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How Can Compliance Steer Companies to Deliver on ESG Goals?

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Abstract

With less than ten years left for the implementation of the 2030 Agenda for sustainable development, only 21% of world-class CEOs are convinced that businesses are playing a critical role in contributing to the Sustainable Development Goals (SDGs). Companies embraced enthusiastically the SDGs but they are not delivering real progress on those goals at a desired pace. In this chapter we discuss the reasons for the yet modest outcome of business contribution and aim at identifying the main issues that companies should map and address when building a robust sustainability governance framework.

We start by looking at the main features of the sustainability legal framework in Europe—including some paradigmatic laws at national level—with a focus on the debate between the merits of a harder stance of the sustainability rules vis-à-vis a softer approach.

We then examine the topic from the companies’ perspective as law-takers, in particular how corporates’ response to sustainability rules is influenced by their compliance maturity.

In conclusion, we propose mechanisms for strategically and sustainability-driven compliance programs seeking to help companies navigate the sustainability shifting waters.

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Notes

  1. 1.

    The concept of world’s “social foundation” as a minimum for certain dimensions (water, food, health, education, income & work, peace & justice, political voice, social equity, housing, networks, and energy), below which the humanity is in deprivation, is explored in the “Doughnut Theory”, created by K. Raworth. For more information about this see, “A Safe and Just Space for Humanity: Can We Live within the Doughnut?” (2012) Oxfam Discussion Papers.

  2. 2.

    The terms “sustainability”, “environmental, social and governance” (ESG), “non-financial” or “corporate social responsibility” (CSR) are all used interchangeably in this chapter.

  3. 3.

    See conclusions agreed in December 2015 by 195 countries at http://unfccc.int/paris_agreement/items/9485.php.

  4. 4.

    Available at https://www.un.org/sustainabledevelopment/sustainable-development-goals/. The Sustainable Development Goals are part of the Resolution adopted by the General Assembly on 25 September 2015, available at https://www.un.org/ga/search/view_doc.asp?symbol=A/RES/70/1&Lang=E.

  5. 5.

    COM(2019) 640 final, available at https://eur-lex.europa.eu/resource.html?uri=cellar:b828d165-1c22-11ea-8c1f-01aa75ed71a1.0002.02/DOC_1&format=PDF.

  6. 6.

    COM(2020) 14 final, available at https://eur-lex.europa.eu/resource.html?uri=cellar:e8c76c67-37a0-11eaba6e-01aa75ed71a1.0003.02/DOC_1&format=PDF.

  7. 7.

    See https://ec.europa.eu/environment/circular-economy/pdf/new_circular_economy_action_plan.pdf.

  8. 8.

    COM(2020) 380 final, available at https://eur-lex.europa.eu/resource.html?uri=cellar:a3c806a6-9ab3-11ea-9d2d-01aa75ed71a1.0001.02/DOC_1&format=PDF.

  9. 9.

    COM/2020/381 final, available at https://eur-lex.europa.eu/resource.html?uri=cellar:ea0f9f73-9ab2-11ea-9d2d-01aa75ed71a1.0001.02/DOC_1&format=PDF.

  10. 10.

    The European Commission launched a consultation on sustainable corporate governance on 26 October 2020. The consultation is a preliminary step towards a future policy intervention, seeking feedback on potential changes to several aspects of corporate governance. The consultation closed on 8 February 2021 and a formal proposal is expected to be published in Q2 2021, but further detail on the direction of the new initiative may be included when the Commission publishes its Renewed Sustainable Finance Strategy (now expected to be in the first half of 2021).

  11. 11.

    COM(2018) 97 final, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0097&from=EN.

  12. 12.

    L. Edelman and M. Suchman (1997). The Legal Environments of Organizations. Annual Review of Sociology, Vol. 23 (1997), pp. 479–515. Retrieved January 27, 2021, from http://www.jstor.org/stable/2952561.

  13. 13.

    Muzaffer Eroglu, “How to Achieve Sustainable Companies: Soft Law (Corporate Social Responsibility and Sustainable Investment) or Hard Law (Company Law)” (January 1, 2015). Kadir Has University Law School Journal, 2014, Available at https://ssrn.com/abstract=2736867.

  14. 14.

    Voluntary compliance results from the conviction that the law is fair and it is fairly applied.

  15. 15.

    Jingchen Zhao, “Extraterritorial Attempts at Addressing Challenges to Corporate Sustainability”, in “The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability” [Edited by] Beate Sjåfjell, Christopher M. Bruner, pp. 29–42.

  16. 16.

    Charlotte Villiers, “Global Supply Chain and Sustainability: The Role of Disclosure and Due Diligence Regulation”, in “The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability” [Edited by] Beate Sjåfjell, Christopher M. Bruner, p. 551.

  17. 17.

    Iris H.Y. Chiu, “Disclosure Regulation and Sustainability: Legislation and Governance Implications”, in “The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability” [Edited by] Beate Sjåfjell, Christopher M. Bruner, p. 521.

  18. 18.

    Cassandra Walsh and Adam J. Sulkowski, “A Greener Company Makes for Happier Employees More so Than Does a More Valuable One: A Regression Analysis of Employee Satisfaction, Perceived Environmental Performance and Firm Financial Value” (December 10, 2009). Available at https://ssrn.com/abstract=1521745.

  19. 19.

    Ibid, p. 527 and Iris Chiu, “Unpacking the Reforms in Europe and UK Relating to Mandatory Disclosure in Corporate Social Responsibility: Instituting a Hybrid Governance Model to Change Corporate Behaviour?” European Company Law, Vol. 14, no. 5 (2017), p. 208.

  20. 20.

    Examples of these intermediaries may be KLD, Thomson Reuters ASSET4, FTSE4Good Index, Dow Jones Sustainability Index, CDP, and MSCI.

  21. 21.

    Jingchen Zhao, “Extraterritorial Attempts at Addressing Challenges to Corporate Sustainability”, in “The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability” [Edited by] Beate Sjåfjell, Christopher M. Bruner, p. 29.

  22. 22.

    https://www.legislation.gov.uk/ukpga/2015/30/contents/enacted.

  23. 23.

    Currently, this threshold is £36 million (https://www.gov.uk/guidance/publish-an-annual-modern-slavery-statement#who-needs-to-publish-a-statement).

  24. 24.

    Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups.

  25. 25.

    Non-binding guidelines were subsequently released with the aim of harmonizing disclosure. See https://ec.europa.eu/transparency/regdoc/rep/3/2017/PT/C-2017-4234-F1-PT-MAIN-PART-1.PDF and https://eur-lex.europa.eu/legal-content/PT/TXT/HTML/?uri=CELEX:52019XC0620(01)&from=EN.

  26. 26.

    The NFRD was transposed in Portugal in 2017 (by the Decree-Law 89/2017, of 28 July 2017 that amended the Portuguese Companies Code (articles 65, 66-B, 508-G, 451, 528 and 546) and the Portuguese Securities Code (article 245-A)) and applies to accounts published by large companies since 2018. In the same year of 2017, Law 62/2017, of 1 August 2017 introduced in Portugal the obligation of publicly listed companies and state-owned companies to prepare and publish equality plans and to meet targets for the representation of both genders in corporate bodies.

  27. 27.

    The summary report of the public consultation is available here https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12129-Revision-of-Non-Financial-Reporting-Directive/public-consultation.

  28. 28.

    As per the same public consultation, 70% of users of company reports believe that companies fail to disclose relevant information. Around 74% have concerns about how reliable the information is and 84% find that reported information is not comparable between companies.

  29. 29.

    Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement.

  30. 30.

    The SRD II was transposed in Portugal in 2020 (by Law 50/2020, of 25 August amending the Portuguese Securities Code (articles 85, 93, 222-A, 359, 390, 392, 394, 397, and 400, and introduced new articles 22-A, 26-A to 26-F, 29-B to 29-E, 245-C, 249-A to 249-D, and 251-A to 251-E), and the Legal Framework of Credit Institutions and Financial Institutions (article 211).

  31. 31.

    COM (2018) 353 final, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CONSIL:ST_14970_2019_ADD_1_COR_1&from=EN.

  32. 32.

    Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector.

  33. 33.

    The OCDE has issued due diligence guidance such as OECD, “OECD Guidelines for Multinational Enterprises”, OECD Publishing, 2011, http://dx.doi.org/10.1787/9789264115415-en; OECD, “OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas: Third Edition”, Paris: OECD Publishing, 2016, http://dx.doi.org/10.1787/9789264252479-en; OECD, “OECD Due Diligence Guidance for Responsible Supply Chains in the Garment and Footwear Sector”, Paris: OECD Publishing, 2018, https://doi.org/10.1787/9789264290587-en; OECD “OECD Due Diligence Guidance for Responsible Business Conduct”, 2018; and OECD, “Due Diligence for Responsible Corporate Lending and Securities Underwriting: Key considerations for banks implementing the OECD Guidelines for Multinational Enterprises”, 2019.

  34. 34.

    Charlotte Villiers, “Global Supply Chain and Sustainability: The Role of Disclosure and Due Diligence Regulation”, in “The Cambridge handbook of corporate law, corporate governance and sustainability” [Edited by] Beate Sjåfjell, Christopher M. Bruner, p. 565.

  35. 35.

    Said EU regulation includes the conflict minerals regulation (Regulation (EU) 2017/821 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 May 2017 laying down the supply chain due diligence obligations of Union importers of minerals or metals), the timber regulation (Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market), and voluntary approaches with third countries such as the staff working document (2017) regarding sustainable garment value chains and the Trade for Decent Work Project.

  36. 36.

    See the list of national human rights and environmental due diligence initiatives (as of 3 July 2020) at https://www.business-humanrights.org/en/latest-news/national-regional-movements-for-mandatory-human-rights-environmental-due-diligence-in-europe/.

  37. 37.

    Loi nº 2017-399 du 27 mars 2017 relative au devoir de vigilance des sociétés mères et des enterprises donneuses d’ordre (“French Due Diligence Act”), available at https://www.legifrance.gouv.fr/eli/loi/2017/3/27/2017-399/jo/texte.

  38. 38.

    Article L. 225-102-4 du code de commerce.

  39. 39.

    For an analysis of the limitations of this law, see Véronique Magnier, “Old-Fashioned yet Innovative”, in “The Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability” [Edited by] Beate Sjåfjell, Christopher M. Bruner.

  40. 40.

    Available (in Dutch) at https://zoek.officielebekendmakingen.nl/stb-2019-401.html, is expected to become effective in mid-2022.

  41. 41.

    See the European Commission “Study on Due Diligence Requirements Throughout the Supply Chain” (January 2020).

  42. 42.

    Benjamin van Rooij and D. Daniel Sokol, “Compliance as the Interaction Between Rules and Behavior” (March 28, 2020). (Introduction to Cambridge Handbook of Compliance). In B. Van Rooij and D. Daniel Sokol (Eds.), “Cambridge Handbook of Compliance”, Cambridge, UK: Cambridge University Press, 2021 (Forthcoming), UC Irvine School of Law Research Paper No. 2020-29, Available at SSRN: https://ssrn.com/abstract=3563295.

  43. 43.

    Neil A. Gunningham, Dorothy Thornton and Robert A. Kagan, “Motivating Management: Corporate Compliance in Environmental Protection”, Law & Policy (2005), p. 290.

  44. 44.

    D. McBarnet and C. Whelan, “The Elusive Spirit of the Law: Formalism and the Struggle for Legal Control”, The Modern Law Review, Vol. 54, no. 6 (1991), pp. 848–873. Retrieved February 11, 2021, from http://www.jstor.org/stable/1096920.

  45. 45.

    Shauhin Talesh and Jérôme Pélisse, “How Legal Intermediaries Facilitate or Inhibit Social Change”, in “Studies in Law, Politics, and Society” [Edited by] Austin Sarat, Vol. 79 (2019), pp. 111 et seq.

  46. 46.

    Lauren B. Edelman and Shauhin A. Talesh, “Chapter 5: To Comply or Not to Comply—That Isn’t the Question: How Organizations Construct the Meaning of Compliance”, in “Explaining Compliance: Business Responses to Regulation” [Edited by] Christine Parker and Vibeke Lehmann Nielsen (2011), p. 116.

  47. 47.

    Law stipulates the right thing to do.

  48. 48.

    For an overview of such studies see Kathleen Miller and George Serafeim, in “Chief Sustainability Officers: Who Are They and What Do they Do”, p. 19, available at http://ssrn.com/abstract=2411976.

  49. 49.

    Christoph Lueneburger and Daniel Goleman, “The Change Leadership Sustainability Demands”, in MIT Sloan Management Review (Summer 2010), available at https://sloanreview.mit.edu/article/the-change-leadership-sustainability-demands/.

  50. 50.

    The Nike sweatshop incident in the 90s is an example of a scandal that triggered internal change, for more information see Andrea Newel, “How Nike Embraced CSR and Went From Villain to Hero” (June 2015) in Tripple Pundit.

  51. 51.

    Christoph Lueneburger and Daniel Goleman, “The Change Leadership Sustainability Demands”, in MIT Sloan Management Review (Summer 2010), available at https://sloanreview.mit.edu/article/the-change-leadership-sustainability-demands/.

  52. 52.

    Asad Ghalib, Farhad Hossain and Thankom Arun, “Social Responsibility, Business Strategy and Development: The Case of Grameen-Danone Foods Limited”, Australasian Accounting, Business and Finance Journal, Vol. 3, no. 4 (2009).

  53. 53.

    Peter White, “Building a Sustainability Strategy into the Business”. Corporate Governance, Vol. 9, no. 4 2009, pp. 386–394.

  54. 54.

    Robert G. Eccles, George Serafeim, and Shelley Xin Li. “Dow Chemical: Innovating for Sustainability”, Harvard Business School Case 112-064, January 2012 (Revised June 2013).

  55. 55.

    D.C. Esty and A.S. Winston, “Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage”, New Haven: Yale University Press, 2006.

  56. 56.

    For an analysis of research on the connection between ESG and financial performance, see Pollman, Elizabeth, “Corporate Social Responsibility, ESG, and Compliance” (November 2, 2019). Forthcoming, Cambridge Handbook of Compliance (D. Daniel Sokol and Benjamin van Rooij, eds.), Loyola Law School, Los Angeles Legal Studies Research Paper No. 2019-35, available at SSRN: https://ssrn.com/abstract=3479723 or http://dx.doi.org/10.2139/ssrn.3479723.

  57. 57.

    Kronthal-Sacco, Randi and Whelan, Tensie and Van Holt, Tracy and Atz, Ulrich, “Sustainable Purchasing Patterns and Consumer Responsiveness to Sustainability Marketing” (August 1, 2019). NYU Stern School of Business, available at SSRN: https://ssrn.com/abstract=3465669 or http://dx.doi.org/10.2139/ssrn.3465669.

  58. 58.

    A. Edmans, “The Link Between Job Satisfaction and Firm Value, With Implications for Corporate Social Responsibility”, Academy of Management Perspectives, Vol. 26 (2012), pp. 1–19.

  59. 59.

    Lynn S. Paine, “Sustainability in the Boardroom” in Harvard Business Review (July–August 2014), about Nike’s experience that has led to the creation of a corporate responsibility committee.

  60. 60.

    Dina Gerdeman, “What Do Chief Sustainability Officers Do?” in Harvard Business School Working Knowledge, available at https://www.forbes.com/sites/hbsworkingknowledge/2014/10/08/what-do-chief-sustainabilty-officers-do/?sh=446f1c9633ab.

  61. 61.

    French, John & Raven, Bertram (1959), “The Bases of Social Power”.

  62. 62.

    Mazars, “Responsible Banking Practices: Benchmark Study 2020” (2020), available at https://www.mazars.com/content/download/1012584/52903051/version//file/Mazars_Responsible_Banking_Practices.pdf.

  63. 63.

    Scott Killingsworth, “The Privatization of Compliance” (May 29, 2014). RAND Center for Corporate Ethics and Governance Symposium White Paper Series, Symposium on “Transforming Compliance: Emerging Paradigms for Boards, Management, Compliance Officers, and Government” (2014), available at https://ssrn.com/abstract=2443887.

  64. 64.

    The public announcement by the Goldman Sachs CEO David Solomon was made from the World Economic Forum in Davos in January 2020 and is available at https://www.cnbc.com/video/2020/01/23/goldman-sachs-ceo-ipo-diversity-squawk-box-interview.html.

  65. 65.

    The term was first used by Richard H. Thaler and Cass R. Sunstein, in “Nudge: Improving Decisions About Health, Wealth, and Happiness”, 2009 Print.

  66. 66.

    For example nudging by the use of “opt-out” instead of “opt-in” choices, as further detailed in Haoyang Yan and J. Frank Yates, “Improving Acceptability of Nudges: Learning from Attitudes Towards Opt-in and Opt-out Policies”, Judgment and Decision Making, Vol. 14, no. 1 (January 2019), pp. 26–39.

  67. 67.

    Todd Haugh, “Nudging Corporate Compliance” (July 17, 2017). 54 American Business Law Journal 683 (2017), Kelley School of Business Research Paper No. 17-54, pp. 687–688, available at https://ssrn.com/abstract=3004074.

  68. 68.

    Oksana Mont, Matthias Lehner & Eva Heiskanen. (2014). “Nudging. A Tool for Sustainable Behaviour?”, Swedish Environmental Protection Agency, p. 69, available at https://www.researchgate.net/publication/271211332_Nudging_A_tool_for_sustainable_behaviour.

  69. 69.

    The Alliance for Corporate Transparency, “Research Report 2019: An Analysis of the Sustainability Reports of 1000 Companies Pursuant to the EU Non-Financial Reporting Directive”, available at https://www.allianceforcorporatetransparency.org/assets/2019_Research_Report%20_Alliance_for_Corporate_Transparency-7d9802a0c18c9f13017d686481bd2d6c6886fea6d9e9c7a5c3cfafea8a48b1c7.pdf.

  70. 70.

    Galit Sarfaty, “Shining Light on Global Supply Chains” (October 20, 2014). Harvard International Law Journal, Vol. 56 (2015), p. 431, available at SSRN: https://ssrn.com/abstract=2512417.

  71. 71.

    See Richard Locke, Fei Qin, and Alberto Brause, “Does Monitoring Improve Labor Standards?: Lessons from Nike”, MIT Sloan Working Paper No. 4612-06, July 2006 for a discussion on how monitoring efforts shall be combined with other interventions focused on tackling the root causes of poor working conditions.

  72. 72.

    ESG risks were once considered “Black Swans”, rare and unpredictable outlier events that may cause extreme impacts as first defined by NASSIM NICHOLAS TALEB, in “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” (2001). These risks are more common today but still advance rapidly. They are commonly inherent to the nature of the services or products and object of particular interest from media or society in general what amplifies the reputational consequences of their materialisation.

  73. 73.

    The Committee of Sponsoring Organizations of the Treadway Commission (COSO) and World Business Council for Sustainable Development (WBCSD), “Enterprise Risk Management: Applying Enterprise Risk Management to Environmental, Social and Governance-Related Risks” (2018).

  74. 74.

    See European Banking Authority, “EBA Discussion Paper on Management and Supervision of ESG Risks for Credit Institutions and Investment Firms”, of 30 October 2020 (EBA/DP/2020/03), p. 28.

  75. 75.

    European Central Bank, “Guide on Climate-Related and Environmental Risks: Supervisory Expectations Relating to Risk Management and Disclosure”, November 2020, available at https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.202011finalguideonclimate-relatedandenvironmentalrisks~58213f6564.en.pdf.

  76. 76.

    WBCSD is a global, CEO-led organization of over 200 leading businesses working together to accelerate the transition to a sustainable world.

  77. 77.

    See latest 2019 United Nations Global Compact—Accenture Strategy CEO Study on Sustainability, “The Decade to Deliver: A Call to Business Action”.

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Reis, L. (2022). How Can Compliance Steer Companies to Deliver on ESG Goals?. In: Câmara, P., Morais, F. (eds) The Palgrave Handbook of ESG and Corporate Governance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-99468-6_16

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