Shareholders in corporate law as potential protagonists of environmental restorative justice in relation to esg criteria

• Pages: 331-368
• Author: Pilar Farias

SHAREHOLDERS IN CORPORATE LAW AS POTENTIAL

PROTAGONISTS OF ENVIRONMENTAL

...

RESTORATIVE

JUSTICE IN RELATION TO ESG CRITERIA

Pilar Farias1

1. INTRODUCTION

Even though corporations have been major drivers for progress, there is

a progressive acknowledgement that their quest for prot contributes to a

broad range of society’s concerns and might have negative externalities on

the community and the environment (Bebchuk & Tallarita, 2020). As growing

literature has suggested, this rise of consciousness has reached shareholders,

who may wish to sacrice certain number of prots to pursue some social goals

(Hart & Zingales, 2017).

The Paris Agreement, of December 2015, adopted at the climate conference

COP21 meant the rst legally binding global climate change agreement

establishing, the objective of limiting the global temperature increase to 1.5°C,

with the purpose of signicantly reducing the risks and impacts of climate

change. After this, the Sustainable Finance Action Plan (“SFAP”)2 was coined

in May 2018 (European Commission, 2018a). Its fundamental objectives were

to redirect capital ows towards sustainable investments, to integrate ESG

(environmental, social and governance) criteria in risk management, and to

encourage transparency and long-term investments.

1 Degree in Law and Business Administration from Universidad Carlos III de Madrid.

Master’s Degree in Law. This work is a synthesis and update of the nal dissertation (TFG) for

the Degree in Law, defended in 2023. For the completion of the TFG, the author collaborated with

various research projects indicated in the repository containing the original work.

2 See the Communication from the Commission to the European Parliament, the European

Council, the Council, the European Central Bank, the European Economic and Social Committee,

the Committee of the Regions on an Action Plan: Financing Sustainable Growth, (COM 2018) 97

nal (March 8, 2018) [hereinafter SFAP].

332 pilar FariaS

Following this line, ESG criteria have been coined over the last decade,

becoming a usual term in corporations, including board meetings and

investment committees alike (Serafeim, 2021; Teh & Khan, 2024; Che,

Song & Li, 2024). For the purpose of this work, ESG will be referred to as

environmental, social and governance principles that the United Nations

believe should guide all management and investment decisions worldwide

(Principles for Responsible Investment [PRI], 2021). This term was created

within a collaboration between the United Nations and some of the major

players in the nancial industry with the aim to pursue broad goals (Pollman,

2022).The relevance of ESG has increased in recent years with international

integration driven by the notion given by the OECD (2011) that to “identify,

prevent, mitigate and account for how they address their adverse human rights

impacts, business enterprises should carry out human rights due diligence”

(p. 17). This is where shareholders come into play. One example of this is

paragraph 14 of the Preamble of the Directive 2017/828/EC. This paragraph

establishes that shareholder involvement in corporate governance can play

a valuable role in improving the nancial and non-nancial performance of

companies (Network for Greening the Financial System, 2024), including ESG

factors, as referred to in the mentioned Principles for Responsible Investment

(Directive 2017/828/EC, Preamble, par. 14).

Conceived as either a mirror or a driver of society’s demands, Law,

especially Corporate Law, a discipline very much related to the market forces,

has reected the changes towards environmentalism following pressures

from different stakeholders (for example, employees and consumers). From

my perspective as a young researcher in Law, this topic is of utmost relevance

because the future of our planet and, hence, of our coexistence will be partly

dened by the concrete decisions taken by corporations at the national and

international legal arena, particularly in relation to environmental protection,

conservation and reparation.

The main objective of this work is to analyze the problem of including ESG

principles within Corporate Law, in relation to restorative justice, throughout

the study of a variety of norms, as well as the relevant proxy ghts3 conducted

by shareholders. In concrete, within the general framework of restorative

principles, this chapter seeks to provide answers to the following challenges

regarding fostering environmentalism by shareholders:

1. How can we integrate agency theory with stakeholderism theory?

2. Is fostering environmentalism changing the purpose of the corporation?

3 A proxy is a person who represents a member in the shareholders’ meeting of a company.

A proxy ght refers to the act of a group of shareholders joining forces and attempting to gather

enough shareholder proxy votes to win a corporate vote.

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ShareholderS in Corporate laW aS potential protaGoniStS oF enVironmental...

3. Can we quantify the attainment of environmental goals?

4. Which, among the three proposed alternatives – exit, voice, or coercion -

would be the appropriate mechanism to foster environmental concerns

of shareholders?

5. How can we pretend that those who make decisions (directors, but

also investment managers and institutional investors) care about

environmentalism while at the same time not conicting their

duciary duties?

6. Are proxy advisors an effective means of mitigating agency concerns

which at the end are the origin of shareholder activism?

To answer those questions, restorative justice theory and practice will be

taken into account to nally propose the use of diverse restorative dynamics to

other potential protagonists4. A very concrete proposal will be to consider the

use of proxy to have a say on climate associated to remuneration of executives.

It is not that difcult to link remuneration to plans with specic and measurable

sustainable objectives, and it might be effective in this realm. Executives, in

turn, should be properly held accountable by shareholders in a say on climate.

In other words, I propose that managers do what principals say by associating

their remuneration to certain objectives. That would be done with a “say on

climate pay”. For some this might not be totally coherent with restorative justice

as usual, but, preserving its core principles, restorative justice has to seek to

be effective in this realm where impunity and “green and restorative washing”

operate. In concrete, restorative principles and dynamics can be used for

participatory and inclusive understanding.

After a literature review restricted to the above mentioned objectives,

mainly at the European, United States and Spanish level, the following section

will seek to explain the origin of the ESG objectives, the reasons for their

emergence, as well as the inrush current they have comprised regarding

previous notions of corporate purpose. The third section will be focused on

analysing shareholder impacts in Corporate Social Responsibility (“CSR”),

concretized in ESG. Three viewpoints will be considered: as exit, coercion,

and voice mechanisms. As said before, a proposal of voice mechanisms,

concretized in ESG tied to remuneration, will be discussed. The work will end

with some concluding remarks.

4 Including the use of apologies, when appropiate and beyond tokenism, see Hornsey et

al. (2024) and Grappi et al. (2024).