72 Am. U. L. Rev. 1017 (2023).
From the earliest stages of the sustainable finance market and of green, social, and sustainable debt as an asset class, sustainability verifiers have been essential to the market’s function. Sustainability verifiers—professional service providers who provide an external review of an issuer’s alignment with established green bond frameworks—play a crucial role in reducing information asymmetries between sustainable finance instrument issuers and investors and serve as reputational intermediaries that assure buyers of the seller’s green, social, and sustainability-centered commitments. Yet, despite their essential function in facilitating the investment of trillions of dollars in green, social, and sustainable finance investments, the role and regulation of verifiers remains relatively ignored and undertheorized. This Article responds to that need by underlining the importance of the role played by the sustainability verification industry. And, importantly, the Article highlights key weaknesses at the core of the verification model—as with other informational intermediaries, such as credit ratings agencies and proxy advisors, conflicts of interest and low-quality verification risk jeopardizing the health and effectiveness of the sustainable finance market. But, as with credit ratings agencies and proxy advisors, strict regulation may prove to be an inapt solution, as it tends to erect barriers to the market, privilege incumbents, and ultimately reduce competition and the quality of information provided by the intermediaries. Instead, this Article argues that regulators could best protect investors against the risk of greenwashing through the imposition of securities liability for verifiers. The risk of liability will, in turn, help drive a sustainability verification market based on the development of reputational capital, while also protecting the market for sustainability verification services from some of the flaws that have undermined the effectiveness of regulations governing other informational intermediaries.
* Robert J. Gilbert Reese Chair in Contract Law, The Ohio State University Moritz College of Law. The author thanks the staff of the American University Law Review for excellent editorial work, Gregory Seymour for excellent research assistance, and Christian Blanco, Joseph Campbell, Cinnamon Carlarne, Ardeshir Contractor, Josh Knights, and Alexander Thompson for helpful comments.