Creditors' Incentives and ESG in Insolvency

In light of the pervasive effects of climate and environmental change, the relationship of insolvency law and environmental protection and the question how climate-change mitigation should figure into insolvency regulation is gaining in importance-and concomitantly, creditors as major providers of financing and players wielding significant power (not only) in insolvency. Additionally, empirical work gives cause to believe that violations of environmental law on the part of 'brown' firms increase in the year before filing for insolvency. Against this background, the chapter makes two novel contributions: First, it explains why creditors' incentives to support debtor-driven climate-change mitigation measures are limited. Second, building on this insight, it explores the possible effects of various proposals for insolvency reform and shows that they risk impeding creditors' incentives and reduce insolvency law's potential to help battle climate change. It is organized as follows: Section II. explores the relationship of climate change and credit risk and why creditors have limited incentives to engage in mitigation activism. Due to limited upside potential and a better position of creditors in insolvency compared to shareholders, creditors' incentives to engage in climate-change mitigation and 'greening' business are smaller than those of equity owners. Building on this general framework, Section III. proceeds to analyze possibilities and limitations of insolvency reform, taking up proposals in recent insolvency scholarship. It first demonstrates why the idea of mandatory liquidation of insolvent carbon-intensive businesses is misguided. Second, it analyzes the potential of awarding environmental liabilities priority or non-dischargeability in insolvency and explores regulatory and policy hurdles. Third, the section turns against more far-reaching suggestions to appoint environmental trustees. Fourth, it justifies the orientation of insolvency law towards creditor value maximization in monetary terms. Section IV. concludes.