16 February 2024 - Recent years have seen a resurgence of the debate on corporate governance and regulatory frameworks focused on environmental and social challenges. Dr Livia Ventura, Prince of Wales Global Sustainability Fellow, explores what purpose-driven businesses need to know now in terms of key legal trends emerging in the UK, the US and Europe.
Corporate Purpose and the Law
The role of ‘purpose’ in driving business conduct is gaining attention among practitioners, scholars, and policy makers. Purpose-driven organisations align their reason to exist with improving the long-term wellbeing of people and planet, aiming “to produce profitable solutions to the problems of people and planet and not to profit from producing problems for people or planet.”
Law is essential in ensuring that businesses profit from creating benefits and not detriments, using interventions to incentivise positive impact while disincentivise harmful practices.
Harmful practices are typically addressed by the law through tort and special rules in areas such as labour, environmental protection, and lately supply chain due diligence. However, there is a grey area for activities that do not violate tort law or other mandatory rules, resulting in lawful activities that create business profits but negative externalities for the community and environment. In this grey area, the role of purpose and the legal reconceptualisation of directors’ fiduciary duties may mediate.
Guiding companies towards creating societal benefits has previously been pursued through self-regulation and soft law, following the model of code of ethics, international organisations’ guidelines, or corporate governance and stewardship codes based on the “comply or explain” approach. However, this has resulted in a lack of effective change from implementing such methods, and legislative interventions have been introduced to better nudge companies towards sustainable behaviors.
Within this context, four key legal trends emerging in the UK, the US and Europe are mapped below. Our Future of Boards research provides a more extensive analysis of legal trends affecting boards globally.
Directors’ Duties
Pressure to reinterpret the content of directors’ fiduciary duties regarding sustainability is increasing, driven by legislators, sustainability-related lawsuits, and ESG-led shareholder activism.
This reinterpretation expands the board’s legal risk beyond tort liability, creating ground for actions against directors for breaching their duty of care, diligence, and oversight regarding existing sustainability obligations and commitments. Examples include:
- the Better Business Act campaign (launched in the UK to amend section 172 of the Companies Act) stipulates that a director’s duty is to advance the company’s purpose for benefit its members as well as the wider society and environment;
- the 2019 French reform (Loi Pacte) introduced a general obligation to manage the company “taking into consideration the social and environmental challenges of its activity”, and the possibility to include a “raison d'être” (a purpose) in the company’s articles of association;
- the European Commission Corporate Sustainability Due Diligence Directive (CSDDD) proposal aims to harmonise some aspects of directors’ duties providing that, in fulfilling their duty to act in the company’s best interest, they must consider the consequences of their decisions for sustainability matters.
Dual-Purpose Companies
In recent decades, there has been a growth of new hybrid entities, such as dual-purpose companies that are characterised by an explicit dual-legal purpose: profit-making and public benefit (e.g. reduction of negative externalities and creation of positive environmental and societal impact). Examples include the US benefit corporations developed since 2010, the Italian società benefit, the French société à mission, or the Spanish sociedades de beneficio e interés común.
The new optional corporate forms require directors to consider social and environmental objectives, which are incorporated into the company agreement and the “company interest” definition, while also providing clear accountability and disclosure mechanisms.
Sustainability Disclosure Requirements
The more recent shift from voluntary to mandatory sustainability reporting and disclosure requirements has resulted in the development of the Regulation on Sustainability‐Related Disclosure in the Financial Services Sector (SFDR), and the Corporate Sustainability Reporting Directive (CSRD) at the EU level. These aim to extend the scope of reporting of sustainability information (to all large undertakings, and undertakings listed on EU regulated markets, except micro-enterprises) and assure the comparability of non-financial information through the mandatory use of the EU Sustainability Reporting Standards drafted by the EFRAG.
Supply Chain Due Diligence
The European Union is also working on the enactment of the CSDDD that requires large companies and companies working in high impact sectors to identify, monitor, prevent, mitigate, or minimise actual or potential human rights and environmental harms arising from the companies’ own operations, subsidiaries, or suppliers. Therefore, such regulations require companies to internalise their suppliers’ externalities, while becoming responsible for their behaviour. This results in expanding the firm’s boundaries beyond the legal ones in terms of directors’ obligations and civil liability, moving along with legal sustainability requirements or the company agreement and self-regulation.
The recently published Research Dialogue on ‘Corporate purposes and the law’ by the European Management Review highlights the importance of stronger synergies between the legal and managerial perspective for further developments of the topic in public policy design and management.
Senior leaders need to be aware of such legislative developments and understand the sustainability maturity of their organisations if they want to strategically position their companies at the forefront of sustainability leadership, and move beyond compliance and legal risk management.
