The legal framework for sustainability

There is a consensus emerging that society and investors are best served by companies that focus on sustainable value creation rather than short-term profit. Many companies communicate increasingly loudly about how sustainability is core to their purpose, producing shiny brochures full of positive stories and setting targets such as the wave of 2050 carbon neutrality targets seen in recent months. However, one of the great challenges of sustainable investing is identifying the difference between company rhetoric and action.

A week ago Danone became the first listed company in France to become a so-called enterprise à mission, clearly cutting through the rhetoric into accountable action. Translated as stakeholder-driven, this is a new French legal framework introduced last year, which enables companies to outline their purpose, link it to ESG objectives and incorporate it into their articles of association. The management team become accountable to not just shareholders but to all stakeholders, and the law obliges the company to set up a monitoring committee to measure progress. Not to be confused for a not-for-profit, these are companies looking to make a return for shareholders, but with the consideration of other stakeholders alongside with the strong belief that doing so is a competitive advantage.

This rise of stakeholder-driven companies has been happening across the world. In the US a legal entity has been developed called a Public Benefit Corporation which makes an organization legally accountable to shareholders, as with a normal corporation, alongside those stakeholders defined in the company’s Certificate of Incorporation. Few are public, which makes the step from Danone notable. One of the key motivations for companies is to protect their purpose should the company be acquired or through a change in management.

There is also growing legislation to enforce more corporate responsibility to all companies. In the UK the Modern Slavery Act was passed in 2015, which is explicit in its requirements that businesses apply more rigour in identifying and preventing the use of ill-treated labour when selecting third parties in their supply chain. The Netherlands published a similar but more ambitious law in 2019 for child labour. The EU has instituted a number of initiatives imposing certain due diligence related obligations including the EU Conflict Minerals Regulation which will come into force in 2021 and is expected to introduce a legislative initiative next year on mandatory due diligence for companies, having identified that voluntary measures have been ineffective.

 

Switzerland has the opportunity to take it a step further. A proposal called the Responsible Business Initiative was made four years ago to make businesses based in Switzerland legally liable for abuses of human and environmental rights anywhere in their supply chains around the world. After four years of debate, a more moderate counter-proposal was rejected meaning a referendum will likely occur on the issue in November. A recent survey suggested 78% of people in Switzerland would support this proposal, although it is too early for a clear indication as there is plenty of time for the campaigns against this proposal to gain traction. For companies that may not have full confidence in the respect of human rights and labour standards paid by their suppliers, it could be onerous. For those already auditing their supply chain for adherence to these principals, this may provide a competitive opportunity.

Which provides another argument to why companies are taking big strides towards greater sustainability. Their clients might demand it, investors might be advocating for it, but also must ensure they sufficiently anticipate future legal headwinds.

 


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