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Alon Brav† and J.B. Heaton*
Most commentary on climate-themed investment treats climate change as a one-way risk to brown assets from a hoped-for transition to a low-carbon economy. But the converse holds as well. Brown assets could turn out to be highly valuable if the world fails to transition out of the high-carbon economy. This is true both because sentiment for green assets may cause brown assets to be underpriced (generating higher expected returns) and because brown assets may provide a valuable hedge against the costs of climate change in a world that failed to transition to a low-carbon economy. Given the lack of progress to date toward transition to a low-carbon economy, we argue that institutional investors subject to fiduciary duties of prudent investment (including the duty to diversify) cannot yet justify divestment from brown assets.
† Peterjohn-Richards Professor of Finance, Fuqua School of Business, Duke University, ECGI, and National Bureau of Economic Research.
* Managing Member, One Hat Research LLC.
For helpful comments, we thank Ashish Arora, Doron Levit, Dorothy Lund, Cam Harvey, Elizabeth Pollman, Bernie Sharfman, Dan Vermeer, and Jonathan Zandberg.
Jesse M. Fried†
In August 2021, the Securities and Exchange Commission approved Nasdaq’s proposed rules related to diversity. The rules’ aim is for most Nasdaq-listed firms to have at least one director self-identifying as female and another self-identifying as an underrepresented minority or LGBTQ+. While Nasdaq claims these rules will benefit investors, the empirical evidence provides little support for the claim that gender or ethnic diversity in the boardroom increases shareholder value. In fact, rigorous scholarship—much of it by leading female economists—suggests that increasing board diversity can actually lead to lower share prices. The implementation of Nasdaq’s proposed rules thus may well generate risks for investors.
† Dane Professor of Law, Harvard Law School. Thanks to Michal Barzuza, Keith Bishop, Alex Edmans, Elisabeth de Fontenay, Joe Grundfest, Yaron Nili, and Steven Davidoff Solomon for helpful comments, and to Jake Laband for excellent research assistance. I serve on the Research Advisory Council of proxy advisor Glass Lewis, but my views here are not necessarily those of Glass Lewis. Comments are welcome and can be sent to me at email@example.com.
Bernard S. Sharfman†
With less than $40 million worth of Exxon Mobil Corporation common stock in hand, Engine No. 1 executed a proxy fight that succeeded in getting three of its four nominated directors elected to the board of the company. This victory was viewed as a success by environmentalists and ESG investors. However, this victory was illusionary as a closer look reveals an absence of accomplishment. The hedge fund activism of Engine No. 1 did not provide a roadmap for the company to improve its financial performance or specific recommendations on how it could transition from a global leader in oil and gas production to a global leader in the production of clean energy. Also, there is no evidence that Engine No. 1 has served as a corrective mechanism (correcting managerial inefficiencies) at the company consistent with this Article’s theory of hedge fund activism. Moreover, and perhaps most importantly, Engine No. 1 may have created a deadly distraction in our global fight against climate change, a fight that should be taken on by governments all over the world, not hedge fund activists.
† Bernard S. Sharfman is a research fellow at the Law & Economics Center at George Mason University’s Antonin Scalia Law School, a Senior Corporate Governance Fellow at the RealClearFoundation, and a member of the editorial advisory board of the Journal of Corporation Law. The research associated with this writing was funded by a generous grant from the Law & Economics Center at George Mason University’s Antonin Scalia Law School. The opinions expressed here are the author’s alone and do not represent the official position of the Law & Economics Center or any other organization with which he is currently affiliated. Mr. Sharfman would like to thank J.B. Heaton, Brian Cheffins, Andrew Jennings, Robert J. Rhee, Marc T. Moore, Alex Platt, Jeffrey N. Gordon, Andrew R. Johnston, and Leo E. Strine, Jr. for their helpful comments.