- Black/Scholes Option Pricing Model •
- Capital Asset Pricing Model (CAPM) •
- Common ownership •
- Disclosure •
- ERISA •
- Externalities •
- Index Fund •
- institutional investor •
- SEC Sole Benefit Rule
The U.S. securities markets have recently undergone (or are undergoing) three fundamental transitions: (1) institutionalization (with the result that institutional investors now dominate both trading and stock ownership); (2) extraordinary ownership concentration (with the consequence that the three largest U.S.
This article will focus on the desire of institutions for greater ESG disclosures and suggest that two reasons underlie this demand for more information: (1) ESG disclosures overlap substantially with systematic risk, which is the primary concern of diversified investors; and (2) high common ownership enables institutions to take collective action to curb externalities caused by portfolio firms, so long as the gains to their portfolio from such action exceed the losses caused to the externality-creating firms. This transition to a portfolio-wide perspective (both in voting and investment decisions) has significant implications but also is likely to provoke political controversy. Indeed, the Trump Administration has proposed new rules that would discourage voting based on ESG criteria and thus would by extension chill ESG investing.
As institutions shift to portfolio-wide decision making, the disclosure needs of individual investors and institutional investors diverge and serious conflicts can arise. As an equity investor, institutional investors have the perspective of an option-holder and favor greater risk-taking, while typically the undiversified retail investor tends to have the opposite perspective and preferences.