1 00:00:00,000 --> 00:00:07,560 Welcome to the Oxford Undergraduate Law Podcast, where we discuss the law, its relationships 2 00:00:07,560 --> 00:00:11,320 with society and its implications on our everyday lives. 3 00:00:11,320 --> 00:00:12,760 I'm Chun. 4 00:00:12,760 --> 00:00:13,760 I'm Dorothea. 5 00:00:13,760 --> 00:00:17,240 And we are your podcast editors. 6 00:00:17,240 --> 00:00:22,080 Today we'll be joined by Professor John Armour and Professor Tom Watzer, who will be discussing 7 00:00:22,080 --> 00:00:27,280 their research paper on green pills in making corporate climate commitments credible. 8 00:00:27,280 --> 00:00:31,600 The research paper is joint work with Professor Luca Enriquez, who unfortunately could not 9 00:00:31,600 --> 00:00:34,720 be present for the discussion today. 10 00:00:34,720 --> 00:00:39,240 Professor John Armour is a Professor of Law and Finance at Oxford University and a Fellow 11 00:00:39,240 --> 00:00:42,840 of the British Academy and the European Corporate Governance Institute. 12 00:00:42,840 --> 00:00:47,560 He studied at the University of Oxford and then Yale Law School and has held visiting 13 00:00:47,560 --> 00:00:52,920 posts at various institutions, including the University of Chicago, Columbia Law School, 14 00:00:52,920 --> 00:00:58,360 the University of Frankfurt, the Max Planck Institute, the Corporate Private Law and Hamburg 15 00:00:58,360 --> 00:01:00,200 and Sydney Law School. 16 00:01:00,200 --> 00:01:05,240 He is a member of the American Law Institute and an academic member of the Chancellor Abar 17 00:01:05,240 --> 00:01:06,240 Association. 18 00:01:06,240 --> 00:01:10,560 Professor Armour has published widely in the fields of company law, financial regulation 19 00:01:10,560 --> 00:01:13,360 and corporate insolvency. 20 00:01:13,360 --> 00:01:17,840 Professor Tom Watzer is Associate Professor of Law and Finance at the University of Oxford 21 00:01:17,840 --> 00:01:21,280 and the founding director of the Oxford Sustainable Law Programme. 22 00:01:21,280 --> 00:01:26,200 At Oxford, Professor Watzer is also a Fellow of Lineker College, Senior Research Fellow 23 00:01:26,200 --> 00:01:30,680 at the Institute for New Economic Thinking at the Oxford Martin School, a member of the 24 00:01:30,680 --> 00:01:35,960 leadership team at the Smith School of Enterprise and the Environment, co-lead at Oxford Net 25 00:01:35,960 --> 00:01:41,800 Zero, lead researcher at the Oxford Martin Initiative for a Net Zero Recovery and a member 26 00:01:41,800 --> 00:01:46,080 of the Oxford Manned Institute of Quantitative Finance. 27 00:01:46,080 --> 00:01:49,960 Professor Watzer's research examines how law and finance can generate value and advance 28 00:01:49,960 --> 00:01:54,720 the public good, focusing on how we can build more resilient financial systems, improve 29 00:01:54,720 --> 00:02:00,120 the governance of corporations and tackle the climate crisis. 30 00:02:00,120 --> 00:02:04,480 Professor Armour and Professor Watzer, welcome to the podcast and thank you for joining us. 31 00:02:04,480 --> 00:02:05,480 Thank you for inviting us. 32 00:02:05,480 --> 00:02:08,360 We're delighted to be here with you today. 33 00:02:08,360 --> 00:02:12,760 The proposal in your joint research paper, Green Pills, responds to the lack of credibility 34 00:02:12,760 --> 00:02:16,220 in corporations' announcements to reduce their carbon emissions. 35 00:02:16,220 --> 00:02:20,440 How does this credibility problem arise and why do credible corporate climate commitments 36 00:02:20,440 --> 00:02:21,440 matter? 37 00:02:21,440 --> 00:02:23,120 So that's a great question to start off with. 38 00:02:23,120 --> 00:02:28,200 And maybe before we delve into it, let's take one step back and ask why we should care about 39 00:02:28,200 --> 00:02:31,680 corporate climate commitments to begin with. 40 00:02:31,680 --> 00:02:36,680 We all know that climate change is a pressing societal challenge and we know that governments 41 00:02:36,680 --> 00:02:43,080 under the Paris Agreement have decided to take action to bring global emissions down 42 00:02:43,080 --> 00:02:45,700 to net zero by 2050. 43 00:02:45,700 --> 00:02:50,160 The question is, what does that governmental commitment mean for companies? 44 00:02:50,160 --> 00:02:56,260 Do companies have an obligation to reduce their emissions to net zero as well? 45 00:02:56,260 --> 00:03:00,880 And perhaps surprisingly, by and large, in most jurisdictions, the answer is that they 46 00:03:00,880 --> 00:03:03,440 do not have such an obligation. 47 00:03:03,440 --> 00:03:06,560 There are, of course, some exceptions to this rule. 48 00:03:06,560 --> 00:03:11,080 In the car industry, for example, there have been net zero requirements introduced for 49 00:03:11,080 --> 00:03:13,800 the cars that are being produced. 50 00:03:13,800 --> 00:03:19,240 There are some companies that have been subjected to court judgments that force these companies 51 00:03:19,240 --> 00:03:20,720 to move to net zero. 52 00:03:20,720 --> 00:03:27,680 But of course, new legislation may be introduced that introduces a broader requirement for 53 00:03:27,680 --> 00:03:30,180 companies to move to net zero. 54 00:03:30,180 --> 00:03:35,760 But at this stage, for most companies in most jurisdictions, there is no such requirement 55 00:03:35,760 --> 00:03:37,180 yet. 56 00:03:37,180 --> 00:03:42,360 And that means that taking climate action, by and large, is a voluntary affair for most 57 00:03:42,360 --> 00:03:44,680 corporations. 58 00:03:44,680 --> 00:03:53,800 And that then raises the question, what is the value of the announced climate commitments, 59 00:03:53,800 --> 00:04:01,080 the voluntary climate commitments that companies have shown to the world, if you will? 60 00:04:01,080 --> 00:04:09,760 So against that background that Tom set out, we characterize the credibility problem with 61 00:04:09,760 --> 00:04:17,160 corporate climate commitments as being one that arises where a firm, a private company, 62 00:04:17,160 --> 00:04:23,040 expresses an intention to reduce its carbon emissions in the future. 63 00:04:23,040 --> 00:04:30,840 So that intention may look great, but in many cases, the intention appears only to be an 64 00:04:30,840 --> 00:04:38,040 aspiration, a hope, and is not backed by action or any form of commitment to actually delivering 65 00:04:38,040 --> 00:04:40,280 on that aspiration. 66 00:04:40,280 --> 00:04:46,120 An example, and this is just one of many that we could pick, is Shell, which announced last 67 00:04:46,120 --> 00:04:53,560 year very publicly its aspiration to become a net zero emissions energy business by 2050, 68 00:04:53,560 --> 00:04:55,080 in line with the Paris Agreement. 69 00:04:55,080 --> 00:05:01,680 But the pathway to this is arguably inconsistent with Shell's current plans and strategies. 70 00:05:01,680 --> 00:05:08,800 And if we look closely at what Shell has said, the small print explains that Shell's delivery 71 00:05:08,800 --> 00:05:16,440 on net zero emissions by 2050 is dependent on societies changing along the way. 72 00:05:16,440 --> 00:05:20,880 And we can understand that as meaning that Shell expects carbon taxes and other policies 73 00:05:20,880 --> 00:05:26,800 to be introduced by governments that will make it more economic for Shell to shift to 74 00:05:26,800 --> 00:05:27,800 net zero. 75 00:05:27,800 --> 00:05:33,840 And conversely, that if that doesn't happen, then a voluntary shift is not something that 76 00:05:33,840 --> 00:05:34,840 it's anticipating. 77 00:05:34,840 --> 00:05:36,880 So why does this matter? 78 00:05:36,880 --> 00:05:41,080 Why does the credibility of these undertakings matter? 79 00:05:41,080 --> 00:05:46,840 Well, it matters in a relatively narrow sense for parties who deal with firms because they 80 00:05:46,840 --> 00:05:49,400 increasingly care about what firms are doing. 81 00:05:49,400 --> 00:05:53,440 Customers increasingly care about the way in which their products are sourced. 82 00:05:53,440 --> 00:05:57,760 Investors increasingly care about the carbon emissions of companies that they're looking 83 00:05:57,760 --> 00:05:58,760 money into. 84 00:05:58,760 --> 00:06:05,280 And these parties need to know whether firms mean what they say when they make undertakings 85 00:06:05,280 --> 00:06:07,200 about reducing emissions. 86 00:06:07,200 --> 00:06:12,520 More fundamentally, and going back to the background that Tom set out, this is a problem 87 00:06:12,520 --> 00:06:17,400 for society because governments have made undertakings, but notoriously they're dragging 88 00:06:17,400 --> 00:06:20,200 their feet on bringing in the necessary change. 89 00:06:20,200 --> 00:06:24,920 So we may hope that the private sector can put a foot forward. 90 00:06:24,920 --> 00:06:30,600 And we need to know whether these undertakings are real. 91 00:06:30,600 --> 00:06:34,560 Thank you for contextualising this problem and explaining the importance of corporate 92 00:06:34,560 --> 00:06:36,400 climate commitments. 93 00:06:36,400 --> 00:06:40,380 On that point, given the increasing costs of climate change and the opportunities which 94 00:06:40,380 --> 00:06:45,420 can arise from a transition to a net zero economy, is there a business case for a transition 95 00:06:45,420 --> 00:06:49,760 to a net zero economy which could sufficiently compel firms to credibly commit? 96 00:06:49,760 --> 00:06:55,080 So there is a business case, but not everyone agrees on how strong that business case is. 97 00:06:55,080 --> 00:06:56,920 So what's the challenge? 98 00:06:56,920 --> 00:07:02,320 The challenge is that because there is no requirement on the part of the government 99 00:07:02,320 --> 00:07:07,320 to that companies decarbonise, and there's actually not a very clear policy framework 100 00:07:07,320 --> 00:07:12,000 in general around decarbonisation, there's a lot of policy uncertainty. 101 00:07:12,000 --> 00:07:15,600 And investors have to grapple with that uncertainty. 102 00:07:15,600 --> 00:07:21,160 And to simplify things a little bit, what we say is that investors, broadly speaking, 103 00:07:21,160 --> 00:07:22,720 they differ on two dimensions. 104 00:07:22,720 --> 00:07:30,960 The first is the expectation and whether they think effectively that the economy is going 105 00:07:30,960 --> 00:07:34,600 to transition to a net zero economy. 106 00:07:34,600 --> 00:07:39,960 And they also differ on the normative dimension, which is how much do they actually care about 107 00:07:39,960 --> 00:07:41,800 climate change. 108 00:07:41,800 --> 00:07:46,720 And based on these two dimensions, we can distinguish between two classes of shareholders. 109 00:07:46,720 --> 00:07:52,000 The first class is what we call the class of climate-indifferent shareholders. 110 00:07:52,000 --> 00:07:58,400 These are not shareholders and investors that are driven by normative commitments to fighting 111 00:07:58,400 --> 00:07:59,720 climate change. 112 00:07:59,720 --> 00:08:02,720 They are driven by profit maximisation. 113 00:08:02,720 --> 00:08:07,920 And on average, these climate-indifferent shareholders do not necessarily put a high 114 00:08:07,920 --> 00:08:10,520 expectation on the transition happening. 115 00:08:10,520 --> 00:08:17,400 And so even though they may account for the costs and benefits associated with the transition, 116 00:08:17,400 --> 00:08:22,920 they are not by themselves necessarily sufficiently motivated to drive forward the transition 117 00:08:22,920 --> 00:08:24,920 at the company level. 118 00:08:24,920 --> 00:08:30,360 The second class of investors might be, and the second class is what we call the climate-conscious 119 00:08:30,360 --> 00:08:32,960 investors. 120 00:08:32,960 --> 00:08:36,600 Climate-conscious investors place a higher value on transition. 121 00:08:36,600 --> 00:08:42,960 And that might be because they attach a higher probability to society transitioning, or they 122 00:08:42,960 --> 00:08:49,960 may have a higher normative value associated with the companies they invest in transitioning. 123 00:08:49,960 --> 00:08:56,280 Whichever it may be, in fact, it may be both simultaneously, that means that these kinds 124 00:08:56,280 --> 00:09:00,960 of investors are likely to push companies to decarbonise. 125 00:09:00,960 --> 00:09:05,680 Now what's complicated is that boards are kind of caught in the middle of these two 126 00:09:05,680 --> 00:09:06,680 groups of investors. 127 00:09:06,680 --> 00:09:10,560 So they are having an investor base that is heterogeneous. 128 00:09:10,560 --> 00:09:16,640 That means some investors will be climate-indifferent, others will be climate-conscious. 129 00:09:16,640 --> 00:09:21,160 And the challenge for the board is that they have a fiduciary duty to act in the best interests 130 00:09:21,160 --> 00:09:22,720 of the company. 131 00:09:22,720 --> 00:09:26,760 And that's generally understood as maximising value. 132 00:09:26,760 --> 00:09:34,480 And that fiduciary duty is overlaid with executive compensation that is paid out in stock. 133 00:09:34,480 --> 00:09:37,600 And of course by the threat of removal by shareholders. 134 00:09:37,600 --> 00:09:44,280 And so the board being stuck in the middle is trying to satisfy both investors, both 135 00:09:44,280 --> 00:09:48,060 classes of investors, at the same time. 136 00:09:48,060 --> 00:09:54,880 And one way in which they might do that is by seeking to satisfy the climate-indifferent 137 00:09:54,880 --> 00:10:01,240 investors whilst also benefiting from the investments from climate-conscious investors. 138 00:10:01,240 --> 00:10:02,240 And how much you do that? 139 00:10:02,240 --> 00:10:10,440 Well, you might do that by effectively committing to going green, but doing so at minimum cost. 140 00:10:10,440 --> 00:10:15,480 And that might mean that you make a promise to transition in the future rather than today, 141 00:10:15,480 --> 00:10:21,040 or that you promise to go green, but retain sufficient flex as part of that promise to 142 00:10:21,040 --> 00:10:26,240 be able to transition away from going green, if that is what shareholders would like you 143 00:10:26,240 --> 00:10:29,320 to do in a future date. 144 00:10:29,320 --> 00:10:35,560 And that is a perfect example of greenwash, because what it means is that all kinds of 145 00:10:35,560 --> 00:10:40,240 investors who do care about climate change may look at your commitments and say, well, 146 00:10:40,240 --> 00:10:45,200 wait a second, this is very interesting for us and we're going to invest. 147 00:10:45,200 --> 00:10:50,480 That means the company benefits from a lower cost of capital, but they don't actually deserve 148 00:10:50,480 --> 00:10:51,480 that. 149 00:10:51,480 --> 00:10:56,440 They don't take the actions to back up their green claims. 150 00:10:56,440 --> 00:11:02,960 It's a standard greenwashing problem, and it's the kind of problem that the mechanism 151 00:11:02,960 --> 00:11:05,600 that we discuss in this paper is meant to address. 152 00:11:05,600 --> 00:11:10,360 Yes, and your explanation of the different classes of investors is really useful in explaining 153 00:11:10,360 --> 00:11:15,400 firms' attitudes to credibly committing and how the problem of greenwashing actually arises 154 00:11:15,400 --> 00:11:16,400 from that. 155 00:11:16,400 --> 00:11:17,400 So thank you. 156 00:11:17,400 --> 00:11:21,840 So you've demonstrated the need for corporate climate commitments, but in your paper, you 157 00:11:21,840 --> 00:11:26,400 argue that traditional corporate governance mechanisms are inadequate in ensuring that 158 00:11:26,400 --> 00:11:30,960 firms deliver credible commitments to reduce emissions. 159 00:11:30,960 --> 00:11:31,960 Why is this the case? 160 00:11:31,960 --> 00:11:34,960 So that's a great question. 161 00:11:34,960 --> 00:11:44,440 Before I start talking about governance mechanisms, let me just elaborate on the core problem. 162 00:11:44,440 --> 00:11:52,920 The core problem here is uncertainty over the costs and benefits of transition to lower 163 00:11:52,920 --> 00:11:55,160 carbon emissions. 164 00:11:55,160 --> 00:12:02,880 That uncertainty means that the position that boards and others acting on behalf of the 165 00:12:02,880 --> 00:12:09,160 company take about how desirable it is to reduce emissions will also change over time 166 00:12:09,160 --> 00:12:12,800 as information emerges about those costs and benefits. 167 00:12:12,800 --> 00:12:18,720 So just to give a flavor of this, firstly, our scientific understanding of the costs 168 00:12:18,720 --> 00:12:23,640 of climate change and the physical costs associated with that is evolving all the time, and those 169 00:12:23,640 --> 00:12:26,840 estimates are changing as a result. 170 00:12:26,840 --> 00:12:35,640 Secondly, the costs and benefits of companies reducing emissions depend on government policies, 171 00:12:35,640 --> 00:12:43,200 in particular, the introduction of taxes and subsidies that are helping them to make it 172 00:12:43,200 --> 00:12:45,400 economic to reduce emissions. 173 00:12:45,400 --> 00:12:50,840 And the speed at which that's happening, the extent to which it's happening, is uncertain. 174 00:12:50,840 --> 00:12:53,200 New information is emerging all the time. 175 00:12:53,200 --> 00:12:59,360 And then thirdly, there are just geopolitical events that create shocks periodically to 176 00:12:59,360 --> 00:13:03,920 the framework that change the costs and benefits. 177 00:13:03,920 --> 00:13:10,400 So Russia's invasion of Ukraine last year, the Saudis' announcement that they're going 178 00:13:10,400 --> 00:13:16,520 to reduce oil production just today are examples of these that impact the costs and benefits 179 00:13:16,520 --> 00:13:24,960 of having clean energy and will therefore affect the pricing that firms put on decisions 180 00:13:24,960 --> 00:13:25,960 to move. 181 00:13:25,960 --> 00:13:31,280 So against this background of uncertainty, how does that interact with corporate governance? 182 00:13:31,280 --> 00:13:35,400 Well, the central corporate governance is the board of directors, and they are tasked 183 00:13:35,400 --> 00:13:41,680 with overseeing the strategy and they have fiduciary duties to act in the best interests 184 00:13:41,680 --> 00:13:45,200 of the company and what they believe to be the best interests of the company. 185 00:13:45,200 --> 00:13:49,640 And so in doing so, they're going to act on the basis of information that they have available 186 00:13:49,640 --> 00:13:50,640 to them. 187 00:13:50,640 --> 00:13:55,560 If that information changes, what they may want to do may change. 188 00:13:55,560 --> 00:14:02,960 And their thinking about this is typically mediated through compensation arrangements, 189 00:14:02,960 --> 00:14:09,560 remuneration arrangements that pay them in a way that is aligned with the value of the 190 00:14:09,560 --> 00:14:10,560 firm's shares. 191 00:14:10,560 --> 00:14:15,760 So if the firm's shares are publicly traded in the stock market, then as the price of 192 00:14:15,760 --> 00:14:24,200 those shares moves, the value of the pay that the directors get will move accordingly. 193 00:14:24,200 --> 00:14:27,840 So they're thinking about things that will affect the stock price, their thinking as 194 00:14:27,840 --> 00:14:32,840 new information is revealed that may affect the stock price, they will adjust their actions 195 00:14:32,840 --> 00:14:33,840 accordingly. 196 00:14:33,840 --> 00:14:41,760 So this means that we can think about their decision making as responding to new information 197 00:14:41,760 --> 00:14:43,760 about costs and benefits. 198 00:14:43,760 --> 00:14:50,520 And against that background of uncertainty, that makes it hard to be sure exactly what 199 00:14:50,520 --> 00:14:57,200 companies are going to be doing, because their governance structures impel them to follow 200 00:14:57,200 --> 00:15:07,680 or respond to these wider drivers of the emissions background. 201 00:15:07,680 --> 00:15:11,840 There are other mechanisms of corporate governance that we might look to. 202 00:15:11,840 --> 00:15:19,400 So one would be to structure the board in a way is to have some members of it specifically 203 00:15:19,400 --> 00:15:22,800 assign responsibility for the firm's climate policy. 204 00:15:22,800 --> 00:15:28,840 So to have a climate committee on the board, and we might put people on there who have 205 00:15:28,840 --> 00:15:34,280 some expertise in understanding the issues at stake and give them the remit of formulating 206 00:15:34,280 --> 00:15:36,240 the firm's policy in response to that. 207 00:15:36,240 --> 00:15:41,800 And you might think that if they've articulated a policy that would then embed the firm on 208 00:15:41,800 --> 00:15:43,800 a particular pathway. 209 00:15:43,800 --> 00:15:49,720 But we can explore how binding and commitment that would be by thinking about what would 210 00:15:49,720 --> 00:15:54,720 happen if there's a sudden shock that made it suddenly more costly than expected for 211 00:15:54,720 --> 00:16:00,440 firms to stick to the pathway that they had articulated. 212 00:16:00,440 --> 00:16:07,800 And a climate committee is appointed by the shareholders, the boards of directors of all 213 00:16:07,800 --> 00:16:10,480 companies are appointed by the shareholders. 214 00:16:10,480 --> 00:16:15,720 And if the majority of the shareholders didn't want the firm to continue on a particular 215 00:16:15,720 --> 00:16:21,400 pathway, then they would be able to remove the director if they wanted to. 216 00:16:21,400 --> 00:16:27,400 And the directors could be expected to anticipate that, to respond to it, and to change course 217 00:16:27,400 --> 00:16:34,160 if what they were composing to be has suddenly become more expensive. 218 00:16:34,160 --> 00:16:40,520 Another mechanism that we discuss in the paper that some people think is a possible means 219 00:16:40,520 --> 00:16:43,720 of implementing through disclosure. 220 00:16:43,720 --> 00:16:51,200 So companies are required to disclose information about their financial affairs to public markets. 221 00:16:51,200 --> 00:16:56,440 And obviously, to ensure that this information is disclosed truthfully, there are liability 222 00:16:56,440 --> 00:17:04,560 regimes in place that make sure that if firms make misleading material statements or omissions, 223 00:17:04,560 --> 00:17:08,720 then they can face liability to invest in. 224 00:17:08,720 --> 00:17:13,200 So we might think that if the firm discloses that it is intending to pursue a transition 225 00:17:13,200 --> 00:17:19,000 pathway, there might be liability associated with a failure to deliver on that. 226 00:17:19,000 --> 00:17:25,080 Actually, as it turns out, we think the risk of liability is relatively modest. 227 00:17:25,080 --> 00:17:31,040 And that means that this doesn't really serve to function as a credible commitment mechanism. 228 00:17:31,040 --> 00:17:34,600 The risk of liability is modest for two principal reasons. 229 00:17:34,600 --> 00:17:42,080 The first is that if the firm discloses that it is intending to move on a pathway to transition, 230 00:17:42,080 --> 00:17:46,040 that's a statement of fact at the time when it makes the disclosure. 231 00:17:46,040 --> 00:17:51,040 And if new information emerges that means that the firm changes its intention, then 232 00:17:51,040 --> 00:17:55,240 as long as the firm tells the markets at a time that it's changing its intention and 233 00:17:55,240 --> 00:17:57,840 hasn't made any false disclosure at all. 234 00:17:57,840 --> 00:18:02,880 Secondly, even if the firm did make a disclosure, which was found to be false, the quantum of 235 00:18:02,880 --> 00:18:09,200 liability of quantum damages rather than it would face to investors is measured by reference 236 00:18:09,200 --> 00:18:13,720 to the investor's financial loss as a result of the misstatement. 237 00:18:13,720 --> 00:18:23,200 But the harm that's triggered by changing tack on a commitment to reducing emissions 238 00:18:23,200 --> 00:18:29,720 is far beyond the quantum of any financial loss that investors might suffer. 239 00:18:29,720 --> 00:18:36,160 Indeed, investors might be better off financially if the firm reneges on a commitment that turns 240 00:18:36,160 --> 00:18:37,960 out to be expensive for them. 241 00:18:37,960 --> 00:18:44,600 And so for these reasons, disclosure and liability associated with it also doesn't deliver a 242 00:18:44,600 --> 00:18:45,600 credible commitment. 243 00:18:45,600 --> 00:18:54,920 So I hope that helps to clarify why we think that firms need to think outside the framework 244 00:18:54,920 --> 00:19:00,760 of traditional corporate governance mechanisms when seeking to craft credible commitments 245 00:19:00,760 --> 00:19:01,760 to reducing emissions. 246 00:19:01,760 --> 00:19:09,640 Yes, thank you for clarifying that there seems to be a governance gap almost in terms of 247 00:19:09,640 --> 00:19:15,760 traditional corporate governance being insufficient in ensuring credible climate commitments. 248 00:19:15,760 --> 00:19:19,680 That moves on quite nicely to your own proposal of Green Hills. 249 00:19:19,680 --> 00:19:24,480 So could you explain what this entails and how this mechanism helps to fill the governance 250 00:19:24,480 --> 00:19:28,640 gap ensuring corporate climate commitments are credible? 251 00:19:28,640 --> 00:19:34,280 So what we propose in our paper, and it's joint work with Professor Luke Enriquez, who's 252 00:19:34,280 --> 00:19:43,720 not able to be here today, is that firms enter into a contractual undertaking to make a fixed 253 00:19:43,720 --> 00:19:52,560 payment if they don't deliver on performance indicator regarding their reduction in emissions. 254 00:19:52,560 --> 00:19:57,200 So they set a target for emissions reduction to be delivered by a certain date. 255 00:19:57,200 --> 00:20:03,440 And then there is a payment that the firm undertakes to make if it doesn't deliver on 256 00:20:03,440 --> 00:20:04,440 that. 257 00:20:04,440 --> 00:20:13,080 And that payment then gives a signal of the credibility of the firm's commitment to deliver 258 00:20:13,080 --> 00:20:19,360 on the undertaking because it's saying we're either going to meet this target by the specified 259 00:20:19,360 --> 00:20:23,240 day or we're going to pay this amount of money. 260 00:20:23,240 --> 00:20:28,960 So if we go back to what I was saying a moment ago about the variability in cost and benefit, 261 00:20:28,960 --> 00:20:33,680 what this is saying is the firm is committing that as long as the cost and benefits don't 262 00:20:33,680 --> 00:20:40,880 change by more than the amount of the payment, then investors can rely on the firm delivering 263 00:20:40,880 --> 00:20:41,880 its commitment. 264 00:20:41,880 --> 00:20:53,480 So what this does is it unites the interests of investors who are climate conscious, who 265 00:20:53,480 --> 00:20:58,680 want the firm to reduce its emissions, and those who are climate indifferent, who don't 266 00:20:58,680 --> 00:21:04,560 care about the firm's emissions, they just care about maximizing the value of its stock. 267 00:21:04,560 --> 00:21:10,320 So once the firm has undertaken to make this payment, the climate-indifferent investors 268 00:21:10,320 --> 00:21:15,120 will not want the firm to pay the money out, it's cheaper for the firm to deliver on the 269 00:21:15,120 --> 00:21:20,600 emission reduction, and the climate-conscious investors will want the firm to deliver on 270 00:21:20,600 --> 00:21:23,000 the emission reduction per se. 271 00:21:23,000 --> 00:21:28,360 And so as long as the difference in cost and benefits is less than the amount of the payment 272 00:21:28,360 --> 00:21:34,560 that's promised, then all the third investors will want it to reduce its emissions. 273 00:21:34,560 --> 00:21:36,960 Thank you for explaining this. 274 00:21:36,960 --> 00:21:41,320 And the fact that your proposal unites the interests of traditional investors and climate-conscious 275 00:21:41,320 --> 00:21:44,680 investors highlights its utility. 276 00:21:44,680 --> 00:21:49,360 Moving on to examining the Green Pill mechanism in further detail, you state that Green Pills 277 00:21:49,360 --> 00:21:51,800 are contractual mechanisms. 278 00:21:51,800 --> 00:21:56,640 How does their contractual nature enhance the credibility of corporate climate commitment? 279 00:21:56,640 --> 00:21:59,120 How do they differ from standard contracts? 280 00:21:59,120 --> 00:22:08,560 Thanks, yeah, so having a contractual undertaking means that the firm is legally bound to pay 281 00:22:08,560 --> 00:22:18,160 the sum of money that is promised in the alternative if it doesn't meet its emission reduction 282 00:22:18,160 --> 00:22:19,400 undertaking. 283 00:22:19,400 --> 00:22:28,680 What this does is it puts a finite bound on the level of commitment that the firm is making. 284 00:22:28,680 --> 00:22:34,480 So it's not making zero commitment, and it's not making an unlimited commitment. 285 00:22:34,480 --> 00:22:42,000 So if it specifies X million pounds as the amount that it's going to pay if the target 286 00:22:42,000 --> 00:22:46,520 is not met, that's the amount that the firm is committing by. 287 00:22:46,520 --> 00:22:53,720 That's the amount that the firm is willing to spend on reducing emissions before it becomes 288 00:22:53,720 --> 00:22:59,440 cheaper for the firm just to make a payment and not reduce emissions going further. 289 00:22:59,440 --> 00:23:06,160 So as you said before, the costs and benefits of emission reduction are changing over time, 290 00:23:06,160 --> 00:23:11,760 and it may well be that an event occurs that makes it suddenly much more expensive or more 291 00:23:11,760 --> 00:23:19,560 expensive than the firm thought to reduce its emissions in the way that it had previously 292 00:23:19,560 --> 00:23:20,560 undertaken. 293 00:23:20,560 --> 00:23:26,840 And if that additional cost is greater than the size of the payment, it will make sense 294 00:23:26,840 --> 00:23:31,200 to the firm just to make the payment and not continue to reduce emissions. 295 00:23:31,200 --> 00:23:36,560 But as long as the changing cost and benefits is less than the amount of the payment, then 296 00:23:36,560 --> 00:23:41,000 the firm is committing to reducing emissions. 297 00:23:41,000 --> 00:23:47,000 And that then allows people to plan, it allows people to make sense of the degree of commitment. 298 00:23:47,000 --> 00:23:53,840 So it's not just the same as making a commitment, which is credible, but the degree of credibility 299 00:23:53,840 --> 00:23:59,160 is given by the size of the amount that it's promising to pay if it doesn't deliver. 300 00:23:59,160 --> 00:24:00,840 Yes, thank you for explaining that. 301 00:24:00,840 --> 00:24:05,080 The fact that a contract-based mechanism can be used to deliver a degree of commitment 302 00:24:05,080 --> 00:24:09,880 that can be tailored to the firm circumstances is really interesting and novel. 303 00:24:09,880 --> 00:24:11,840 So thank you for that. 304 00:24:11,840 --> 00:24:16,560 So what examples are there of green pills already in use? 305 00:24:16,560 --> 00:24:21,760 So the good news is that green pills are no longer purely hypothetical. 306 00:24:21,760 --> 00:24:27,520 We do in fact see a number of mechanisms that companies have adopted that really mirror 307 00:24:27,520 --> 00:24:31,120 the kind of mechanism that we propose. 308 00:24:31,120 --> 00:24:37,000 Perhaps the most common example is that of sustainability in these bonds. 309 00:24:37,000 --> 00:24:42,080 Let me just tell you something about one company that has adopted such a box, an Italian energy 310 00:24:42,080 --> 00:24:44,280 company called Enel. 311 00:24:44,280 --> 00:24:51,240 And Enel has issued bonds, the sustainability bonds, that have an interest rate that moves 312 00:24:51,240 --> 00:24:56,320 around depending on whether Enel needs a sustainability commitment. 313 00:24:56,320 --> 00:25:03,920 So Enel has established certain KPIs, for example, the amount of installed renewable 314 00:25:03,920 --> 00:25:06,000 energy capacity. 315 00:25:06,000 --> 00:25:11,600 And the interest rate of the bonds that they've issued will move around on whether they're 316 00:25:11,600 --> 00:25:14,600 going to meet that KPI. 317 00:25:14,600 --> 00:25:20,840 So if the company meets its installed renewable capacity target, the interest rate will stay 318 00:25:20,840 --> 00:25:21,840 the same. 319 00:25:21,840 --> 00:25:28,080 If the company fails to meet that KPI, the interest rate on the bonds will go up by something 320 00:25:28,080 --> 00:25:30,000 called 25 basis points. 321 00:25:30,000 --> 00:25:33,480 Now how much is that in practice? 322 00:25:33,480 --> 00:25:39,720 That's an amount of increased borrowing costs that you can measure in the millions. 323 00:25:39,720 --> 00:25:47,080 You might say increased borrowing costs going up by several millions of dollars is not that 324 00:25:47,080 --> 00:25:48,080 much. 325 00:25:48,080 --> 00:25:52,880 It's rather modest in comparison to the market capitalization of the company, which is measured 326 00:25:52,880 --> 00:25:53,880 in the billions. 327 00:25:53,880 --> 00:26:00,520 But what matters here is that the introduction of the sustainability-based bond helped establish 328 00:26:00,520 --> 00:26:05,480 the practice of a green-bill style mechanism in the market. 329 00:26:05,480 --> 00:26:10,440 In the case of Enel, it also made a quite significant cultural difference because what 330 00:26:10,440 --> 00:26:16,760 it means is that the chief financial officer, the CFO, is now invested in the company meeting 331 00:26:16,760 --> 00:26:22,320 its climate KPIs because whether or not the company meets its climate KPIs is going to 332 00:26:22,320 --> 00:26:24,800 affect borrowing costs. 333 00:26:24,800 --> 00:26:29,480 And beyond Enel, more and more companies are now following suit and they're adopting these 334 00:26:29,480 --> 00:26:34,240 sustainability-linked bonds or other sustainability-linked instruments as well. 335 00:26:34,240 --> 00:26:38,920 So we have an emerging market for these kinds of instruments. 336 00:26:38,920 --> 00:26:45,440 So yeah, just as Tom said, it's very interesting because when we started this project two or 337 00:26:45,440 --> 00:26:49,640 three years ago, we weren't actually aware of any examples. 338 00:26:49,640 --> 00:26:51,680 It was a purely hypothetical exercise. 339 00:26:51,680 --> 00:26:57,320 And then as we got into it, we discovered the Enel example, which we think is perhaps 340 00:26:57,320 --> 00:27:00,120 the first one that we're aware of. 341 00:27:00,120 --> 00:27:06,240 But then in the time since then, this type of undertaking by firms has really taken off 342 00:27:06,240 --> 00:27:12,720 dramatically within very, very rapid growth in North America and elsewhere in these kinds 343 00:27:12,720 --> 00:27:18,160 of sustainability covenants in corporate borrowing agreements. 344 00:27:18,160 --> 00:27:19,160 Yes. 345 00:27:19,160 --> 00:27:23,760 And it's important to highlight that, as you say, the green pill was not just a hypothetical 346 00:27:23,760 --> 00:27:27,680 model, but it's one that can be implemented by corporations in practice. 347 00:27:27,680 --> 00:27:29,680 So thank you for that. 348 00:27:29,680 --> 00:27:34,920 If we look to the theoretical issues that may arise in implementing green pills, can 349 00:27:34,920 --> 00:27:39,160 it be said that the adoption of green pills aligns with existing principles under corporate 350 00:27:39,160 --> 00:27:40,160 law? 351 00:27:40,160 --> 00:27:43,440 Yes, we think it very much does say. 352 00:27:43,440 --> 00:27:51,480 So as I said before, at the heart of the board's corporate law obligations are their fiduciary 353 00:27:51,480 --> 00:27:52,480 duties. 354 00:27:52,480 --> 00:28:02,320 So the board of directors of the UK company, or indeed, most public companies, most jurisdictions, 355 00:28:02,320 --> 00:28:07,040 owe a duty to act in the best interests of the company. 356 00:28:07,040 --> 00:28:16,440 And that is a duty that is framed in terms of the subjective beliefs of the directors, 357 00:28:16,440 --> 00:28:19,360 so what they believe to be the interests of the company. 358 00:28:19,360 --> 00:28:24,200 So they have to act in good faith in accordance with what they believe to be the interests 359 00:28:24,200 --> 00:28:27,080 of the company. 360 00:28:27,080 --> 00:28:33,440 In English law under Section 122 of the Companies Act 2006, there's a list of factors that 361 00:28:33,440 --> 00:28:37,560 the board has to take into consideration in discharging their duties to act in the best 362 00:28:37,560 --> 00:28:38,560 interests of the company. 363 00:28:38,560 --> 00:28:44,040 And that includes the impact of the company's actions on the environment. 364 00:28:44,040 --> 00:28:57,320 So entering into a commitment to reduce emissions, a commitment that is bounded by a figure in 365 00:28:57,320 --> 00:29:03,480 the way that we have described, is consistent with the board's duty to act in what they 366 00:29:03,480 --> 00:29:06,760 believe to be the interests of the company. 367 00:29:06,760 --> 00:29:13,040 Where, by making this commitment, as we explained, the firm is able to secure investment more 368 00:29:13,040 --> 00:29:16,400 cheaply from climate conscious investors. 369 00:29:16,400 --> 00:29:23,440 Just to run through the steps, the climate conscious investors want to buy investments 370 00:29:23,440 --> 00:29:28,400 which are associated with lower carbon emissions, as well as financial returns. 371 00:29:28,400 --> 00:29:34,800 So they're willing to pay more for investment for lower carbon emissions. 372 00:29:34,800 --> 00:29:41,800 They will increasingly look for credibility in firms' commitments to lowering emissions 373 00:29:41,800 --> 00:29:46,360 because they don't want to pay extra for firms that don't actually deliver. 374 00:29:46,360 --> 00:29:56,200 So making the commitment credible will be key to actually attracting the premium investment 375 00:29:56,200 --> 00:30:00,200 from the climate conscious investors. 376 00:30:00,200 --> 00:30:07,080 So by entering into the commitment, the firm can attract capital more cheaply. 377 00:30:07,080 --> 00:30:12,720 So that means that the directors will be able to say that they think it's in the interest 378 00:30:12,720 --> 00:30:17,800 of the company because they've attracted this capital more cheaply and they've also done 379 00:30:17,800 --> 00:30:21,680 so through their emissions. 380 00:30:21,680 --> 00:30:28,600 If things change and costs emerge that make it more expensive for the firm to stick to 381 00:30:28,600 --> 00:30:37,520 this commitment, then by locking it in to a certain quantum of payments if the firm 382 00:30:37,520 --> 00:30:43,080 doesn't deliver, the directors may have made things more expensive for themselves if that 383 00:30:43,080 --> 00:30:44,080 happened. 384 00:30:44,080 --> 00:30:45,080 So we might say, well, hang on a minute. 385 00:30:45,080 --> 00:30:48,800 Is it really in the interest of the company to lock yourself into this commitment? 386 00:30:48,800 --> 00:30:52,120 Wouldn't it be more in the interest of the company to retain flexibility so that you 387 00:30:52,120 --> 00:30:55,760 can change course if new costs emerge? 388 00:30:55,760 --> 00:31:01,560 Well, yes, no, it is in the interest of the company to have flexibility. 389 00:31:01,560 --> 00:31:05,800 But if they keep complete flexibility, the climate conscious investors won't believe 390 00:31:05,800 --> 00:31:06,800 them at the start. 391 00:31:06,800 --> 00:31:13,560 They won't be willing to invest and the firm won't be able to secure a low cost of capital 392 00:31:13,560 --> 00:31:14,560 from them. 393 00:31:14,560 --> 00:31:18,520 So it needs to make some level of commitment in order to induce the climate conscious investors 394 00:31:18,520 --> 00:31:19,520 to invest. 395 00:31:19,520 --> 00:31:25,720 But equally, it doesn't want to set that commitment in concrete so that the firm can never really 396 00:31:25,720 --> 00:31:31,720 renege on it because if the costs were to increase dramatically, it might be more than 397 00:31:31,720 --> 00:31:35,520 the amounts of the discount from the cost of capital that they can get from the climate 398 00:31:35,520 --> 00:31:36,520 conscious investors. 399 00:31:36,520 --> 00:31:41,080 So that's why having a finite undertaking is desirable. 400 00:31:41,080 --> 00:31:47,440 And that's why we think our mechanism is clearly one that's compatible with directors' 401 00:31:47,440 --> 00:31:48,440 fiduciary duties. 402 00:31:48,440 --> 00:31:53,640 Now, then, of course, you might say, well, how much is the appropriate level of commitment 403 00:31:53,640 --> 00:31:55,640 for a firm to enter into? 404 00:31:55,640 --> 00:32:00,320 Well, that depends on its investor base, it depends on its cost of transition, it depends 405 00:32:00,320 --> 00:32:05,520 on many factors that the board are probably best placed to assess. 406 00:32:05,520 --> 00:32:13,080 But in setting the quantum, again, that's something that the board should do, acting 407 00:32:13,080 --> 00:32:17,240 consistently without using the best interest of the company. 408 00:32:17,240 --> 00:32:21,640 But if it were to be challenged, if it were to be said that the board had entered into 409 00:32:21,640 --> 00:32:26,400 a commitment that was too big or maybe too little in terms of the amount of money at 410 00:32:26,400 --> 00:32:30,720 stake, we have to bear in mind that the duty to act in the best interest of the company 411 00:32:30,720 --> 00:32:31,720 is a subjective one. 412 00:32:31,720 --> 00:32:36,240 It's what the directors think are the interests of the company, not what the core thing. 413 00:32:36,240 --> 00:32:43,680 And so this is a mechanism where to attract liability, somebody who was challenging it 414 00:32:43,680 --> 00:32:49,440 would need to show that what the board had done was so unreasonable that no reasonable 415 00:32:49,440 --> 00:32:52,360 board of directors could have thought it was in the interest of the company. 416 00:32:52,360 --> 00:32:57,600 But it was beyond the bounds of what a rational board of directors could have thought was 417 00:32:57,600 --> 00:32:58,600 in the interest of the company. 418 00:32:58,600 --> 00:33:04,880 And that's quite a difficult standard for somebody challenging it to meet. 419 00:33:04,880 --> 00:33:11,000 We have to show that it was wholly outside the realm of plausibility, that the level 420 00:33:11,000 --> 00:33:17,520 of commitment that the firm had entered into was compatible with the framework that we've 421 00:33:17,520 --> 00:33:18,520 set down. 422 00:33:18,520 --> 00:33:23,800 And by the way, it was harmful to the interests of the company. 423 00:33:23,800 --> 00:33:31,040 So the subjective nature of the duty gives boards some space to set business policy space 424 00:33:31,040 --> 00:33:33,080 free from legal challenge. 425 00:33:33,080 --> 00:33:40,880 And within that space, they can use the finite level of commitment to secure investment from 426 00:33:40,880 --> 00:33:48,800 client conscious investors, and that is in the interest of the company, and that is how 427 00:33:48,800 --> 00:33:52,640 this is aligned with existing principles. 428 00:33:52,640 --> 00:33:58,560 So it's important to emphasize that point, because you can come up with all kinds of 429 00:33:58,560 --> 00:34:03,600 policy changes that would mean companies move to get zero. 430 00:34:03,600 --> 00:34:08,720 But the problem with all of that is that it's contingent on governments actually acting. 431 00:34:08,720 --> 00:34:13,600 And as we discussed before, governments are notoriously slow to act on this particular 432 00:34:13,600 --> 00:34:14,600 issue. 433 00:34:14,600 --> 00:34:21,280 And that is why it is so valuable to be able to conclude that introducing a green pill 434 00:34:21,280 --> 00:34:26,200 is actually consistent with existing principles of corporate law, because what that means 435 00:34:26,200 --> 00:34:30,080 is that in principle, a company could adopt a green pill tomorrow. 436 00:34:30,080 --> 00:34:32,120 Yes, thank you. 437 00:34:32,120 --> 00:34:37,560 And as you've explained, if there aren't any issues with the adoption of green pills, coming 438 00:34:37,560 --> 00:34:42,880 into tension with existing principles in corporate law, that does make it easier to implement 439 00:34:42,880 --> 00:34:45,320 green pills as soon as possible. 440 00:34:45,320 --> 00:34:51,360 Moving to examining the issue of implementation of green pills in practice, are there any 441 00:34:51,360 --> 00:34:55,200 issues that may arise from the implementation of green pills in practice? 442 00:34:55,200 --> 00:35:01,720 Yeah, so I think I'd just like to focus on two that we have in the paper. 443 00:35:01,720 --> 00:35:07,360 So one is a potential legal issue for listeners who have studied or are studying contract 444 00:35:07,360 --> 00:35:08,360 law. 445 00:35:08,360 --> 00:35:09,360 This may be something that you're already aware of. 446 00:35:09,360 --> 00:35:12,840 And that's what's called the rule and penalty clauses. 447 00:35:12,840 --> 00:35:19,480 So this applies where somebody enters into a promise, they say they can do something, 448 00:35:19,480 --> 00:35:23,760 and then if they don't do it, they have to pay a large sum of money. 449 00:35:23,760 --> 00:35:29,800 And the law generally is suspicious of these kinds of promises because they think that 450 00:35:29,800 --> 00:35:41,400 they can be used as a means of coercion for vulnerable parties to become required to meet 451 00:35:41,400 --> 00:35:47,000 their contractual promises, where doing so is out of all proportion to the real value 452 00:35:47,000 --> 00:35:48,640 of the same. 453 00:35:48,640 --> 00:35:57,080 So there are two ways that green pills, as we described in Canon, are structured to avoid 454 00:35:57,080 --> 00:35:58,080 this practical problem. 455 00:35:58,080 --> 00:36:05,560 And so the first is to characterize the undertakings that the firm enters into as alternatives. 456 00:36:05,560 --> 00:36:14,400 So it's not if the firm doesn't deliver its emission reduction, it promises by way of 457 00:36:14,400 --> 00:36:20,200 compensation to make a payment of X million dollars. 458 00:36:20,200 --> 00:36:26,800 Rather, what the firm does is it says it will either deliver on its own or it will make 459 00:36:26,800 --> 00:36:27,800 a payment. 460 00:36:27,800 --> 00:36:34,800 So it's a very formal response to the rule and penalty clauses. 461 00:36:34,800 --> 00:36:41,440 It might be accepted by the courts in some jurisdictions, but in others, they might say, 462 00:36:41,440 --> 00:36:46,280 well, this is just an attempt to evade the rule and we'll characterize it as a penalty 463 00:36:46,280 --> 00:36:47,280 clause. 464 00:36:47,280 --> 00:36:53,960 So probably the more robust way of doing this is to say that the payment that the firm is 465 00:36:53,960 --> 00:37:01,680 making is a genuine pre-estimate of the loss that the climate conscious investors would 466 00:37:01,680 --> 00:37:04,880 suffer if the firm doesn't deliver on its emissions. 467 00:37:04,880 --> 00:37:10,480 Because remember, the climate conscious investors are willing to pay extra for investments that 468 00:37:10,480 --> 00:37:13,600 are green, that are associated with reducing emissions. 469 00:37:13,600 --> 00:37:15,600 And that's because they care about this. 470 00:37:15,600 --> 00:37:18,600 They care not just about the money, but about something else, emissions. 471 00:37:18,600 --> 00:37:24,400 So they're paying for that upfront and if the firm doesn't deliver, they suffer a loss 472 00:37:24,400 --> 00:37:26,480 because they don't get what they pay for. 473 00:37:26,480 --> 00:37:32,800 But in contract law, damages are generally calculated by reference to the financial consequences 474 00:37:32,800 --> 00:37:35,800 for the party that hasn't received performance. 475 00:37:35,800 --> 00:37:46,560 And so in this case, the investors' dissatisfaction about the emissions not being reduced might 476 00:37:46,560 --> 00:37:54,000 not be something that would be easily calculable in the ordinary damages framework. 477 00:37:54,000 --> 00:38:01,800 And so we can understand the green pill payments as a payment of liquidated damages as a pre-agreed 478 00:38:01,800 --> 00:38:09,400 estimate of the non-financial loss that the climate conscious investors would suffer. 479 00:38:09,400 --> 00:38:11,880 That's the first practical issue. 480 00:38:11,880 --> 00:38:19,920 The second is something that we don't see yet, but that we could imagine emerging if 481 00:38:19,920 --> 00:38:22,320 the use of green pill mechanisms were scaled. 482 00:38:22,320 --> 00:38:29,680 That is, if the amount of money that was being undertaken were to grow significantly along 483 00:38:29,680 --> 00:38:32,840 with growth in climate conscious investing. 484 00:38:32,840 --> 00:38:38,320 So as soon as we're making bigger and bigger commitments, then this problem might emerge 485 00:38:38,320 --> 00:38:39,320 as a practical one. 486 00:38:39,320 --> 00:38:45,000 And the problem is that what might happen is that if there's a very large amount of 487 00:38:45,000 --> 00:38:53,680 money at stake, which will be paid to investors if the firm doesn't deliver on its emission 488 00:38:53,680 --> 00:39:00,560 reduction, then there might be some unscrupulous parties in the market who might offer to buy 489 00:39:00,560 --> 00:39:10,760 up the securities that have been issued to the climate conscious investor. 490 00:39:10,760 --> 00:39:20,000 And they might also buy shares in the company, use those shares to cause the company to appoint 491 00:39:20,000 --> 00:39:26,840 different directors who change policy and trigger a breach of the green pill undertaking 492 00:39:26,840 --> 00:39:29,840 and a payment then to the investor. 493 00:39:29,840 --> 00:39:38,840 And that might be something that might be a perverse consequence where actually people 494 00:39:38,840 --> 00:39:43,440 who come to hold the securities, they don't care about the reduction in emissions, they 495 00:39:43,440 --> 00:39:44,440 just care about the money. 496 00:39:44,440 --> 00:39:52,800 And they see violation of the green pill undertaking as a way to trigger a large payout in an opportunistic 497 00:39:52,800 --> 00:39:53,800 fashion. 498 00:39:53,800 --> 00:39:57,400 And that's what we characterize as dirty voting. 499 00:39:57,400 --> 00:40:04,440 That is where the people wanting to attract the payout use the boats attached to their 500 00:40:04,440 --> 00:40:11,560 shares to procure the company to breach its undertaking regarding emission reduction in 501 00:40:11,560 --> 00:40:14,680 order to then trigger a payment to investors. 502 00:40:14,680 --> 00:40:23,000 And to avoid that, we suggest that where large, very large amounts are at stake, the firm 503 00:40:23,000 --> 00:40:29,400 should undertake not to pay it to the climate conscious investor themselves, but rather 504 00:40:29,400 --> 00:40:41,320 to a third party such as an NGO that is committed to transitioning or committed to policies 505 00:40:41,320 --> 00:40:48,200 or implementing policies that are conditioning toward net zero or should cause a firm to 506 00:40:48,200 --> 00:40:58,160 make payments to companies that are investing in carbon capture technology. 507 00:40:58,160 --> 00:41:05,320 So basically, the payment would be made to the party that has no incentive to try and 508 00:41:05,320 --> 00:41:12,040 cause the firm to violate its commitment, has no power to do that either. 509 00:41:12,040 --> 00:41:19,440 And the party would use the payment to then help to reduce global emissions. 510 00:41:19,440 --> 00:41:24,320 So that would be consistent with what the climate conscious investors would have wanted. 511 00:41:24,320 --> 00:41:28,880 So how do you prevent the implementation of green pills might develop with greater growth 512 00:41:28,880 --> 00:41:30,200 in climate conscious investment? 513 00:41:30,200 --> 00:41:36,960 So it's a great question because we do in fact see quite a rapid rise in the number 514 00:41:36,960 --> 00:41:44,720 of ESG funds, so the funds that care about environmental, social and governance characteristics 515 00:41:44,720 --> 00:41:46,680 of the companies they invest in. 516 00:41:46,680 --> 00:41:51,240 And of course, if you're running a fund like that, you're going to be interested in the 517 00:41:51,240 --> 00:41:57,120 commitments made by the companies you invest in and therefore you might want to adopt mechanisms 518 00:41:57,120 --> 00:41:58,740 like the green pill. 519 00:41:58,740 --> 00:42:04,600 So in general, we can say in an environment like this, if we see climate conscious investment 520 00:42:04,600 --> 00:42:11,440 increase, we would also expect to see increased demand for credible corporate climate commitments. 521 00:42:11,440 --> 00:42:16,960 And therefore, you would expect to see the increased implementation of mechanisms that 522 00:42:16,960 --> 00:42:20,040 credibly embed that corporate climate commitment. 523 00:42:20,040 --> 00:42:25,000 Now, of course, the green pill is not the only mechanism that could result in something 524 00:42:25,000 --> 00:42:26,000 like that. 525 00:42:26,000 --> 00:42:32,880 In a way, you can think of credible regulatory enforcement against greenwashing and green 526 00:42:32,880 --> 00:42:37,240 pills as being at least partial substitutes. 527 00:42:37,240 --> 00:42:44,120 But then regulatory enforcement at the moment, particularly in Europe, is still quite modest. 528 00:42:44,120 --> 00:42:49,680 And so in the absence of a commitment mechanism of that nature, you would actually expect 529 00:42:49,680 --> 00:42:55,880 the number of green pills that is adopted to rise. 530 00:42:55,880 --> 00:43:02,040 The result of that is actually quite valuable because what it means is that even if once 531 00:43:02,040 --> 00:43:08,200 the company, even if later on the interest in meeting climate objectives fades or reduces 532 00:43:08,200 --> 00:43:14,960 a little bit, then the green pills, because they're in place, still make sure that firms 533 00:43:14,960 --> 00:43:22,640 deliver on their climate commitment, at least up to the point where doing so is still economically 534 00:43:22,640 --> 00:43:23,760 viable. 535 00:43:23,760 --> 00:43:29,400 So that's about the point that John mentioned about the quantum of the payments on the green 536 00:43:29,400 --> 00:43:33,720 pill tailoring the commitment of the firm. 537 00:43:33,720 --> 00:43:39,160 So once firms have these green pills, once the climate conscious investors have managed 538 00:43:39,160 --> 00:43:46,020 to get them adopted, you've actually locked in climate commitment for much longer. 539 00:43:46,020 --> 00:43:51,560 It's worth pointing out, however, that the rise in climate conscious investment isn't 540 00:43:51,560 --> 00:43:53,800 a trend that we can take for granted. 541 00:43:53,800 --> 00:44:00,320 In fact, we also see a counter movement at the moment where companies and boards say, 542 00:44:00,320 --> 00:44:05,840 well, wait a second, we're happy to commit, but only if that commitment is one that is 543 00:44:05,840 --> 00:44:09,840 effectively non-credible, if that's one that we can renege on. 544 00:44:09,840 --> 00:44:14,760 So we've seen actually quite a bit of greenwashing be exposed recently. 545 00:44:14,760 --> 00:44:23,760 Just to give you some examples, an oil manager called BP had committed to go green, but had 546 00:44:23,760 --> 00:44:26,920 recently rolled back its climate commitments. 547 00:44:26,920 --> 00:44:32,760 Another example is that of the Glasgow Financial Alliance for Net Zero, GFANS, which is set 548 00:44:32,760 --> 00:44:38,080 up and spearheaded by Mark Carney, the former governor of the Bank of England. 549 00:44:38,080 --> 00:44:44,600 That's effectively a group of financial institutions that collectively had agreed that they would 550 00:44:44,600 --> 00:44:48,840 move their investments to Net Zero. 551 00:44:48,840 --> 00:44:53,960 But now that it turns out that there may be some legal bite to those commitments, you 552 00:44:53,960 --> 00:45:00,720 can see various companies that had previously signed up now stepping away from that alliance. 553 00:45:00,720 --> 00:45:07,080 And so in that sense, there is a lesson that we can take from the adoption or the lack 554 00:45:07,080 --> 00:45:10,680 of adoption of green bills. 555 00:45:10,680 --> 00:45:17,320 If we don't see credible commitment mechanisms accompanying climate pledges, then we should 556 00:45:17,320 --> 00:45:22,160 be quite worried that the private sector isn't going to practice what it preaches. 557 00:45:22,160 --> 00:45:28,120 And in a way, this flips the takeaway from the paper because there is no excuse not to 558 00:45:28,120 --> 00:45:33,760 adopt a green bill if you're serious about meeting your climate objectives. 559 00:45:33,760 --> 00:45:38,080 As John said, it is entirely consistent with corporate law to implement a mechanism like 560 00:45:38,080 --> 00:45:39,080 that. 561 00:45:39,080 --> 00:45:45,680 And so in a way, a lack of a commitment mechanism of this nature might also suggest that the 562 00:45:45,680 --> 00:45:54,880 private sector is in fact not serious about transitioning voluntarily to Net Zero. 563 00:45:54,880 --> 00:46:00,040 And that would mean governments have an additional reason to step up their game. 564 00:46:00,040 --> 00:46:01,040 Yes. 565 00:46:01,040 --> 00:46:05,920 Thank you for expanding on the role that green bills can play in building corporate governance. 566 00:46:05,920 --> 00:46:11,320 Would you say that this instrument is limited to ensure a credibility for corporate climate 567 00:46:11,320 --> 00:46:15,320 commitment solely or could it be linked to broader sustainability goals? 568 00:46:15,320 --> 00:46:17,600 So that's a really great question. 569 00:46:17,600 --> 00:46:22,120 In the paper, we limit ourselves to a discussion of corporate climate commitments because there 570 00:46:22,120 --> 00:46:26,160 is a specific investment logic to climate change. 571 00:46:26,160 --> 00:46:32,400 But in theory, the instrument could be used across a whole range of non-financial commitments 572 00:46:32,400 --> 00:46:34,760 that firms may want to enter into. 573 00:46:34,760 --> 00:46:41,560 And so we do in fact see sustainability linked bonds that have KPIs unrelated to climate 574 00:46:41,560 --> 00:46:49,880 change that, for example, focus on equal pay, gender representation on the boards, or cleaning 575 00:46:49,880 --> 00:46:52,480 up of supply chain practices. 576 00:46:52,480 --> 00:46:58,200 And there is no reason why the green bill mechanism that we described couldn't be equally 577 00:46:58,200 --> 00:47:04,080 effective in those contexts as it might be in the context of climate change. 578 00:47:04,080 --> 00:47:05,080 Thank you. 579 00:47:05,080 --> 00:47:09,160 And I think throughout our discussion, you've highlighted that current corporate governance 580 00:47:09,160 --> 00:47:15,240 practices are failing to keep corporations on track to meet commitments of net zero. 581 00:47:15,240 --> 00:47:20,440 And given that this is such an important issue, what can listeners themselves do to get involved 582 00:47:20,440 --> 00:47:27,160 in helping to achieve this goal of ensuring that reducing carbon emissions is taken seriously? 583 00:47:27,160 --> 00:47:28,160 Thank you. 584 00:47:28,160 --> 00:47:29,880 That's a great question. 585 00:47:29,880 --> 00:47:38,280 I think one thing that listeners can do is just to reflect on how basic components of 586 00:47:38,280 --> 00:47:47,800 private law, company law, and more fundamentally contract law can be used to facilitate outcomes 587 00:47:47,800 --> 00:47:54,400 that are helping to encourage companies to reduce emissions and helping to fight the 588 00:47:54,400 --> 00:47:57,480 battle against the climate crisis. 589 00:47:57,480 --> 00:48:05,480 So these subjects are not normally labeled as tools to be used against climate crisis, 590 00:48:05,480 --> 00:48:12,320 but they are at a very basic level frameworks of private law that facilitate what parties 591 00:48:12,320 --> 00:48:13,320 want. 592 00:48:13,320 --> 00:48:19,720 And so if parties do want to engender commitments to reduce emissions, then they can use these 593 00:48:19,720 --> 00:48:21,320 frameworks to do so. 594 00:48:21,320 --> 00:48:25,960 And that's something that listeners who are current students or who are thinking about 595 00:48:25,960 --> 00:48:33,280 how they might direct their studies in the future can think about in approaching those 596 00:48:33,280 --> 00:48:34,280 topics. 597 00:48:34,280 --> 00:48:40,840 So what this all illustrates is that climate change is quite a legally disruptive development 598 00:48:40,840 --> 00:48:49,520 where we can see the adoption and use of legal tools in this novel context being quite innovative. 599 00:48:49,520 --> 00:48:53,880 To understand that legally disruptive nature of climate change and other sustainability 600 00:48:53,880 --> 00:48:59,360 challenges, we have a few years ago created the Oxford Sustainable Law Program, which 601 00:48:59,360 --> 00:49:04,920 is a collaboration between the Faculty of Law and the Smith School of Enterprise and 602 00:49:04,920 --> 00:49:07,520 the Environment here at Oxford. 603 00:49:07,520 --> 00:49:13,560 And what we do at the program is we try to think about how legal tools can catalyze and 604 00:49:13,560 --> 00:49:17,840 reinforce the sustainability transition. 605 00:49:17,840 --> 00:49:22,480 That involves studying how the law is being used in that context, but also trying to be 606 00:49:22,480 --> 00:49:25,040 imaginative about how the law could be used. 607 00:49:25,040 --> 00:49:32,800 And the Green Hills paper that we've talked about today is one very good example of that. 608 00:49:32,800 --> 00:49:38,440 What it also illustrates is that when we think about the climate crisis and its relationship 609 00:49:38,440 --> 00:49:44,400 to the law, we shouldn't just think about the traditional area of environmental law. 610 00:49:44,400 --> 00:49:51,560 We should think across the board around how different subsets of the legal system could 611 00:49:51,560 --> 00:49:52,560 be employed. 612 00:49:52,560 --> 00:49:58,760 And that means that what we do at the Sustainable Law Program is to collaborate across legal 613 00:49:58,760 --> 00:49:59,760 disciplines. 614 00:49:59,760 --> 00:50:06,160 But in fact, we also go beyond that and we work with experts from non-legal disciplines 615 00:50:06,160 --> 00:50:07,160 too. 616 00:50:07,160 --> 00:50:13,640 Because if we really want to understand the way in which the law is or could be used, 617 00:50:13,640 --> 00:50:18,840 we also need to have a really good understanding of the financial environment in which companies 618 00:50:18,840 --> 00:50:23,440 operate and how that financial environment is affected in this case by climate change. 619 00:50:23,440 --> 00:50:28,880 We need to understand climate change itself and the risks and benefits that it generates 620 00:50:28,880 --> 00:50:32,000 in these states for firms. 621 00:50:32,000 --> 00:50:38,760 And that really is the kind of challenge that the Sustainable Law Program is set up to meet. 622 00:50:38,760 --> 00:50:42,360 So it's a multidisciplinary research group. 623 00:50:42,360 --> 00:50:48,200 And it's a research group that students and academics and practitioners who might be listening 624 00:50:48,200 --> 00:50:55,080 to this podcast can get involved in because we're always looking for research assistants. 625 00:50:55,080 --> 00:51:00,400 We're working on a sort of legal clinic where experts can get involved in. 626 00:51:00,400 --> 00:51:06,280 And that is work that involves litigation, it involves policy work, and it involves the 627 00:51:06,280 --> 00:51:09,240 kind of contractual work that we've been talking about today. 628 00:51:09,240 --> 00:51:14,400 So it's very diverse and we're always looking for people who want to help us do this quite 629 00:51:14,400 --> 00:51:19,480 complex but socially important and highly salient mission. 630 00:51:19,480 --> 00:51:28,000 Yes, and I think the message of looking at legal frameworks to resolve such tangible 631 00:51:28,000 --> 00:51:30,840 and important issues is a really key takeaway. 632 00:51:30,840 --> 00:51:32,320 So thank you so much for that. 633 00:51:32,320 --> 00:51:35,880 Professor Arm and Professor Wetzler, thank you so much for joining us on the podcast. 634 00:51:35,880 --> 00:51:38,280 It's been a really great discussion today. 635 00:51:38,280 --> 00:51:39,280 Thank you. 636 00:51:39,280 --> 00:51:40,280 Thank you. 637 00:51:40,280 --> 00:51:44,160 It's been a great pleasure to be here. 638 00:51:44,160 --> 00:51:48,720 That was Professor Arm and Professor Wetzler speaking with us on Green Pills and making 639 00:51:48,720 --> 00:51:50,760 corporate climate commitments credible. 640 00:51:50,760 --> 00:51:56,640 For more legal writings and discussions on other topics, visit the OUULJ's blog and 641 00:51:56,640 --> 00:51:57,640 read our annual publications. 642 00:51:57,640 --> 00:52:14,480 Thank you.