The Dubious Role of Institutional Investors in Driving the Green Transition: Legal and Economic Constraints

There is a well-established trend that the process of transition to a sustainable economic growth model marked by the pursuit of environmental, social and governance (“ESG”) objectives has large companies at its center, which are considered an essential hub for this purpose given their weight in the global economy. In this context, the role of shareholders, especially institutional investors, plays an important role. Indeed, it is widely recognized that they, having an increasing prominence in the shareholder base of large, listed companies, can push these public companies to adopt more virtuous conduct in the areas of, among others, environmental protection and human rights. Accordingly, the private initiative of shareholders partly replaces state intervention in the pursuit of general interest objectives. 

The European Union has embraced this idea more openly. EU legislation explicitly casts investors as key players in the shift toward sustainable capitalism. The Shareholder Rights Directive requires asset managers to publish engagement policies and disclose how they incorporate not only financial but also environmental and social factors into decision-making. More recent frameworks like the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD), and the Taxonomy Regulation go even further, pushing financial actors to explain how ESG is integrated into strategy. In effect, these rules are reshaping fiduciary duty itself—expanding it beyond narrow financial returns to include broader societal responsibilities.

The United States tells a very different story. Here, the notion that institutional investors should be active drivers of sustainability has become a political battlefield. Since 2021, conservatives have fueled a backlash. Some states now prohibit public pension funds from considering “non-pecuniary” factors, and attorneys general have even sued major asset managers for allegedly violating fiduciary duties by supporting ESG proposals. Meanwhile, the SEC’s attempt to mandate climate-related disclosures has stalled under legal pressure, with implementation suspended pending judicial review. Other proposed ESG disclosure rules for fund advisors are still gathering dust.

The backlash has gone further, with calls to break up the so-called “Big Three”—BlackRock, Vanguard, and State Street—or impose strict ownership limits. Legislation like the proposed “Index Act” would even force large passive managers to poll their clients before casting proxy votes. The underlying assumption is that these institutions aren’t just investing—they’re wielding political power.

Against this fragmented background, there is a lack of unanimity as to whether institutional investors are willing and able to play a role in promoting ESG objectives in the interests of society at large, rather than just their end clients. Particularly, it is debatable whether asset managers have a real interest (and the necessary resources) in actively monitoring the companies in which they invest to promote their improved ESG performance. The analysis of the legal framework is not sufficient to shed light on whether these actors can actually play a role in promoting a more sustainable economic development model. To this end, it is essential to assess the economic and reputational incentives that may influence the propensity of investors to pursue sustainability objectives.

Against this background, in a recent article I contend that the large number of engagement initiatives and the tendency of major asset managers to promote their image as active members committed to pursuing ESG goals may be justified by the use of this strategy in order to attract clients who are more sensitive to environmental and social profiles. This is particularly true for younger investors in the Millennial and GenZ generations. In addition, it should be considered that the demand for ESG funds is growing and that they account for a very large percentage of assets under management. In addition, some asset managers tend to avoid the dirtiest firms, even though those are the ones where pressure could matter most. European rules often reinforce this logic, as funds seeking “light green” or “dark green” status under SFDR are nudged to divest from laggards rather than stay invested and fight for change. Meanwhile, in the U.S., legal uncertainty and political attacks have made managers more cautious about even the appearance of climate activism. The safest route is to stick to broad, non-controversial statements, leaving little appetite for costly, confrontational engagement.

Based on legal developments taking place both in the US and in the EU, the introduction of a specific category of transition funds could serve as a corrective. Such funds would invest in companies that have begun transitioning toward more sustainable business models and, in particular, have adopted credible plans to reduce their environmental impact. Adoption of this proposal—consistent with the gradual proliferation of transition funds—could create stronger incentives for institutional investors to allocate resources to engagement activities and to undertake a greater number of company-specific initiatives capable of materially improving ESG performance. This approach would also reduce the risk that investors without a genuine commitment to ESG engagement adopt the tool merely for formal compliance, and it would prevent disclosure rules from unintentionally encouraging a superficial wave of ESG activism.

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Giovanni Strampelli is Full Professor of Business Law and Director of the PhD in Legal Studies at Bocconi University, Milan, and an ECGI Research Member.

This blog is based on a discussion which took place at The Corporation in Society: Corporate Law and Criminal Law Perspectives Workshop. Visit the event page to explore more conference-related blogs.

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