Market Regulation, Banking Industry and ESG: The Long and Winding Road to Sustainability

by Federico Riganti* and Anne-Marie Weber**

ABSTRACT: With this paper, we seek to outline how the sustainability revolution impacts the banking sector. To that end, we present a brief account of the socio-political background (section 1) and depict the relevant regulatory landscape and identify its influence on (section 2). We focus on the latter and discuss the legal-economic foundations of the most pressing underlying corporate governance challenge (section 3). We then turn to identify the broader controversy regarding a public-private clash of interests that emerges from the sustainability revolution (section 4) and present our final remarks (section 5).

SUMMARY: 1. Introduction. – 2. The regulatory landscape. – 3. Focusing on the Markets? The Legal-Economic Context. – 4. “Go Sustainable” or “Go Home!”. Sustainability between Private Players and Public Interests. – 5. Final Remarks.

1. In light of the newest evidence from the natural sciences[1], human-induced climate change is increasingly being understood as the defining global challenge of our age. The European society demonstrates increased awareness of these scientific facts. For instance, 94% of Europeans declare that environmental protection is important to them personally[2]. Thereupon, the sustainability challenge has unleashed profound societal and cultural transformation processes – a sustainability revolution – which calls into question many basic organizing principles of the European political economy[3]. In particular, notions on the role of companies within society are progressively being challenged[4].

The scientific evidence regarding the planetary boundaries of economic development, coupled with the growing societal alertness to the problem of climate change, positions the transition towards a sustainable economy highest on today’s global political agendas. International climate policy commitments like the Paris Climate Agreement[5] or the UN 2030 Agenda for Sustainable Development[6] with its specific Sustainable Development Goals shape the global course of sustainability policy.

As a sustainable reorientation of the economy boils down to the need to change economic behavior, companies as crucial economic actors are naturally at the center of attention. It is widely recognized that companies must play a central role in mitigating climate change by reducing their net emissions and by driving the necessary innovation and adaptation. Consequently, lawmakers vigorously debate how to align corporate strategy and conduct with climate policy objectives. “Corporate sustainability” is the flag under which the emerging debate sails.

The EU is in the vanguard of recognizing companies as agents for public interests that justify the pursued sustainability transformation. Fundamentally, a stronger responsibilization of companies for meeting sustainability objectives, particularly climate change mitigation goals, is being advocated. Alongside treaty-based obligations (Art. 3 TEU [7]), the European Green Deal [8], with its climate neutrality commitment, sets the blueprint for this transformational change.

Since the publication of the Commission’s Action Plan on Financing Sustainable Growth [9], the idea of re-channeling investments towards sustainability-driven projects has been indisputably present in the EU Commission’s political agenda for financial markets[10]. Having thus morphed from a buzzword to a source of normativity, “sustainability” is nowadays a pivotal regulatory topic in financial markets. While the “ESG-movement” in financial market regulation has primarily focused on the role of capital and shareholders[11], the recent proposal for a Corporate Sustainability Due Diligence Directive [12] brings growing attention to organizational processes and the duties of board members. Further, the umbilical role of other suppliers of capital to businesses, in particular banks, in meeting climate policy goals has come to the fore and triggered distinct microprudential regulatory efforts.

This paper aims to outline how the sustainability revolution impacts the legal ecosystem for the EU’s banking sector. To that end, we depict the relevant regulatory landscape and diagnose a double-track influence on (i) microprudential banking regulation and (ii) banks’ corporate governance (section 2). We focus on the latter and discuss the legal-economic foundations of the most pressing underlying challenges and debates (section 3). We then turn to identify the broader controversy regarding a public-private clash of interests that emerges from the sustainability revolution (section 4), and present our final remarks (section 5).

2. The Action Plan set out a strategy which is construed around three regulatory goals, i.e. (i) reorienting capital flows towards a more sustainable economy[13], (ii) mainstreaming sustainability into risk management[14] and (iii) fostering transparency and long termism[15]. The EU’s legislative measures taken so far in the effort to implement the Action Plan have shaped the regulatory landscape for the EU banking sector in several dimensions.

Primarily, banks are affected by regulatory initiatives stemming from the second goal that aim to introduce a ‘green supporting factor’ in the EU prudential rules for banks[16]. Regarding the Risk Reduction Measures for banks, the European Parliament and Council agreed in the context of the negotiations on Risk Reduction Measures for banks to mandate the European Banking Authority (EBA) to identify the principles and methodologies for the inclusion of ESG risks in the review and evaluation performed by supervisors. The European Banking Authority published on 6 December 2019 its Action Plan on Sustainable Finance[17], which explains the phased approach and associated time-lines for the reports, advices, guidelines and technical standards that were mandated to the EBA. In particular, banks are subject to the 2019 reform of the Credit Requirement Directive[18] and the Credit Requirements Regulation[19].

Further, if they provide portfolio management services[20], banks are subject to the reporting obligations framed by the Regulation (EU) 2019/2088[21] which lays down sustainability disclosure obligations for manufacturers of financial products and financial advisers towards end-investors. The integration of sustainability risks into the investment decision-making process and the assessment of adverse effects caused by investment decisions or investment advice are to be disclosed at entity-level. Additionally, product-level disclosure requires the classification of the products into one of the three following categories: mainstream products, products promoting environmental or social characteristics or products with sustainable investment objectives.

While the aforementioned Action Plan firmly and explicitly entrenched sustainability-driven policy goals in EU financial market regulation, one has to note that in particular the actions pertaining to foster transparency and long-termism are actually a continuation of earlier measures. The first milestones on the road to sustainability were reached with the adoption of the Non-Financial Reporting Directive 2014/95/EU[22] and the Shareholder Rights Directive II 2017/828[23]. Although both directives refrained from establishing specific “sustainability obligations” for companies and their board members, they pursued sustainability-related disclosures as regulatory techniques to indirectly promote the consideration of public interests in corporate decision-makin[24]. As several of the biggest banks fall into the scope of these directives, they are subject to the implementing national regulation. Consequently, transparency requirements regarding banks’ remuneration policies, in particular regarding the sustainability aspects of variable remuneration[25], along with non-financial reporting obligations have already been shaping a part of the banking sectors’ regulatory framework. In line with the Action Plan, these strategies are being further developed. Currently, a significant reform to the NFRD-framework, namely the proposal for a Corporate Sustainability Reporting Directive (CSRD)[26] is being processed. Its fundamental objective is to widen the scope of obliged entities, in particular by including all companies listed on a regulated market (except for those qualified as micro-enterprises). The CSRD also introduces further standardization of sustainability information with reference to EU sustainability reporting standards and replaces the term “non-financial reporting” by the notion of “sustainability reporting”[27].

The common denominator of the above-identified regulatory strategies applicable to the EU’s banking sector is their “financialization”[28], as they address sustainability goals from the perspective of financial concerns and risks. Along with the proposal of the CSDDD which was published on 23 February 2022[29], the sustainability-infused regulatory landscape for banks may soon be complemented by a distinct, seemingly “non-financialized” regulatory approach. This initiative delivers on promises made within Action 10 of the Action Plan, which envisaged the inclusion of corporate governance instruments into the policy toolbox for supporting sustainable growth. In addition to a regulatory framework on due diligence within the company’s value chain[30], according to art. 24 sec. 1 of the CSDDD proposal, the EU Commission aims for a harmonized understanding of the directors’ duty of care. This means that the EU Member States should ensure that, when fulfilling their duty to act in the best interest of the company, directors of companies have to take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change, and environmental consequences, including in the short, medium and long term. Further, art. 15 of the CSDDD proposal establishes a company’s obligation to adopt a “climate change mitigation plan” to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement. Such a plan should also identify the extent to which climate change is a risk for, or an impact of, the company’s operations.

While the framing of sustainability concerns as financial risks factors and thus a

“financialized” approach to the topic of ESG in banking regulation seems quite digestible for the industry, the EU Commission’s corporate governance interventions are being received very cautiously. In that regard, the banking sector is by no means unique or isolated. The Commission’s Sustainable Corporate Governance Initiative which resulted in the CSDDD has been subject to fierce debate[31]. This is understandable as the EU Commission decided to actively foster sustainable corporate conduct by de facto harmonizing the understanding of the purpose of the company.

3. Constituting the ultimate Grundfrage in company law and corporate governance studies, the question of how to define the company’s purpose certainly constitutes a continual subject of academic dispute. Naturally, this results from the fact that the corporate form, as a conventional creation of the law “without a soul”[32] requires an external assignment of purpose. The notion of the corporate purpose[33] has been a recurring subject of discussion, most prominently mirrored in the Berle – Dodd deliberations[34]. This dispute and the ensuing scholarly contributions produced a large body of research on the so-called stakeholder v. shareholder primacy dilemma, which basically revolves around the question whose interests should shape the purpose of the company and – as a result – its business strategy and conduct. In terms of the banking sector, the debate on the corporate governance aspect of sustainability revolves around: (i) the well-known contrast between shareholder and stakeholder interests and (ii) the urge align ESG compliance with economically efficient outcomes.

As regards the first topic, the building blocks of the currently dominating shareholder primacy approach are understood to be of economic nature and a matter of efficiency. The theoretical foundations for the proclaimed “trickle down effect” of the shareholder primacy model find their background in a line of thought that dates back as far as Adam Smith and, most prominently and recently, Milton Freedman[35]. In his article entitled The Social Responsibility of Business is to Increase its Profits[36]Friedman called for a shareholder-focused profit orientation of companies which would then positively “trickle down” on society at large has pushed the idea of a corporation’s social responsibility into the “abyss” of voluntary corporate philanthropy[37]. Later, shareholder primacy was often advocated by law & finance scholars, which shaped the shareholder primacy argument around the so-called agency theory and argued that shareholders are residual claimants of a company’s cash flows and thus care most about the company’s value[38]. Consequently, at the beginning of the 21^st century, renowned scholars proclaimed the final victory of shareholder primacy over stakeholder approaches and the “end of history for corporate law” by arguing that contracts cannot adequately protect shareholders, unlike other stakeholders, and so they must therefore be granted the right to control the firm to protect their interests[39]. Shareholder primacy was being understood as a sort of “natural corporate law”[40] and developed a true paradigm in the Kuhnian sense of this term[41]. Outside of the academic debate, the shareholder value paradigm has evolved into a social norm internalized by those actors of the corporate world that play the lead role in shaping corporate conduct: directors[42].

The shareholder-dominant approaches referred to above underline a hierarchical dominance of shareholders’ interests over stakeholders’ interests. In particular, it must be underlined that “historically speaking”, shareholders’ investments represent the necessary means by which business activity takes place and, consequently, by which markets can operate through players with solid economic and asset bases. Shareholders, in other words, as investing actors, seek remuneration for their investments, and this is precisely because, beyond other considerations (also of ethical nature), the company’s distributed profits are the premium for the business risk taken.

In the light of the foregoing line of thought, the relevance of the stakeholders loses its centrality: for these actors, in fact, the business company’s business activity (for which they do not risk their own assets) is not an instrument with which they realize their own interests; the business activity at issue or public policies, at most, might assume compensatory connotations in the event that companies excessively discharge negative externalities on stakeholders. Consequently, the board members’ agencyrelationship with their principals (the shareholders)[43] imposes upon them legal obligations, that aim at guaranteeing the pursuit of the corporate interest in the aforementioned meaning, i.e. as defined through the lens of the shareholders’ interests. Such an interpretation of directors’ obligations is straightforward and is understood to confirm the need for the directors to pursue, through their management activity, neither personal interests (precisely in conflict) nor, interests that are outside the scope of to the company (such as those of the stakeholders), but only, and exclusively, those interests (even if progressively more sustainable) of the company and, therefore, of its shareholders. It must be noted that the considerations above do not aim to exempt directors (commonly protected, it should be remembered, by the principle of the business judgment rule) from management respectful of third parties. Such considerations do, however, imply that the corporate purpose (more or less sustainable) is the only interest that directors must pursue and achieve. And this, of course, even in the case it is in conflict with third parties’ interests. This point is being raised for consideration by the economic regulation, albeit without burdening the regulatory frameworkwith additional provisions that, for sure, would outline an overly costly discipline for the relevant operators.

It must be noted that the consideration of environmental, social and governancefactors will serve as a point of reference and benchmark for the bank’s management. The adequate disclosure to the market by thetools explained in section 2 is assumed to result in economic value and attract new investments that find new profit in sustainability[44]. These ‘sustainable cash-flows are contingent upon the mood and the feeling of investors (welcome back behavioral law and economics!) who deal with the subject matter with a “new approach”. This in turn could remodel some characteristics of the banking industry into a direction more compliant with third parties’ interests[45]. Sustainability could thus be understood as a key element to reshaping the banking system in its search for profit[46]. Such profits, as it should be noted, generally have positive systemic outcomes: such as subsequent (re-) investment, and taxation through they clearly contribute to the realization of the multiple stakeholder interests, or broadly speaking “the common good”. According to the examined approach profits will deliver incentives to “go sustainable”.

If one would try to align sustainability challenges with this framing of the corporate purpose, the normative model of the interrelation between companies, their shareholders, and stakeholders should navigate towards an “enlightened shareholder value approach”[47]. This means that regulation would not impose new entrepreneurial objectives, but rather envisage directing them towards an “enlightened” management of activities, insofar as capable of minimizing the negative impacts on stakeholders. Within such a regulatory approach, sustainability aspects would need to be considered in the decision-making processes of the board, while still being subordinated to shareholder interests.

In light of the bursting planetary boundaries of economic development and the resulting challenge of climate change, it seems necessary to reflect on whether the sustainability revolution has created a novel, contemporary framing of the seemingly settled debate on the corporate purpose. Although a couple of decades ago the question of whom the corporation should serve was, in fact, a matter of political and ideological alternative choices, the sustainability revolution delivers a new factual context that seems to redefine today’s debate. In particular, it seems necessary and prudent to evaluate the theoretical models that have long served as the foundation for how the role of the company within society is being understood. Along these lines it is being argued that the ‘corporate world’ is not detachable from the “outside world” and “corporations, like humans, need to adapt to their environment and social context”[48].

With its famous 2019 statement, the U.S. Business Roundtable (composed of the CEOs of the most important US corporations) expanded the purpose of the corporate form beyond mere profit maximization for shareholders. Though jubilated as a major turning point for the corporation’s role in society, the statement was in fact a reflection of vivid academic debate that emerged along with the sustainability revolution and the underlying imminent threat of climate change. As a result, substantial literature advocating the necessity of a sustainability-driven “repurposing” of companies has been produced lately[49]. Nonetheless, a meaningful pushback advocating the shareholder-primacy doctrine as the defining source of the corporation’s purpose remains[50].

4. Irrespective of whether sustainability is pursued within the traditional model of shareholder primacy or through a renewed concept of a pluralistic corporate purpose, adequate regulatory action appears to be of essential importance. In particular, if an EU harmonization on the understanding of the corporate purpose is being pursued despite significant differences in that regard amongst the member states, nebulousformulas will not suffice and only create legal uncertainty. Such uncertainty will primarily affect board members and their decision-making processes. Therefore, a clear regulatory framework, characterized by a high degree of certainty and objectivity which serves to ensure an equally high degree of confidence, trust, and, therefore, investment and stability in the markets is key. As pointed out by a scholar recently, the task of the regulation is not easy at all, given that the formulas used often present a great vagueness, “to attribute to businesses a supplanting role of clear, punctual and prescriptive rules that distinguish what is lawful from what is not, imposing (..) general (and potentially endless) obligations to “behave well” with real “risk (…) of approaching a questionable legislation of ethics”. An adequate skill-distinction, able of transcending the boundaries of a political correct approach and of “cosmetic measures” is, therefore, crucial, even more if related to the intercurrent nexus between corporate purpose and ESG, as well as to the necessity to properly understand the real purposes of two separate categories of market players: the private ones, intended to pursue primarily their own interests (e.g., profit, that is crucial for sustainability as well), and the public ones, which instead should be necessarily and exclusively oriented, in the matter of markets, to implement adequate ex ante and ex post verification measures (e.g., entry and removal mechanisms), aimed at avoiding pathological behavior (such as “greenwashing”) of companies, to the detriment of all Stakeholders. A position, this last one, that must be “prudential” and not “contaminated” by a brand-new type of interventionism of the supervisory authorities, quite frequent nowadays, and able to re-allocate on private players (banks as well) negative externalities (e.g., costs) related to the “long and winding road” to sustainability.

Moreover, efficient enforcement architectures, as well as optimal accountability mechanisms, contemplated by both civil law and criminal law, as well as the internal structuring of appropriate governance structures (e.g. ESG committees) and remuneration policies (linked to the realization of ESG goals) as sustainability safeguards could help to address, upstream, the sustainability challenge. In the end, it cannot be discarded that a less capillary and regulatory approach could result in greater benefits in terms of sustainability, it would be remunerated by greater investments.

Finally, it has to be stressed, that the question of the appropriate regulatory framing of the new sustainable corporate governance reality proves to be especially tricky in the context of the banking sector as banks are endowed with undeniable systemic and public functions which have shaped management concepts over decades. Moreover, banks will gain a leverage effect for sustainability goals as it is to be expected that in the near future, only ESG-compliant projects will become “worthy” of financing, with a consequent incentivizing effect for operators to equip themselves with suitable structures deemed adequate by banks, which will play the role of “gatekeepers” of the system’s sustainability.

5. Deteriorating climate, loss of biodiversity and aggravating social inequalities are the “grand challenge”[51] of our times. The famous “sustainability question”[52], i.e. whether global economic development may still meet the needs of the present generation without compromising the ability of future generations to meet their own needs, sadly yields unequivocal answers. It appears that the global community currently navigates an unsustainable route of development.

In the EU the surfacing sustainability revolution is mirrored in mushrooming regulatory efforts which seek to transform business activity towards a model of sustainable capitalism. Given that the sustainable revolution needs to be economically and financially sustained by the players involved, financial markets, including the banking sector, currently face changes in the regulatory landscape. For banks, regulatory compliance with new microprudential provisions or reporting obligations is certainly a strenuous task. But, as we claim above, what seems even more problematic are the corporate governance implications of the sustainability revolution. As we have explained, under the doctrine of shareholder primacy the corporate form, in which banks typically operate, has long been understood to primarily serve the interests of its shareholders. In light of the sustainability revolution and the resulting regulator steps that the EU Commission is envisaging with its CSDDD proposal, a reassessment of this concept is clearly mandated. As we have found, steps towards the alignment of a bank’s corporate governance with sustainability-driven goals are inevitable. The question remains whether this will take place “within” a cautious approach integrated into the shareholder primacy doctrine, which identifies sustainability as a source of profit and thus de facto a shareholder interest, or, through a redefinition of the corporate purpose that would pursue a hierarchical balance between stakeholder and shareholder interests.

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[1] Intergovernmental Panel on Climate Change (IPCC), Climate Change 2022: Impacts, Adaptation and Vulnerability, 2022, available at SSRN: https://www.ipcc.ch/report/ar6/wg2/.

[2] European Commission, Special Eurobarometer No 501, Public opinion in the European Union, March 2020, available at SSRN: https://europa.eu/eurobarometer/surveys/detail/2257.

[3] Britton-Purdy, Grewal, Kapczynski Rahman, Building a Law-And-Political-Economy Framework: Beyond the Twentieth-Century Synthesis, Yale Law Journal, Vol. 129(6), 2020, pp. 1784-1835; Harris, Varellas, Law and Political Economy in a Time of Accelerating Crises, Journal of Law and Political Economy, Vol. 1(1), 2020; Hofmann, Pantazatou, Zaccaroni, The Metamorphosis of the European Economic Constitution, Edward Elgar Publishing, 2019; Mayer, Valuing the invaluable: how much is the planet worth?, Oxford Review of Economic Policy35(1), 2019, pp. 109–119.

[4] Choudhury, Petrin, Corporate Duties to the Public, Oxford University Press, 2019; Fisch, Solomon, Should Corporations Have a Purpose? Texas Law Review, Vol. 99(7), 2021, pp. 1309-1346; Fleischer, Corporate Purpose: A Management Concept and its Implications for Company Law, European Company and Financial Law Review, Issue 2, 2021, pp. 161–189; Mayer, The Future of the Corporation and the Economics of Purpose (2020), ECGI Finance Working Paper No. 710/2020; Sjåfjell, Bruner, Corporations and Sustainability, Sjåfjell, Bruner (eds.):The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability, Cambridge University Press, 2020, p. 6.

[5] Paris Agreement, O.J. 2016, L 282/4.

[6] United Nations’ Sustainable Development Agenda of 2030: UNGA Res 70/1 (25 Sept. 2015) UN Doc A/RES/70/1.

[7] Consolidated version of the Treaty on European Union, OJ C 326, 26 October 2012, pp. 13–390.

[8] Communication from the Commission, The European Green Deal, Brussels, 11 December2019COM(2019) 640 final.

[9] Communication from the Commission to the European Parliament, The European Council, The Council, The European Central Bank, The European Economic and Social Committee and the Committee of the Regions, Action Plan: Financing Sustainable Growth, Brussels, 8 March 2018 COM(2018) 97 final, hereinafter: “Action Plan”.

[10] Mittwoch, Möslein, Der Europäische Aktionsplan zur Finanzierung eines nachhaltigen Wachstums, WM, 2019, pp. 481-489.

[11] See further in detail MacNeil, Esser, From Financial to an Entity Model of ESG, European Business Organization Law Review, Issue 1, 2022, pp. 9-45.

[12] Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, Brussels, 23 February 2022 COM(2022) 71 final 2022/0051 (COD), hereinafter: “CSDDD”.

[13] See actions 1-5 of the Action Plan, i.e.: Action 1- Establishing an EU classification system for sustainable activities, Action 2- Creating standards and labels for green financial products, Action 3- Fostering investment in sustainable projects, Action 4- Incorporating sustainability when providing financial advice, Action 5- Developing sustainability benchmarks.

[14] See actions 6-8 of the Action Plan, i.e.: Action 6- Better integrating sustainability in ratings and market research; Action 7- Clarifying institutional investors’ and asset managers’ duties; Action 8- Incorporating sustainability in prudential requirements.

[15] See actions 9-10 of the Action Plan, i.e.: Action 9- Strengthening sustainability disclosure and accounting rule-making, Action 10- Fostering sustainable corporate governance and attenuating short-termism in capital markets.

[16] See Smoleńska, van’t Klooster, A Risky Bet: Climate Change and the EU’s Microprudential Framework for Banks, Journal of Financial Regulation (8), 2008, pp. 51-74; Arriba-Sellier, Turning Gold into Green: Green Finance in the Mandate of European Financial Supervision, Common Market Law Review 2021(58) 2021, pp. 1097-1140; Schoenmaker, Van Tilburg, What role for financial supervisors in addressing environmental risks?”, Comparative Economic Studies 58,2016, pp. 317–334.

[17] EBA Action Plan on Sustainable Finance, 6 December 2019, available at SSRN: https://www.eba.europa.eu/eba-pushes-early-action-sustainable-finance.

[18] Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures, OJ L 150, 7 June 2019, pp. 253–295.

[19] Regulation (EU)2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings ,large exposures, reporting and disclosure requirements, regulation (EU) No.648/2012, OJ L 150, 7 June 2019, pp. 1–225.

[20] As defined in in point 8 of Article 4(1) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance, OJ L 173, 12 June 2014, pp. 349–496.

[21] Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector, OJ L 317, 9 December 2019, pp. 1–16.

[22] Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, OJ L 330, 15 November 2014, pp. 1–9.

[23] Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, OJ L 132, 20 May 2017, pp. 1–25.

[24] See Hommelhoff, Nichtfinanzielle Ziele in Unterhehmen von öffentlichem Interesse, Die Revolution übers Bilanzrecht, Festschrift für Bruno M. Kübler zum 70. Geburtstag, C.H. Beck, 2015, pp. 291-299.

[25] The EU legislator connected long-term objectives with social and environmental aspects of sustainability. If a company awards variable remuneration components, the remuneration policy should contain clear, comprehensive and differentiated criteria with regard to financial and non-financial performance criteria for their award, including criteria concerning the consideration of social interests, the company’s contribution to environmental protection and undertaking actions aimed at preventing and eliminating negative social impacts of the company’s operations.

[26] Proposal for a Directive of the European Parliament and of the Council, amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting, Brussels, 21 April 2021 COM(2021) 189 final, 2021/0104(COD).

[27] See further Monciardini and Mähönen, Goodbye, non-financial reporting! A first look at the EU proposal for corporate sustainability reporting, Blogging for Sustainability, available at SSRN: https://www.jus.uio.no/english/research/areas/companies/blog/companies-markets-and-sustainability/2021/goodbye-non-financial-reporting–monciardini-mahonen.html; Glazerman and Cohen, “Non-financial” is a misnomer, but doesn’t have to be a missed opportunity, Journal of Applied Corporate Finance, 2020/32, 2020, pp. 108-116.

[28] MacNeil, Esser, From Financial to an Entity Model of ESG, European Business Organization Law Review, Issue 1, 2022, pp. 19-31.

[29] Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, Brussels, 23 February 2022 COM(2022) 71 final 2022/0051 (COD), hereinafter: “CSDDD”.

[30] See: Bertram, Green(wash)ing Global Commodity Chains: Light and Shadow in the EU Commission’s Due Diligence Proposal, Verfassungsblog, 24 February 2022, available at SSRN: https://verfassungsblog.de/greenwashing-global-commodity-chains/; Ruggie, European Commission initiative on mandatory human rights due diligence and directors’ duties, Harvard Kennedy School, available at SSRN: https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/EU%20mHRDD.pdf.

[31] See critically European Company Law Experts Group, EC Corporate Governance Initiative Series: A Critique of the Study on Directors’ Duties and Sustainable Corporate Governance Prepared by Ernst & Young for the European Commission, 14 October 2020, available at SSRN: https://www.law.ox.ac.uk/business-law-blog/blog/2020/10/ec-corporate-governance-initiative-series-critique-study-directors; Bianchi, Milič, EC Corporate Governance Initiative Series: European Companies are Short-Term Oriented: The Unconvincing Analysis and Conclusions of the Ernst & Young Study, 13 October 2020, available at SSRN: https://www.law.ox.ac.uk/business-law-blog/blog/2020/10/ec-corporate-governance-initiative-series-european-companies-are; Bassen, Lopatta, EC Corporate Governance Initiative Series: The EU Sustainable Corporate Governance Initiative – room for improvement, 15 October 2020, available at SSRN: https://www.law.ox.ac.uk/business-law-blog/blog/2020/10/ec-corporate-governance-initiative-series-eu-sustainable-corporate; Corradi, EC Corporate Governance Initiative Series: Corporate Opportunities Rules, Long-termism and Sustainability, 29 October 2020, available at SSRN https://www.law.ox.ac.uk/business-law-blog/blog/2020/10/ec-corporate-governance-initiative-series-corporate-opportunities; Edmans, EC Corporate Governance Initiative Series: Diagnosis Before Treatment: the Use and Misuse of Evidence in Policymaking, 30 October 2020, available at SSRN : https://www.law.ox.ac.uk/business-law-blog/blog/2020/10/ec-corporate-governance-initiative-series-diagnosis-treatment-use-and; Roe et. al., The European Commission’s Sustainable Corporate Governance Report: A Critique,Harvard Public Law Working Paper” 2020/20–30; Richter, Thomsen, Ohnemus, EC Corporate Governance Initiative Series: A Response from the Copenhagen Business School, 26 October 2020, available at SSRN: https://www.law.ox.ac.uk/business-law-blog/blog/2020/10/ec-corporate-governance-initiative-series-response-copenhagen; Hansen, Unsustainable Sustainability, Oxford Business Law Blog, 8 March 2022, available at SSRN: https://www.law.ox.ac.uk/business-law-blog/blog/2022/03/unstainable-sustainability; Gözlügöl, Ringe, The EU Sustainable Corporate Governance Initiative: Where are We and Where are We Headed?, Harvard Law School Forum on Corporate Governance, 2022, available at SSRN: https://corpgov.law.harvard.edu/2022/03/18/the-eu-sustainable-corporate-governance-initiative-where-are-we-and-where-are-we-headed/?utm_content=buffer07f0c&utm_medium=social&utm_source=linkedin.com&utm_campaign; See affirmatively Sjåfjell, Mähönen, Corporate Purpose and the EU Corporate Sustainability Due Diligence Proposal, Oxford Business Law Blog, 25 February2022 r., available at SSRN: https://www.law.ox.ac.uk/business-law-blog/blog/2022/02/corporate-purpose-and-eu-corporate-sustainability-due-diligence (dostęp: 18.05.2022 r.); Brabant et. al., Due Diligence Around the World: The Draft Directive on Corporate Sustainability Due Diligence (Part 1), Verfassungsblog, 15 March2022 r., available at SSRN : https://verfassungsblog.de/due-diligence-around-the-world/, Bertram, Green(wash)ing Global Commodity Chains: Light and Shadow in the EU Commission’s Due Diligence Proposal, Verfassungsblog, 24 February 2022, available at SSRN: https://verfassungsblog.de/greenwashing-global-commodity-chains/.

[32] As famously declared by Edward, First Baron Thurlow: “Did you ever expect a Corporation to have conscience, when it has no soul to be damned, and no body to be kicked?”, cited and further explored by, Coffee, “‘No Soul to Damn: No Body to Kick’: An Unscandalized Inquiry into the Problem of Corporate Punishment.” Michigan Law Review 79 (3), 1981, pp. 386–459.

[33] On this topic see: recently, Stella Richter jr., Long termism, (2021) Riv. società, 16; Tombari, Corporate purpose e diritto societario: dalla “supremazia degli interessi dei soci” alla libertà di scelta dello “scopo sociale”?, (2020) Riv. Società 3.

[34] Berle, Corporate Powers as Powers of Trust, Harvard Law Review 44, 1931, p. 1049; Dodd, For Whom are corporate managers trustees?, Harvard Law Review 45, 1932, p. 1145; Berle, For Whom are corporate managers trustees: A note, Harvard Law Review 45, 1932, p. 1365; For a comprehensive overview see Sneirson, The history of shareholder primacy, from Adam Smith through the rise of financialism,Sjåfjell, Bruner, (eds.): The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability, Cambridge University Press, 2020, pp. 73-85; and Hill, Then and Now: Professor Berle and the Unpredictable Shareholder, University Law Review 33, 2010, pp. 1005, 1009-10.

[35] Sneirson,The History of Shareholder Primacy, from Adam Smith through the Rise of Financialism,B. Sjåfjell and C. M. Bruner (ed.), The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability, Cambridge University Press, 2019.

[36] Friedman, The Social Responsibility of Business is to Increase its Profits, The New York Times Magazine 13 September 1970.

[37] Fleischer, Corporate Purpose: A Management Concept and its Implications for Company Law, European Company and Financial Law Review, Issue 2, 2021, pp. 165-166.

[38] Fama, Jensen, Agency Problems and Residual Claims, The Journal of Law and Economics, Vol. 26(2), 1983, pp. 327-349.

[40] Mayer, Prosperity: Better business makes the greater good, Oxford University Press, 2018, p. 2.

[41] Kuhn, The Structure of Scientific Revolutions, University of Chicago Press, 1970.

[42] Sneirson, The history of shareholder primacy, from Adam Smith through the rise of financialism, in: Sjåfjell, Bruner The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability, Cambridge University Press 2020, p. 76 et seq.

[43] See Kraakman et al., The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford, 2017.

[44] On this topic see Capriglione, Finanza e politica nell’UE dopo la pandemia. Verso un auspicabile incontro, in Contr. e impr. Europa,1 (171), 2021,; and Capriglione, Il sistema finanziario verso una transizione sostenibile, Riv. trim. dir. econ.241, 2021. On this topic see also Enger-Enriques-Ringe-Varottil-Wetzer, Business Law and the Transition to ta Net Zero Economy, Munich, 2022.

[45] On this topic also see the current version of the Circolare 285 of the Bank of Italy, available at SSRN: https://www.bancaditalia.it/compiti/vigilanza/normativa/archivio-norme/circolari/c285/ and that pays strong attention at the ESG context within the banking governance. Generally speaking on banking governace see also Enriques-Zetzche, Hertig Improving the Governance of Financial Supervisors, in Eur. Bus. Org. Law Rev. 357, 2011; Enriques-Zetzche, Quack Corporate Governance, Round III? Bank Board Regulation Under the New European Capital Requirement Directive, in ECGI Law Working Paper, No. 294/2014, 2014; Macey-O’hara, The Corporate Governance Of Banks, in Econ. Pol. Rev 91, 2003.

[46] Reference made to the “new wave” that characterizes the corporate governance of banks see Capriglione-Sacco Ginevri, Metamorfosi della governance bancaria (2019), Turin.

[47] This would correspond e.g. to the approach taken within the Italian Corporate Governance Code applicable to listed companies, which requires the board of directors to guide the company by pursuing its ‘sustainable success’ very broadly defining it as “an objective that guides the board’s action […] in the creation of long-term value for the benefit of shareholders, taking into account the interests of other stakeholders relevant to the company”.

[48] Mayer, Prosperity: Better business makes the greater good, Oxford University Press, 2018, p. 15.

[49] See Sjåfjell, and Bruner, The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability, Cambridge University Press, 2019; Mayer, Prosperity. Better Business Makes the Greater Good, Oxford University Press, 2018; Mélon, Shareholder Primacy and Global Business. Re-clothing the EU Corporate Law, Routledge, 2019; Choudhury, Petrin, Corporate Duties to the Public, Oxford University Press, 2019; Möslein, Sørensen, Sustainable Corporate Governance: A Way Forward, Nordic & European Company Law Working Paper, No. 21-03, 2021.

[50] See Bebchuk, Tallarita, The illusory promise of stakeholder governance, Cornell Law Review, Vol. 106, 2020, pp. 91-178.

[51] Sjåfjell, Responding to the Grand Challenge of Our Time,Eftestøl-Wilhelmsson, E., Sankari, S., Bask A. (eds.): Sustainable and Efficient Transport. Incentives for Promoting a Green Transport Market, Edward Elgar, 2019.

[52] The question is derived from the definition of sustainability as presented in the Brundtland Report “Our Common Future” from 1987, available at SSRN: http://www.un-documents.net/our-common-future.pdf.

Authors:

* Assistant Professor of Economic Law, Department of Management, University of Turin (Corresponding Author: federico.riganti@unito.it)

** Assistant Professor at the Chair of Commercial Law, Faculty of Law and Administration, University of Warsaw

Though the considerations expressed in the paper are shared by both authors, sections 1 and 2 should be attributed to Anne-Marie Weber, while sections 3 and 4 should be attributed to Federico Riganti. The conclusions at sections 5 should instead be attributed to both authors.