Will the EU Taxonomy Regulation Foster Sustainable Corporate Governance?

EU securities regulation has established a taxonomy of environmentally sustainable activities. This article discusses, from a law and economics standpoint, the potential of this taxonomy to support sustainable corporate governance. Corporate governance can be an efficient way to channel investor preferences towards sustainability because the concentration of institutional shareholding has lowered the transaction costs of shareholder action. However, there is a principal-agent problem between institutional investors and their beneficiaries, which depends on greenwashing and undermines sustainable corporate governance. This article argues that introducing environmental sustainability into EU mandatory disclosure aligns the institutional investors’ incentives with the interest of their beneficiaries and may foster the efficient inclusion of sustainability in corporate governance. The argument is threefold. Firstly, the EU taxonomy may curb greenwashing by standardizing the disclosure of environmental sustainability. Secondly, this information may become salient for the beneficiaries as the same standards define the sustainability preferences to be considered in recommending and marketing financial products. Thirdly, sustainability disclosure prompts institutional investors to compete for sustainability-minded beneficiaries. Being unable to avoid unsustainable companies altogether, institutional investors are expected to cater to beneficiaries’ preferences for environmental sustainability using voice instead of an exit.

Rethinking Securities Law—Laying the Groundwork

This chapter explains the need for the “rethinking” of the federal securities laws, with particular emphasis on the Securities Act of 1933 and the Securities Exchange Act of 1934. Recognizing the historical preeminence of the U.S. securities law framework, the chapter first highlights key attributes that facilitate the effectuation of this achievement. Thereafter, the chapter addresses problematic characteristics of U.S. securities regulation. As set forth therein, the framework of securities regulation that exists today in the United States is comprised of piecemeal federal legislation, judicial decisions, SEC action, state securities (blue sky) activity, and self-regulatory organization oversight. As a consequence, the presence of consistent and logical regulation all too often is absent. With frequency, in both transactional and litigation settings, mandates apply that are erratic and antithetical to sound public policy. Setting the stage, in a preliminary manner, the chapter identifies several of the key problematic areas, succinctly explains their deficiencies, and suggests corrective measures that should be implemented.

Rethinking Securities Law

Rethinking Securities Law focuses on a very important and timely subject that merits comprehensive analysis: “rethinking” the securities laws, with particular emphasis on the Securities Act of 1933 and the Securities Exchange Act of 1934. The system of securities regulation that prevails today in the United States is one that has been formed through piecemeal federal legislation, Securities and Exchange Commission (SEC) invocation of its administrative authority, and self-regulatory organization episodic action. As a consequence, the presence of consistent and logical regulation all too often is lacking. In both transactional and litigation settings, with frequency, mandates apply that are erratic and antithetical to sound public policy. Over four decades ago, the American Law Institute (ALI) adopted the ALI Federal Securities Code. The Code has not been enacted by Congress and its prospects are dim. Since that time, no treatise, monograph, or other source has comprehensively focused on this meritorious subject. The objective of this book is to identify the deficiencies that exist under the current regimen, address their failings, provide recommendations for rectifying these deficiencies, and set forth a thorough analysis for remediation in order to prescribe a consistent and sound securities law framework. By undertaking this challenge, the book provides an original and valuable resource for effectuating necessary law reform that should prove beneficial to the integrity of the U.S. capital markets, effective and fair government and private enforcement, and the enhancement of investor protection.

Part II The Transatlantic Dialogue, 4 The Parallel System—The United States

This chapter evaluates securities regulation in the United States. For a variety of reasons, domestic US securities regulation has served as a model to the world, either directly or through its influence in international standard setting. The parallel system, however, has not been exported and so remains a somewhat unique aspect of US law, and based on the concept of the foreign private issuer (FPI), appears firmly entrenched. Going forward, it is possible that the domestic and international aspects of US markets may become more integrated, or at least coordinated. Calls for greater EU-style deference to home country regulation for non-US issuers and market participants would certainly simplify, and perhaps undermine, the US parallel system. There is no doubt as to the decline of US hegemony in regulation of international capital markets. Within the United States, level playing field arguments continue to surface, sometimes in surprising ways.

Part I International Capital Markets in Context, 1 Introduction

This introductory chapter provides an overview of international capital markets. International capital markets are not a new phenomenon; in various forms, they have been around for centuries. The global financial crisis, however, shone a strong light on the workings of international capital markets. They had, unmistakably, been purveyors of systemic risk and seemingly attracted little by way of oversight or regulation. The chapter then assesses how international capital markets have been regulated and what lies on the regulatory horizon. It addresses securities regulation; capital market regulation; information disclosure; and self-regulation. There is no doubt that in a dozen years from now, the regulatory and institutional landscape of international capital markets will have been transformed. Adjustments to the shock of financial crisis have been working their way through systems around the world. Demographics and geopolitical forces are shifting, changing with them investment patterns, institutional models, and long-held assumptions about market behaviour. Information technology has also profoundly impacted information-based regulatory systems, outpacing regulatory responses.

Part VII International Securities, Including Markets and Clearing Systems, 22 US Equity Market Structure

This chapter provides an overview of the laws applicable to the markets and regulated market participants in the US. It recounts how US securities markets have evolved significantly over time due to advancements in technology and intervening efforts by lawmakers and securities regulators. It also notes the current US system of securities regulation, which was formulated in the early 1930s by the US Congress in an attempt to restore confidence in the financial system following a market collapse, bank failures, and widespread scandals. This chapter looks at the laws that directly affect the day—to—day operations of securities exchanges and equity markets in the US and are enforced by the US Securities and Exchange Commission (SEC). It also mentions the Securities Exchange Act of 1934 (Exchange Act) as the principal law that governs the US equity markets.