In 2014, the Onion published this headline: “Scientists Politely Remind World That Clean Energy Technology Ready To Go Whenever.” The satirical report sharply criticized how most countries, at the time, were prone to overlooking the clean energy alternatives readily available to them in favor of the established oil, gas, and coal industries that made up such a large proportion of the global economy. By now, it seems like most countries have taken the hint: CO² emissions finally reached somewhat of a plateau in 2022, after steady rises every year for the past few decades. A survey in July showed that, even in the United States, carbon emissions fell by 5% compared to May of last year – this change, admittedly, being partially due to the mild winter in the Northern Hemisphere.

The U.S. has always been one of the slowest countries in the transition towards clean energy while most other countries have placed it as a top priority. In 2021, we still produced 14.9 tons of CO2, per person – as opposed to Germany’s 8.1 tons and the United Kingdom’s 5.2 tons. The U.S. is still the world’s top producer of unrefined oil and natural gas – while we import an average of six million barrels of crude oil a day, mostly from Canada. Oil makes up nearly 8% of the U.S.’s GDP, despite the controversy that surrounds the average American’s grossly disproportionate carbon footprint.

Government regulatory bureaus have not only failed to control the energy monopoly that oil and gas companies seem to have on our economy – they’ve encouraged its growth, often to immense public backlash. For example, the Bureau of Land Management (BLM) opens up nearly 90% of all publicly-owned U.S. land to oil and gas leasing. Recent reforms and regulations on this use serve to “increase returns to the public” rather than phase out oil and energy use, the way that most of the “public” wants. The Biden administration has even given explicit approval to large-scale, long-term oil enterprises like the Willow Project – a massive oil drilling project in Anchorage, Alaska, projected to add 9.2 million metric tons of CO2 to the atmosphere per year.

Organizations like the Center of Biological Diversity criticize these financial incentives as nothing more than stopgap measures, focused on ensuring that the government gets a cut of the profits that can be made from non-renewable energy. Other conservation groups take a more direct approach in confronting the BLM’s environmental harms. Earthjustice, for example, filed a lawsuit to stop the Willow Project entirely. Their case is currently pending appeal in the Ninth Circuit Court of Appeals.

Individual companies, hoping to make themselves more palatable to their environmentally-conscious consumers, have also started to hold themselves accountable for shifting towards greener-energy alternatives, primarily through the adoption of ESG initiatives: goals focused around improving the Environmental, Social, and Governance scores assigned to different corporations. They’re held responsible for transparency in their ESG disclosures both by their profit margins and by regulatory agencies like the Securities and Exchange Commission (SEC) – providing both the internal and external pressures necessary to change the behavior of even the most pollution-heavy companies.

The former holds companies accountable by providing a monetary incentive for corporations to meet their ESG initiatives. Greater transparency in company environmental disclosures is consistently tied to positive financial growth, creating greater trust across all levels of corporate governance and greater trust with the consumers that these corporations market towards. The latter allows the government to intervene directly through the SEC’s Climate and ESG task force. This team charges companies with misrepresentation (or even fraud) if they fail to make a good-faith effort to meet their ESG initiatives or lie in their public ESG disclosures. Multiple initiatives have both been proposed and passed by the SEC that create more transparency in private entities’ climate-related risks. The large fines and injunctions that the SEC has the power to impose further encourage corporations to be upfront with their environmental impacts – while their consumers push them to be more environmentally friendly overall.

It’s telling that even the Organization of Petroleum Exporting Countries (OPEC) is currently expanding its legal team specifically to manage climate change concerns and “energy transition law.” The U.S. often treats OPEC like a rival – having come head-to-head with it many times in the past and currently fighting to try to get the “No Oil Producing and Exporting Cartels” (NOPEC) Act through Congress, the same way they’ve done for the past two decades. As public opinion continues to shift towards clean energy over the oil, gas, and coal industries that dominated the market in the past, it wouldn’t be surprising if the United States started to focus its own legal power on the same fields of law – with pressures coming from both their external rivals and internal company movements towards ESG, overall.

Insider trading is a broad and murky area. However, now, the SEC has complicated matters with the introduction of a new theory — shadow trading. Unlike insider trading, where a person trades in the stocks of a company in which they have MNPI (material non-public information), shadow trading involves trading in an economically linked company with the MNPI of a target company (entirely different company). Coined by Mehta, Reeb and Zhao in their research paper titled “Shadow Trading ”, this concept was first put to test by the SEC in SEC v. Panuwat. The SEC slapped charges on Panuwat stating that he misappropriated material information about his pharmaceutical company, Medivation, to trade in the stocks of their competitor, Incyte Corporation. Since shadow trading was rather a novel concept, the SEC brought claims under the misappropriation theory of insider trading where trading is forbidden on the basis of MNPI obtained by someone who is not a corporate insider (i.e., a corporate outsider) in breach of a duty.

The SEC alleged that Panuwat, upon receiving confidential information from Medivation’s CEO about the imminent acquisition by Pfizer, misappropriated the information by swiftly purchasing out-of-the-money stock options in Incyte Corporation from his work computer. When the merger was made public the share prices of both companies rose and Panuwat reaped illicit profits of $107,066. Panuwat was charged with violating Section 10(b) and Rule 10b–5 of the Securities Exchange Act of 1934. Panuwat hit back by arguing that SEC failed to show that the information was material and unavailable to the public, there was a breach of fiduciary duty and that he possessed scienter (intent). However the Court ruled against him and dismissed his motion for summary judgment.

The Court held that Panuwat had material information regarding the merger and its disclosure would have been viewed by a reasonable investor as material when deciding to trade in those securities. While Panuwat did point out that he did not possess any information about Incyte when he purchased the stock options, SEC said that the market viewed Medivation and Incyte to be complementary to each other. SEC blamed Panuwat for narrowing the meaning of materiality and held that the information would have been material for more than one company. SEC showed evidence from reports and articles that linked Medivation and Incyte, Panuwat’s positive comments about Incyte months before he bought stock options and Panuwat’s awareness of the market reports which influenced his perspective on the biopharmaceutical market. It was also established that Panuwat had MNPI since he had access to confidential information through summary of bids, letters soliciting final bids and internal emails related to the merger.

These allegations were further strengthened when SEC successfully established breach of fiduciary duty. The Court held that Panuwat was bound by Medivation’s insider trading policy that prohibited all employees from using the company’s sensitive and confidential information for profit by trading in securities. Panuwat breached this duty by using MNPI’s of Medivation to trade in Incyte’s securities. Lastly, the Court held that Panuwat possessed intent, when he actually used information about Medivation’s acquisition to purchase stocks in Incyte. Panuwat immediately purchased stocks right after he received an email showing that the merger was to move forward.

However it is to be noted that Judge Orrick was careful to place the liability on Panuwat because of the broad language of Medivation’s insider trading policy that prohibited their employees from trading in any stock or security. It is unclear whether Panuwat would still be liable under the section absent the broad language or explicit prohibition in the policy. Furthermore, this fact pattern could be applied to any scenario where it is found that information from one company can be linked to the stock price of another. This is unreasonable since any corporate insider could be liable for trading in stocks with the information of their own company.

Shadow trading is still a relatively new concept and Panuwat’s case is only at its initial stage. Shadow trading is not an uncommon phenomenon and the SEC has claimed to take up the task of mitigating illegal trading in all forms starting from Panuwat. It is also a caveat to the ones who interpret insider trading laws narrowly, that the courts are willing to accept the broad powers of the SEC. Needless to say if this is accepted in the future it is a threat to the corporate insiders and would have far reaching effects. Therefore it is important to adopt policies to curb insider trading litigation with the Panuwat decision in mind. After all, prevention is better than cure.

This October 8th, 2023, Gavin Newsom, Governor of California, signed into a law the Senate Bill n°54, or SB 54. The law will come into effect in March 1st, 2025, and aims to promote sustainable finance through diversity in venture capital (VC) companies by empowering historically underrepresented communities. Similar to the California Equal Pay Pledge of 2019, it is part of a political commitment to achieve gender and racial equality.

Venture Capital (VC) companies are companies or investment funds that usually invest in early-stage start-ups. Consequently, VCs drive innovation, economic and employment growth. In recent years, we have observed an increase in Socially Responsible Investment (SRI). This investment strategy consists in investors threatening to discard assets from the VC’s equity if it does not comply with corporate social responsibility standards. Hence, impact investing is limited to investors’ resources. These stakeholders cannot act alone towards an impact investing approach and sustainable finance. Regulators must promote sustainable finance throughout the investment chain. The California State Capitol attempts to do so through the SB 54.

The SB 54 provides more scrutiny on the policies conducted by VCs. The law targets “covered entities”, which is a VC company that: “(i) primarily engages in the business of investing in, or providing financing to, startup, early-stage, or emerging growth companies [; or] (ii) manages assets on behalf of third-party investors, including, but not limited to, investments made on behalf of a state or local retirement or pension system.”

Additionally, the VC company must: “(i) [be] headquartered in California [; or] (ii) [have] a significant presence or operational office in California [; or] (iii) [make] venture capital investments in businesses that are located in, or have significant operations in, California [; or] (iv) [solicit] or [receive] investments from a person who is a resident of California.”

Besides, the law prescribes duties to the targeted VCs, namely through a yearly survey reporting information related to its “founding team”. This targets owners of initial shares or interests of the company, a stakeholder who had an important role within the business before the issuance of initial shares or who is not a passive investor in the business, the chief executive officer, the president, the chief financial officer, the manager of the business, or any other stakeholder benefitting from the same level of authority.

Simultaneously, the VC must report information related to gender identity, race, ethnicity, disability status, and sexual orientation of the individual falling under the “founding team” criteria. The report shall also mention if that individual is a veteran or a disabled veteran, and if he/she is a resident of California. The person surveyed can decline to provide information, but the use of this right must be notified in the report.

Finally, the VC company must also provide “the number of [VC] investments to businesses primarily founded by diverse founding team members, as a percentage of the total number of venture capital investments the covered entity made.” Eventually, the results must be submitted to the Civil Right Department (CRD), a state agency that publicizes the data in a searchable database. Monetary penalties are prescribed for VCs who breach the provisions. The fine will be reinjected in the Civil Rights Enforcement and the Litigation Fund to enforce the Civil Rights laws.

This law is welcomed because it intervenes on a level distinct from that of the investors. It is an additional tool that must be used simultaneously with the investors’ room of maneuver. Here, the law targets the policies undertaken by the VC companies in their structure and thus, in their investment choices. Through the report and its publication, the law gives incentive for VC companies to include more diversity in their founding team. By doing so, it aims at easing the burden upon investors who favor ethical investments but are slowed down by the lack of capital.

Conversely, the law does not establish specific diversity standards for compliance; instead, it mandates the submission of a report. Consequently, VCs can potentially disclose a founding team composition lacking in diversity without facing direct consequences.

Yet, the law introduces an indirect incentive for increased diversity, as the annual report is made public. Accordingly, a VC company disclosing a lack of diversity in their data may experience a decline in stock prices. This decline could be attributed to investors prioritizing impact investing over mere profit gains. Hence, the responsibility for fostering sustainable finance ultimately rests on the shoulders of investors. In the end, this law must act as a stepping stone for future laws to provide solutions throughout the investment chain. For instance, regulators could set diversity standards for VCs to abide by, or nudge them to invest in a certain percentage of ESG companies.