The role of companies and corporate legislation (- or is it time for “benefit corporations” in the Nordics?)
More than half a century ago, the American economist Milton Friedman wrote that the responsibility of the private sector is to “make as much money as possible while conforming to the basic rules of the society,” (the article was called “the social responsibility of a business it to make profit”). A similar view seems to be at the core of several pieces of corporate legislation around the world. Some countries, however, have introduced new corporate forms that allow for companies to register with dual purposes; to generate profit while at the same time also serving other stakeholders (which in practice often means integrating ESG into the business model). This is the case in the USA where companies have the opportunity to register as a “benefit corporation” in more than 30 states. A similar legislation has been passed in Italy and recently also in Spain and France.
In Sweden, criticism towards the corporate legislation act (“aktiebolagslagen”) from an ESG perspective has been raised from time to time (see for example this discussion in Dagens Industri from 2021). The criticism often points to the fact that current legislation only stresses the need to make profit, and may discourage entrepreneurs who wish to combine profit making with having a social or environmental impact.
I believe that the time has come when the “basic rules of society”, as Friedman put it, have evolved and now include a genuine expectation that companies also consider environmental and social aspects in their business. It would seem more logical if we requested those companies that do not have any ambitions regarding ESG to explain why, rather than the other way around. In that case, ESG might become more of a strategy discussion and less of a reporting requirement.
A couple of weeks ago a Swedish politician, Lotta Olsson (M), together with a the CEO of a pharma company (Chiesi) and the founder of the B-corp movement in the Nordics wrote an article suggesting that it is time to introduce a new form of corporate legislation to complement the current legislation so as to encourage, or enable more of a stakeholder approach and dual purposes combining profit and social or environmental goals.
Perhaps, I thought when reading it, this could be one way of “solving” the politically very contested area (at least in the Nordic countries) of making profit in the welfare sector? (I have written about some of these issues, including the distinction between stakeholder and shareholder capitalism in some previous newsletters).
Reporting: with tighter requirements the accusations of “green-washing” seem to increase
As the roll out of more and more legislation around sustainability disclosure (reporting) continues, so does the criticism towards alleged “green washing” (meaning portraying themselves as greener, or more sustainable, than they are). The criticism comes from both consumers and licensing authorities, which I have written about in previous newsletters. Though some readers might be frustrated when hearing about companies trying to portray themselves as more sustainable than they are, I think it is only natural and a sign of the business maturing. Definitions, expectations, and communication will need some time to be calibrated and even then, there will still be some room for interpretation – and of course some companies wanting to paint a brighter picture of their footprint than they can back up with facts and figures.
There are expectations that new EU legislation, including CSRD (Corporate Sustainability Reporting Directive), will help strengthen the extent and nature of sustainability reporting. Many large companies in the EU are already now obliged to publish information relating to environmental and social matters (including treatment of employees), on human rights, anti-corruption, and diversity on company boards. When the new legislation enters into force there are expectations that, among other things, more companies will be obliged to report, that more detailed standards are used, that the information provided is audited and that information is digitally tagged. Read more here. The first set of standards is expected to be approved already in October 2022 (read more here).
As a management consultant, I remain somewhat skeptical towards the idea of reaching goals – in this case more sustainable businesses achieving more positive impact while reducing the negative footprint of their doings – primarily by deciding what and how to report. Therefore, I find the proposal adopted by the European Commission on a new legislation on corporate sustainability due diligence at least as interesting as CSRD. The aim of this Directive is to promote more sustainable and responsible corporate behavior and to secure both human rights and environmental considerations in the way companies behave, including in their value chain (read more here). The proposal also needs to be approved by the European Parliament and the Council before member states are given two years to transpose the Directive into national law.
Although these initiatives are largely welcome, a read-through of some of the many standards and requirements associated with them, serves to remind us that for small-and medium sized companies more regulations also mean less time to concentrate on the most material issues. For this to work, I think we will have to see more cooperation between companies and possibly more support through for example industry associations.
The ESG Debate: should we only focus on the E?
Recently, the Economist published a special report on ESG. It concluded that “although ESG is well-meaning it is deeply flawed” and that the S and the G distracts companies from focusing on the crucial goal of cutting emissions (those who have an account can read the full story here). The arguments are not new. The report was met by criticism, for example from Principles for Sustainable Investments, who responded that the economic transition needed to reduce emissions is also a social transition.
“ESG” is not one thing, but rather a method for considering issues beyond traditional financial data, which still entail financial materiality. This is not to say that we shouldn’t be cognisant of the limits of ESG as a tool – we should. But separating climate from its impact on society and its implications on corporate governance marginalises the issue […] -PRI 11 August 2022
It is tempting to focus on emissions, which is relatively easy to measure. The challenges are very visible and very challenging. In my view, however, there is a reason that the 2030 Agenda has 17 Goals: many of the challenges we face are interconnected, either directly or indirectly, scientifically, and politically. Besides, the starting point for any serious sustainability work should be a risk and materiality analysis where the company identifies what is most relevant to work with.
Change is coming?
The UN Global Compact Network Sweden recently launched a report on what companies in Sweden expect with regard to the transition ahead. It confirms the notion that most companies work with sustainability, but also that many still struggle with integrating sustainability into their operational work, their skills and knowledge among employees. You can read the report (in Swedish) here.
The greatest climate package ever (?) was recently passed in the USA. It consists of investments, largely related to clean energy, amounting to 369 MUSD. The package, called “the inflation reduction act” originates from the “build back better”-initiative. Though extraordinary in many ways, critics also points out that it is not enough to meet the 1.5-degree target in the Paris Declaration. However, some analysts believe that the package may contribute to a (much needed) “clean energy arms race” between China and the USA.