milk and the meat that a single cow produces over its lifetime?15 Nevertheless, investors largely support the SEC’s Scope 3 proposal, and have used their own shareholder power to press for increasingly stringent supply-chain emissions disclosures from corporate management directly.16 Investors justify their pursuit of corporate emissions disclosure for two broad reasons. The first is that emissions are useful as a proxy for measuring transition risk, or their exposure to regulatory and market changes affecting fossil-dependent investments.17 This reason is consistent with a “single materiality” framework that compels disclosure of risks to a company. 18 This contrasts with a “double materiality” framework that additionally aims to capture risks that a company imposes on others, including other corporations in the market.19 While discourse in the United States has tended to accept the traditional single materiality of Scope 1 and 2 emissions, Scope 3 is often described as a metric limited to “double materiality.”20 This Article argues that because the division between Scopes 1, 2, and 3 follow the arbitrariness of firm boundaries, certain channels of transition risk — and reputational risk — are not eliminated by simply outsourcing a high-risk process to a third-party. A blinkered focus on Scopes 1 and 2 misses these exposures. The second reason U.S. investors demand emissions disclosure is that it is needed for monitoring corporate progress over time. Metrics on emissions reduction progress are used throughout corporate governance: informing decisions on board member support, setting executive pay incentives, and monitoring portfolio-level alignment with climate indexes.21 Institutional investors are increasingly adopting their own reduction-commitments simultaneously as retail inventors seek out “carbon aligned” funds. Firm-level Scope data is needed before an asset manager can market any low-emissions fund.22 Investors are increasingly adopting their own reduction-commitments, and retail investors are seeking “carbon aligned” funds of various kinds — the firm-level Scope data is needed in order construct footprints of assets and funds. While the number of ESG reports about emissions “data gaps” grows, just where the data comes from and how it is (mis)used by market actors has been underexplored in the legal literature, particularly beyond the realm of ESG metrics for portfolio-screening. In Part I, this Article discusses how Scope data is collected and shared in practice, as well as its widespread adoption as a metric for financial risk and corporate governance. Part II argues that these uses of emissions data demonstrate that this information is broadly material to investors, requiring standardization and assurance. For these reasons, the SEC should not back down on requiring the disclosure of relevant Scope 3 emissions.23 Corporate claims of lack of control and access to data should be met with skepticism for large companies, especially in light of recent technological advances related to emissions monitoring and trends in supply chain contracting.24 However, the usefulness of Scope 3 data depends upon its use-case — a fact that has been relatively underappreciated — as well its granularity and the availability of other contextual data. This Part goes on to offer a brief critique and qualification of the uses of Scope 3 data, highlighting how U.S. financial regulators can improve upon the early approaches of other jurisdictions. Part III concludes

The Integration of Environmental Law into International Investment Treaties and Trade Agreements: Negotiation Process and the Legalization of Commitments

There were seventeen international investment agreements (“IIAs”) signed around the world in 2012, and each one of them contained some provision relating to the protection of the environment. In comparison, no investment treaty signed before 1985, and fewer than ten percent of treaties signed between 1985 and 2001, contained any reference to the environment at all. Environmental language has become increasingly common in bilateral investment treaties (“BITs”), and to an even greater degree in other IIAs, such as free trade agreements (“FTAs”). The legal implications of the integration of environmental law and norms into investment law treaties have yet to be fully explored, though there has been significant literature on trade and environment “linkages.” This paper seeks to give a U.S.-centric overview of the recent trends in the inclusion of environmental provisions in BITs and FTAs. In particular, this paper focuses on the recognition and integration of multilateral environmental agreements (“MEAs”) into the text of investment agreements. The analysis of this integration takes two approaches. In the first, the international legal implications of the inclusion of MEAs into other international treaties is aided by the concept of “legalization,” first introduced in 2000 by Abbot et al., in which the “hard” or “soft” nature of a legal norm is determined by the degree to which it possesses three characteristics: obligation, precision, and delegation. The second approach of the paper asks how and why these MEAs came to be prioritized in the trade negotiations of the United States. The answer to the question is found by applying theories of international negotiation, primarily Robert Putnam’s theory of “two-level games,” to the history of the development of environmental provisions of trade and investment agreements

Citizen Scientists, Data Transparency, and the Mining Industry

What happens when a community feels that the standards imposed by state and federal laws are insufficient to protect its health and environment? Or when the responsible government agencies lack the funding, competency, or political will for full enforcement of the law? One of the greatest hurdles facing citizen environmental advocates in these situations is a lack of access to environmental monitoring data. All routes available for policing industry—whether it be rallying community support for protest, petitioning a government agency for enforcement action, or bringing a citizen suit—require, as a first step, an understanding of whether and what pollution has been released. This article looks at a few examples of how citizen organizing, combined with changes in technology, have successfully empowered communities to take environmental monitoring and enforcement of the mining industry into their own hands

The Chicago School’s Coasean Incoherence

This comment traces the divergent legal academic interpretations of the Chicago School\u27s Ronald Coase and where their influence lands--revealing the law’s inconsistent conception of just what a corporation is or should be. By following Alyssa Battistoni\u27s investigation of the origin of the externality, we can see the late 60s and early 1970s as a pivotal era. People were waking up to the collective costs of industrialization and pushing back against corporate power. Against this democratic wave, the writings of the Chicago School worked to separate one human person into her different roles in the economy—consumer, worker, shareholder. They used the law to solidify the divergent interests of these roles, even as they preached the gospel of shareholder democracy and personal choice. The law and economics movement helped to argue for limiting the choices and political power of shareholders over corporations, simultaneously as they insisted that profit maximizing was for the shareholders. This comment argues for the resurrection of pre-neoliberal legal conceptions of the corporation as a moral entity and a locus for political change in our fight against the climate crisis