Will the EU Taxonomy Regulation Foster Sustainable Corporate Governance?

Round 1

Reviewer 1 Report

In this study, the author analyzes a (possible) positive impact of EU mandate sustainability disclosure on fostering corporate governance. In particular, institutional investors (such as mutual funds), on behalf of retail investors, could monitor corporations’ adverse impact on environments. On the other hand, there may exist agency problem as the retail investors could not hold the mutual fund managers accountable for their actions (the so-called greenwashing). The EU mandatory disclosures may facilitate communication and help align the mutual fund managers’ interests with the interests of their beneficiaries.

The author did a really good job to make reference to the literature. The current analysis falls in the literature in which mandatory disclosure mitigates agency conflicts. Although I prefer a more rigorous analytical model, the current study seems to be a good first step to tackle this issue.

• I agree shareholders may not be profit-maximizers; they may care about whether the corporations take social responsibilities. However, I wonder whether choosing mutual funds is the primary channel for the retail investors to express their preference. Are there other channels for individuals to express their concerns, for instance, whether to buy the firms' products.
• In US, the employers choose which mutual fund manages the employees’ retirement. Individuals do not have much say on this matter. Is it fair to assume that the choice of mutual fund depends on the ESG scores?
• What percentage of the retail investors for the Big Three is willing to trade off profit for common goods? Clearly the mutual fund manager deals with a collective preference (not individual preference). How do we evaluate the aggregated preference?
• The author acknowledges that it is important to bind the retail investor’s preference with the institutional investors (see Line 226). I wonder given there are only Big Three mutual funds, how different are these three big funds? Can individuals really vote with feet?
• The agency cost (referred in Line 309) seems to come from two sources. One is the unknown preferences from the retail investors; and the other is the unknown preferences of the mutual fund managers (the greenwashing). Some discussions on the collective preferences might be helpful.
• I wonder whether the environmental sustainability is really measurable. Measurement may produce attention pressure which can have its own negative externality.

Author Response

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Author Response File: Author Response.pdf

Reviewer 2 Report

Very well and in detail written theoretical paper. It would be interesting to see a proposal for future research that would support the theoretical assumptions of this paper. What relevant data should be gathered and analyzed and in what data frame?

Author Response

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Author Response File: Author Response.pdf

Reviewer 3 Report

The article presented by the author is more of an academic lecture in which the author tries to present as many issues as possible related to corporate social responsibility, sustainable development, corporate governance and the expected impact of the planned EU taxonomy on investor decisions, rather than a scientific article. Presenting so many issues is not justified either in the title or for the purposes set by the author, and consequently becomes difficult to understand and does not present a proper academic analysis.

 

List of issues that need the authors' attention:

1. The subject of the article is: Will the EU Taxonomy Regulation Foster a Sustainable Corporate Governance? But the article is more about the question of whether institutional investors or investors in general (why should this only be chosen by institutional investors?) will choose more sustainable companies to invest in in the future.
2. Author tries to present as many issues as possible related to corporate social responsibility, sustainable development, corporate governance and the expected impact of the planned EU taxonomy on investor decisions, without presenting a full academic discussion in individual areas. From the point of view of the final conclusions, an appropriate introduction would be to present the research conducted so far, which shows to what extent companies now take into account social responsibility when making investment decisions. Meanwhile, in the introduction, the author refers to the discussion about the role of business - whether to maximize profit or to take into account also social goals, which was one of the basic discussions influencing the development of CSR, but the author only gives such voices as Frieman and Hart & Zingales, ignoring the whole a discussion that has gone on over the years. Moreover, the role / goal of shareholders is not the direct aim of the article.
3. It is not fully understandable to distinguish between the method of defining the author's corporate governance and the European Parliament. The author states that "takes a different approach to sustainable corporate governance, in which the role of regulation is also different as it is based more on mandatory disclosure to investors than on direct constraints on corporate decision-making" (43-44), while in the content of the article, the author describes the EU regulations that will require the information of investors about the activities of companies in the area of a sustainable approach to the market (environment). So where is the difference between defining this concept by the author and what the EU plans to do by introducing the regulations described by the author?
4. Authors writes: "Sustainability is otherwise an elusive concept because confuses two already ill-defined notions. On the one hand, sustainability is often interpreted as the corporation’s concern for stakeholders, without explaining how to balance the interest of these constituencies. On the other hand, sustainability is sometimes understood as a preference for long-term, as opposed to short-term, decision-making without specifying what counts as long or short and what interest is at stake in the computation" without any sources. These two approaches are not mistakes but different ways of defining of sustainability. Why author call it ill-defined notions? Any proofs?
5. The aims of the article are not clearly stated. They can be found in many places in the article and the goals indicated in the content of the following chapters differ from those defined in the introduction.
6. In introduction author described aims of all chapters without 2nd.
7. Despite the relationship between sustainable development and the reduction of greenhouse gas emissions, in the opinion of the reviewer there is no justification for developing this topic with the goals defined by the author.
8. Greenwashing - appears in Chapter 2, is in 3, but there is little about it in the introduction (or rather nothing).
9. The article is an author's thoughts / predictions. As the author himself writes: "As a caveat, the question how institutional investors will respond to the Taxonomy cannot yet be answered empirically".
10. References should be numbered in order of appearance and indicated by a numeral or numerals in square brackets—e.g., [1] or [2,3], or [4–6].
11. The list of references (at the end of the article) should be adapted to the requirements of the journal.

The article needs a major overhaul to be able to be issue.

Author Response

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Author Response File: Author Response.pdf

Round 2

Reviewer 3 Report

It was nice to read an improved article. The article was significantly improved, the prospect from which the Author looks at the subject was explained. The issues that were raised in the article were justified. Goals were corrected - they are more clear now. The current version of article is interesting, presented in a consistent way. I have not additional comments.

Sincerely