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Corporate Sustainability: The New Normal

 

This post was guest-authored by James Struthers, a member of the NEXT Leaders' Council. He is a graduate of the Peter A. Allard School of Law (’17) and articling student at Bennett Jones LLP. The views expressed in this article are solely the views of the author, and do not represent the views of the Business Council of British Columbia, nor Bennett Jones LLP.  This article is for informational purposes only, and nothing in this article constitutes or may be relied upon as legal advice.

 


 

Since sustainability's global debut in the 1987 Brundtland Report, it has graduated from a catchword to a cornerstone of planetary governance. Contestable concepts like justice, freedom, equality, and now sustainability have demonstrated significant societal value, despite their flexibility and evolutionary nature. Though not a new concept, sustainability has recently become a mainstay in corporate governance, and the question has shifted from whether to seek sustainability to how to achieve, implement, and harness its potential.

What is corporate sustainability?

Corporate sustainability involves integrating the creation of long-term environmental, social, and economic ("ESG") value through business operations ("Integration").[1] Examples range from startup social enterprises like Evernu and its waste-sourced textile fibers, to multinational corporations like Apple and its proposed supply chain circularization.

Why not whether?

First, sustainability is good business. Canada is experiencing rapid growth in ESG reporting,[2] socially responsible investing,[3] consumer preference for sustainable goods,[4] public funding for clean-tech and impact businesses,[5] and sustainable public policy.[6]

Second, unsustainability increasingly is viewed as bad business. Reputational risks, greater public scrutiny, regulatory developments, and current or upcoming shifts in corporate governance are fostering growth in corporate sustainability, even at the institutional investor level.[7]

Third, our earth has limits. Data suggest that growing populations, consumption patterns, and attendant waste streams[8] are pressing, and in some cases, exceeding these limits,[9] putting our environment, society, and economy at risk.[10] Integration is key for long-term economic success.

Are there legal barriers to Integration?

Canadian corporate law does not require directors and officers to maximize short-term share value to the exclusion of long-term ESG value.  In fact, Canadian corporate law provides significant latitude to directors and officers to integrate corporate sustainability. Founders and shareholders are free to dictate the corporate purpose in the company's articles,[11] and directors' and officers' duties: [12]

  • compel long-term considerations when a corporation is an ongoing concern; [13]
  • appear to mandate something more than mere legal compliance; [14] and
  • are developing globally such that failure to consider ESG matters in investment decision making poses significant litigation risk. [15]

Canadian corporate law permits a broad range of stakeholders to bring an action for compensation against a corporation where they have a) a reasonable expectation that their interests be considered by the corporation, and b) those expectations were not met in a way that amounts to oppression, unfair prejudice, or unfair disregard for the stakeholder's interests. [16] Personal liability is uncommon, however, and directors and officers are required to act reasonably, not perfectly.[17]

As such, corporations have significant freedom to engage in corporate sustainability.

Non-legal barriers

According to Dr. Stephanie Bertels at the Embedding Project, a BC-based initiative aimed at helping global companies embed environmental and social factors into their operations and decision-making, short-termism and investor activism continue to place pressure on companies to privilege short-term share value over longer-term interests. However, Dr. Bertels also notes that institutional investors are placing increasing weight on ESG matters when making investment decisions, which puts pressure on corporations to demonstrate that they know how to manage these issues. A group of 30 Canadian institutional investors representing $1.2 trillion in investment assets recently made a public declaration to this effect.

Another key barrier is a lack of uniformity and standardization. Dr. Bertels notes that corporations must "learn how to transparently articulate their approach, rationale, and strategies for addressing [ESG matters]," and the Embedding Project aims to assist corporations with this process by using rigorous social science methods to help companies assess their corporate sustainability practices, and makes their research findings available as a public good to stimulate the rate of Integration.

In closing, corporate sustainability is becoming the norm. Companies are realizing that there is a competitive advantage to Integration. The law provides significant latitude to corporations to integrate sustainability and governance, and the non-legal barriers that remain are lessening as institutional investors push for heightened disclosure and best practices improve and diffuse across industries, borders, and philosophies. 

 


 

[1] Beate Sjåfjell defines corporate sustainability as the creation of aggregate value by economic actors "in a manner that is (a) environmentally sustainable in the sense that it ensures the long-term stability and resilience of the ecosystems that support human life, (b) socially sustainable in the sense that it facilitates the respect and promotion of human rights, and (c) economically sustainable in the sense that it satisfies the economic needs necessary for stable and resilient societies."

[2] PwC reports growth in ESG (environmental, social and governance) reporting by S&P 500 companies from 20% in 2011 to 81% in 2015.

[3] The RIA reports growth in the value of responsible investment assets in Canada from $459.53 billion in 2006 to $1.5 trillion in 2015.

[4] Nielsen reports that the percentage of respondents, being globally located consumers aged 15-20 (dubbed 'Generation Z'), that are willing to pay more for products from companies that are committed to positive social and environmental impact, rose from 55% in 2014 to 72% in 2015.

[5] Since 2001, the Government of Canada has allocated $965 million to the Sustainable Development Technology Fund.  Various provinces also have significant funding in place for climate change adaptation and sustainability initiatives.

[6] In August, the federal government announced the creation of the expert panel on climate change adaptation and resilience results. The panel was created against the backdrop of significant funding initiatives and various federal and provincial policies towards climate change adaptation and sustainable development.

[7] BNP Paribas notes the shift in focus of institutional investors to long-term, sustainable considerations, and the factors underlying this shift.

[8] In the last century, global material use increased eight-fold, global population quadrupled and global GDP grew more than 20-fold: Fridolin Krausmann et al, "Growth in global materials use, GDP and population during the 20th century" (August 2009) 68:10 Ecol Econ 2969-2705.

[9] The IPCC Fifth Assessment notes that human influence on the climate system is clear. Greenhouse gas concentrations are the highest in recorded history, recent climate changes have had widespread impacts on human and natural systems, and warming of the air and oceans is unequivocal as evidenced by ice cap melting, glacier rescission and rising oceans: RK Pachauri and A Reisinger (eds), Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (Geneva, Switzerland: IPCC, 2014) 151. There is growing scientific consensus on climate change: N. Oreskes “Beyond the Ivory Tower: The Scientific Consensus on Climate Change Science” (December 2004) 306:5702, p 1686 and PT Doran & MK Zimmermann “Examining the Scientific Consensus on Climate Change” (January 2009) 90:3 EOS. Steffen et al observe transgression of four/nine ecological boundaries: W.Steffen et al, “Planetary Boundaries: Guiding human development on a changing planet” (13 January 2015) Science, accessed 10 April 2017 <www.sciencemag.org/content/347/6223/1259855>. Planetary boundaries impact humanity's continued ability to thrive: RK Pachauri and A Reisinger (eds), Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (Geneva: IPCC, 2008), 65.

[10] Biodiversity loss, climate change and ecosystem collapse are among the biggest long-term risks facing humanity, global inequality is on the rise: World Economic Forum, Global Risks 2015, (Geneva, Switzerland: World Economic Forum, 2015) 10, accessed 10 April 2016 <http://www3.weforum.org/docs/WEF_Global_Risks_2015_Report15.pdf>. Climate change, material resource scarcity, population growth, food security, ecosystem decline and deforestation noted as both risks and opportunities facing corporations in coming decades: KPMG, Sustainable Insigne Climate Change & Sustainability Services Expect the Unexpected; Building Business value in a changing world (KPMG, 2012), accessed online 10 April 2017 <https://assets.kpmg.com/content/dam/kpmg/pdf/2012/03/sustainable-insights-march-2012.pdf>.

[11] Canada Business Corporations Act, RSC 1985, c C-44, at ss 2, 6(1)(f) and 16(2) [CBCA].

[12] BCE Inc. v 1976 Debentureholders, 2008 SCC 69 [BCE]), at para 38.

[13] Peoples Department Stores Inc. (Trustee of) v Wise, 2004 SCC 68, 3 SCR 461 [Peoples]; BCE.

[14] BCE, supraat para 66.

[15] The 2016 UN Principles for Responsible Investment report "Fiduciary in the 21st Century" notes that failure to integrate ESG factors into investment processes is emerging as a significant source of legal and financial risk: file:///C:/Users/struthersj/AppData/Local/Microsoft/Windows/INetCache/IE/7MMM86PJ/fiduciary-duty-in-the-21st-century-us-roadmap.pdf.

[16] BCE, supra.

[17] Peoples, supra: "Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made."