Sustainability concerns are driving a change in corporate responsibility. Zero-emission commitments have soared since COP26, but there will be a risk if companies make pledges which they fail to fulfil.
There has been a revolution in the cultural focus of business in the past five years or so, highlighted by the US Business Roundtable releasing its ‘Statement on the purpose of a corporation’ in August 2019. This document, signed by 181 CEOs of leading American companies, stated that their corporations no longer existed only to serve their shareholders, as recommended by the economist Milton Friedman (and the economic orthodoxy of the past 40 years and more), but also owed equal duties to employees, suppliers and communities.
This recognition of a wider role for business has been given an added impetus by the inequalities highlighted by the pandemic and the necessity to change how we live and work to meet the climate challenge. It is possible that the failings of the political class in the past five or so years have also encouraged CEOs to take a stance, whereas they may have previously chosen to stay out of the fray. However, companies must recognise that if they acknowledge these wider responsibilities, they will be held to account if they fail to meet them.
COP26 might not have achieved everything that had been hoped, but there was a strong response from the business and the financial community, with initiatives such as the Glasgow Financial Alliance for Net Zero, led by former governor of the Bank of England, Mark Carney. In what is probably the biggest change to corporate culture since the 1970s, many businesses have now committed to a range of environmental, social and governmental (ESG) initiatives, having been driven to do so by both growing investor demand as well as employee and consumer pressure. Increasingly, businesses must demonstrate to activist stakeholders how they are implementing these commitments in practice. These stakeholders focus on all aspects of the ESG strands and demand that institutional investors vote for boards in accordance with their ESG performance.
COP26 might not have achieved everything that had been hoped, but there was a strong response from the business and the financial community
An architecture of regulations, global standards and disclosure is being developed, against which companies can measure their commitments. This means that businesses are being held accountable to these standards. It is already clear that there will be consequences for companies that make commitments they fail to uphold; however, this is also helpful, since it gives clear guidance to businesses about what they must do to avoid accusations of ‘greenwashing’, and allows investors to make more informed decisions.
The UN Sustainable Development Goals (SDGs) and the UN’s Principles for Responsible Banking are now used by many businesses, with 220 banks being signatories to the latter, which requires the signatories to produce SDG-aligned reporting.
The EU implemented the Sustainable Finance Disclosure Regulation in March 2021, which sets out rules for the sustainability-related information that financial market participants must disclose. As this creates a benchmark for European financial institutions, it may be adopted by other institutions globally.
For specific instruments, such as green bonds, there are global standards such as the International Capital Market Association’s green bond principles. To verify the sustainability of the issuance, there are third parties such as the Center for International Climate and Environmental Research Oslo.
These principles and regulations provide valuable direction for companies in implementing their ESG goals, but there will be a risk if companies make pledges that they fail to fulfil. Companies will also be criticised, and possibly sued, if they make general promises which are not backed up by verifiable commitments using the available frameworks.
Other ESG ratings criteria that businesses must consider are provided by companies such as Bloomberg ESG Data Services and the Dow Jones Sustainability Index. ESG ratings measure a company’s exposure to ESG risks and evaluate its performance in managing them relative to its peers, although ratings providers currently apply their own criteria for evaluating a company’s ESG risk, and there is no industry standard. India has suggested that it will establish a regulatory framework for ESG ratings providers that may be followed by other jurisdictions.
The need to create global standards that are universally understood and applied is both recognised and being developed. These will be valuable tools in guiding the businesses that have responded to the social and environmental issues of the day by making public commitments, but all businesses should be aware that they will need to adapt their activities in a meaningful way in response to this change in corporate culture.
Farmida Bi is global chair and chair of Europe, the Middle East and Asia for Norton Rose Fulbright.
