Topics: Corporate Governance,Corporate Social Responsibility,ESG
Topics: Corporate Governance,Corporate Social Responsibility,ESG
August 9, 2018
August 9, 2018
It is encouraging to live in a time where society is increasingly insisting that corporations generate and measure social impact alongside profit. Not only is this a positive development from a moral perspective, but it’s also good business. In the report, “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance,” for example, Oxford University and Arabesque Asset Management establish that corporations that “incorporate sustainability considerations into decision-making processes . . . show better operational performance and are less risky.”
Mainstream financial and business leaders appear to, in large part, agree. In 2017, Larry Fink, chair of Blackrock, the world’s largest asset manager, sent a letter to CEOs stating that, “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” Investors are following suit, with eighty-four percent (84%) applying or considering Environmental, Social and Governance (ESG) criteria.
As the sustainability movement grows, so too do the ambiguities under which boards of directors govern. Boards are bound by fiduciary duties, including the duty of loyalty, which requires that a board acts in good faith and in the best interest of the corporation. Historically, the “best of the corporation” was interpreted to mean maximizing profits solely for the shareholder. Many regulators, academics, politicians, and investors are now challenging this concept, contending that a corporation is best served when it incorporates “more nuanced and tempered approaches to creating shareholder value” and considers the interests of a broader set of stakeholders, such as employees, customers, and communities. Boards can lead the way by partnering with experienced, creative legal counsel to balance a multitude of considerations.
The sustainability movement is exciting, but complicated and still developing. For example, on the one hand, BNP Paribas, JPMorgan, and Citibank offered Danone significantly lower borrowing costs on a $2 billion credit facility to the extent that Danone’s business units could demonstrate they were generating positive social impact. On the other hand, the U.S. Department of Labor issued a bulletin that creates roadblocks for ERISA plan fiduciaries that want to consider ESG factors in their investment decisions. But with experienced counsel, boards can navigate this uncertainty and successfully guide corporations to long term profits and impact.