Thilo Kuntz, chair in private, commercial, and corporate law and managing director of the Institute for Corporate Law at Heinrich-Heine-University in Düsseldorf, Germany, is currently a visiting scholar at UCLA School of Law. I am very much enjoying getting to know this learned and insightful colleague.
Kuntz has a book chapter “ESG Demand-Side Regulation – Governing the Shareholders,” forthcoming in Corporate Purpose, CSR and ESG: A Trans-Atlantic Perspective (Jens-Hinrich Binder, Klaus J. Hopt, Thilo Kuntz, eds., Oxford University Press 2024), which is available here.
Kuntz posted a summary of the chapter to the CLS Blue Sky Blog:
If a regulator (in the broadest sense of the word) wants companies to incorporate ESG-oriented decisions into their governance structures, the regulatory strategy must include the shareholders and investors. When stockholders have to abide by norms mirroring those of the corporate board, at least in theory, the incentives and investment aims of corporate directors and shareholders should align.
Many U.S, and European laws and legal frameworks involving ESG already reflect demand-side regulation. Notwithstanding their differences, what those laws have in common is their target: It is no longer the board of directors, the German Vorstand, the French conseil d’administration, or a similar body managing the affairs of the public corporation or company, but rather the shareholders and investors. After decades of focusing on directors’ duties to the corporation, stockholders, and society at large, this development is a major change. ...
Kuntz draws a distinction between direct and indirect demand-side regulation. "Whereas the first addresses shareholders and investors directly through ESG disclosure rules and requirements to commit to ESG, the second targets retail investors as a group and seeks to move them toward preferring ESG."
Kuntz then suggests limitations to both direct and indirect demand-side regulation. He concludes:
Many empirical studies show that even those opting for an ESG product often prefer financial gains once the investment is made. Consequently, the largest group of shareholders will still judge directors based on financial performance. Therefore, the effects of indirect demand-side regulation are rather limited, and it will probably not cure the incentive problem of supply-side regulation. The same is true regarding ESG proponents who may be willing to give up profit for non-monetary benefits. Having more shareholders expressing general ESG preferences does not help solve the conflicts within that group ....
I highly recommend checking out the paper.
