A new way of doing business involves changes to governance — not more greenwash.
Climate change is topping the list of issues we face as a generation. Its urgency was acknowledged at the historic UN conference in Paris in December — the 21st annual United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties, aka COP21. A total of 195 countries — many of them oil-rich economies — committed to keeping the global temperature increase to well below 2°C, and ideally 1.5°C, above pre-industrial levels.
The Paris Agreement signals the end of the fossil fuel era. It shifts the entire world economy, and it has huge implications for business. The transition to a net zero carbon economy starts now. Governments have committed to climate goals, but the scale of the transition required is such that governments can’t do it alone. We need business to fully commit too.
Before Paris, the world saw unprecedented numbers of private-sector businesses commit to climate goals of their own — 2,043 corporate commitments were registered on Non-State Actor Zone for Climate Action, and 1,200 organizations signed the Paris Pledge for Action. But we also saw plenty of private-sector inaction on a global scale.
And how many of the thousands of corporate pledges were just greenwash — companies seizing the opportunity to affirm environmental goodwill without putting a lasting commitment behind it? Where should the public and shareholders seek reassurance that those promises will be upheld?
If we’re to make real progress in the wake of Paris, we need the COP21 commitments to resonate through both state and corporate policy.
A company’s successful transition to a net zero carbon economy should be central to its planning. It should influence executive remuneration, dictate board members’ decisions, and determine a company’s ability to compete in the investor and consumer marketplace. Too few companies are doing this — or even aspiring to it.
So how can we make sure Paris lives on, loudly, in company decision making?
In the United Kingdom, a company’s governing documentation is called its constitution and is made up of both its articles of association and any special resolutions passed by the company in general meetings. The constitution lays out the principles that the organization must adhere to as well as its objectives. The company, and its management, must follow these governing principles.
In the United States, these governing documents are known as articles of association and bylaws, and they establish the contractual relationship between the company and its shareholders (and further contractual relationships between the shareholders themselves).
A company has the power to change its constitution in its general meeting. And in the UK, this change can be made at a general meeting through the passage of a special resolution. A special resolution is one that is voted upon by 75% of the company shareholders who are entitled to vote at the meeting.
In 2014, ClientEarth worked with the “Aiming for A” investor coalition to file historic shareholder resolutions with Shell and BP, calling on the companies to demonstrate “strategic resilience for 2035 and beyond.” The resolutions called for routine annual reporting from 2016 to include further information about ongoing operational emissions management; asset portfolio resilience to the International Energy Agency’s scenarios; low-carbon energy research and development and investment strategies; relevant strategic key performance indicators and executive incentives; and public-policy positions relating to climate change.
As the resolutions were supported by company management, and passed with over 98% of the vote, they now form part of the constitutions of those companies. Similar resolutions have been filed by the Aiming for A Coalition with three of the world’s largest integrated miners — Anglo American, Glencore, and Rio Tinto — and will be voted on at those companies’ AGMs in early 2016. As the governance framework for a company, it is not surprising a director must act in accordance with the company’s constitution. At the same time, a director must act in the way that she or he considers, in good faith, to be most likely to promote the success of the company for the benefit of its shareholders as a group (section 172 Companies Act 2006 [UK]).
In working towards the success of the company, the directors should be guided by their business judgment and knowledge of the nature and purpose of the company, as well as anything relevant in the company’s constitution.
This means that if a shareholder resolution is passed that amends the purposes of the company as described in the constitution, any director must be guided by the new provision — subject to their good-faith business judgment.
Our analysis has concluded that the law in the UK permits companies to incorporate the climate goals governments made in Paris into their corporate constitutions.
Such a move would demonstrate, publicly, that the company is genuinely committed to the transition required. But also gives it competitive edge with investors. Companies who continue without addressing the issue of climate change will find themselves facing the pressures of mounting investment risk.
In many ways, this proposed provision simply reflects existing UK law. In the UK, directors have a duty to promote the success of the company and consider the likely long-term consequences of any decision. There is no longer any doubt that climate change poses material financial risks to many companies — and this means company directors are under a legal duty to adapt their business models to these risks.
This is not to say that every corporation has the same scope to act. Just as the Paris Agreement reflects a country’s capacity to act on climate, so must an additional clause in corporate policy allow for flexibility in approach. It must give scope to directors to act in the “best interests” of the company, and to an extent that makes sense dependent on the company’s size, sector, and location. Directors are, after all, best placed to make these decisions.
We therefore suggest wording that recognizes this — and almost exactly echoes Article 2(1)(a) of the Paris Agreement:
“The Company will undertake its business in a manner consistent with the objectives of the Paris Agreement (in so far as they relate to the Company’s business), in particular, the objective to hold the increase in the global average temperature to well below 2°C above preindustrial levels and to pursue efforts to limit the temperature increase to 1.5°C above preindustrial levels, and it shall be one of the purposes of the Company.”
Incorporating this duty into a UK company’s constitution would act as a clear signpost to shareholders, stakeholders, and other customers that management’s commitment to the Paris Agreement is absolute.
In the United States, the law does not allow the purposes of a for-profit company to be explicitly and easily changed to recognize stakeholder interests in the same way. This has led to the growth of the concept of the “benefit corporation,” a hybrid corporate form that allows a for-profit company to be governed in the best interests of all constituents, not just stockholders. Several U.S. states have now enacted benefit corporation legislation, providing a legal form for companies who wish to preserve their social purpose, or to permit directors to consider the interests of stakeholders equally with those of stockholders.
Alternately, Harvard Business School’s Robert Eccles has suggested that companies could prepare a “Statement of Significant Audiences and Materiality” identifying a company’s significant audiences, which may include shareholders, bondholders, employees, or NGOs representing a variety of environmental, social, and governance (ESG) issues. This method would allow traditional for-profit companies to identify and accordingly manage stakeholder interests without changing their legal obligations to stockholders.
Governments can’t make the shift to a low-carbon economy alone. We cannot achieve the transition to a net zero carbon economy without business signing onto the same goals, and there are legal mechanisms that enable them to do so.
One hundred ninety-five countries have made this commitment — now it’s up to business to make it real.