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To pollute or not to pollute is (not only) the question!

A lot has been written about the role of companies in society and the challenges they meet today.

We all strive for a sustainable future for our children, grandchildren, great-grandchildren. Today, more than ever, we want them to live in a safe, fair and prosperous Europe, not only in the present but also tomorrow, the next year, the next decade, the next century. That is the definition of sustainability[1].

We also all agree that companies play an important role in achieving that end: the climate emergency threatens the future of humanity and the relentless exploitation of today’s resources does not create value in the long-term.

However, the responsibility of companies is not limited to their impact on climate or the use of natural resources, it is about much more than ‘to pollute or not to pollute’. We all have the moral obligation to behave in a prosocial way, and companies can be no exception. They are essential pillars of our European social system.

Companies innovate, they produce, they deliver goods and services, responding to the necessities of life but also creating wellbeing for millions of people. Meanwhile, in doing so, they generate jobs - and I would not just call them jobs: no, they generate purpose and dignity for people, allowing them to make a living through employment or return on investment, and procuring ecosystems in which people can thrive, find fulfillment, raise children, take care of elders, create art and music.

So even in the context of the sustainability transition, companies should consider all the different roles they have in society, which are all important and not always easy to align...

To make companies fully implement and align these roles, do we need a shift in the burden of accountability that rests upon the company actors? Are the existing legal frameworks (regulations but also governance codes) not enough? 

To answer these questions, I invite you to take a closer look at the nature itself of the company: what are companies actually and how do they play these different roles? 

History teaches us that the company is a legal invention, a human creation, which is considered as a (fictive) person, who can own assets, can exercise rights and can be held accountable[2].

This legal invention, which has its origins in Roman law where it organised public works, was the first structure that survived its partners. The first large private enterprises were born during the Middle Ages and the early Renaissance, followed by the mergers of corporations or ports in order to finance large expeditions in the later Renaissance. These structures, such as the Dutch East India Company, were the first to establish the principle of stable shareholding with fixed capital, independent of one expedition or trading activity. They also were the first to establish real governance to attract “passive” investors, who put in their assets, risking losses if the business failed but with a hope of profit in case of good management of the operations for which the company had been created.

Times have changed, but the principles of this legal invention which serve individual as well as economic and social goals, have remained the same: companies are still fictive persons, acting through their corporate bodies. It is thus the company, as a legal person, that is liable for the acts performed by its corporate bodies.

And make no mistake, as essential pillars of our social system, companies can indeed be held accountable on several bases: social legislation, environmental rules, money laundering regulations, privacy legislation, .... 

In addition to this special legislation, often “of public order” and combined with criminal sanctions, there is also common law[3] as a possible foundation of companies’ legal liability. Civil law or human rights can be invoked to bring legal actions against companies. A pioneering example was set with the Urgenda case in the Netherlands[4]: through the principles of (direct or indirect) third party effect, the violation of fundamental rights can also be upheld against private persons or companies. Several lawsuits are pending against major oil and gas companies (e.g. Exxon, Mobil, BP, Shell…) for their negative climate impact.

The question raised today is thus not ‘should we make companies more liable’, but would it be beneficial for our common sustainability pursuit to strengthen the liability of the corporate bodies?

Should additional liabilities for directors be created, making them directly accountable towards the stakeholders? Would it be possible in good governance terms to regulate, in a uniform manner, a process of balanced decision making in very diverse environments, sectors and situations?

On the other hand, would it serve our sustainable future if shareholders were to respond, beyond their investment, for the actions of a company that would not fulfill certain sustainability criteria? Is it überhaupt possible to make investors liable for more than their contribution without undermining the corporate structure itself?

If we look at the existing governance frameworks, we can distinguish the first wave of governance, when the focus lay on the role of the board of directors to “solve” agency conflicts, from the second wave of governance where attention was added towards the balancing of the interests of all shareholders.

Today we have clearly and irreversibly entered the age of what we define as the ‘third wave’ of governance, where governance is not only process but outcome-oriented [5] and aims at sustainable value creation.

We see this positive change reflected at several levels.

First, shareholders are an important driver of the sustainability transition, and they are taking up their role: in Belgium, the yearly Mira report shows an increase of no less than 74% in sustainable investments in Belgium in 2019, a progression which should be confirmed in 2020 because data collected during the Covid-19 crisis points out that sustainable funds generally outperformed their benchmarks.

From a more controlling role, we see that shareholders are evolving towards a more dynamic, guiding role, in a permanent dialogue with the company, on the path of the sustainability transition. Shareholder activism led in several cases to positive results, and the Shareholder Rights Directive that has been transposed in Belgian law in April 2020, is especially aiming at encouraging long-term shareholder engagement[6].

In this legal fiction that is the company, shareholders are and remain the backbone of the entity. Without shareholders, there is no (private) company: they create the company, they set its purpose, they appoint and dismiss the directors, they approve the accounts - they take the upside but also the downside of their investment.

And more and more are doing so in a sustainable manner because it is in their long-term interest to do so: evidence is growing that superior performance on ESG issues leads to superior financial performance.

Secondly, if we look at the existing legal frameworks, we notice that company law does not hamper a long-term sustainable approach to the company’s activities, even in the presence of a certain number of short-term oriented shareholders.

Directors are held to achieve the company’s purpose that is defined by its shareholders, but this purpose is not to be limited to shareholders’ interests.

As excellently stated in a recent article published in the Harvard Business Review, directors do not have a fiduciary duty to put shareholders’ interests above all others: Setting aside the growing evidence that superior performance on material ESG issues leads to superior financial performance, it is simply not true that shareholders must come first. Shareholders are obviously important, but other stakeholders – such as employees, customers and suppliers - are also crucial for a company’s long-term prospects. To dispel directors’ misconceptions, we recently gathered legal memos on fiduciary duty from all G20 countries and 14 others. None offered an endorsement of shareholder primacy. (...)[7].

Various national legislations, including Belgian law, also provide for the express possibility to install an “entreprise à mission”, a benefit corporation. In Belgium this opportunity was recently grasped by Ion Beam Applications SA, a medical technology company based in Louvain-la-Neuve.

Third, corporate governance codes, which are often anchored in company law through the comply- or- explain principle, are explicitly emphasising sustainable value creation, as a basic part of directors’ duties. 

Already in 2015, the OECD Principles of Corporate Governance stated that the board is not only accountable to the company and its shareholders but also has a duty to act in their best interests. Boards are expected to take due regard of, and deal fairly with, other stakeholder interests including those of employees, creditors, customers, suppliers and local communities. Observance of environmental and social standards is relevant in this context. 

This fundamental principle is repeated by European Corporate Governance Codes, including the Belgian Code on Corporate Governance which considers the shareholders as part of the legitimate stakeholders of the company[8].

Indeed, companies are taking up the challenge: not only is it a Danish company, Ørsted, a renewable energy provider, which is the first electricity company to be number one in the Global 100 List (the yearly ranking of 100 organisations worldwide doing the most to embrace sustainable business practices), but nearly half of the companies on this ranking are based in Europe.

Companies are moreover doing this in an increasingly transparent manner, through legal reporting obligations that have already entered into force or are about to be[9].

Both hard law and soft law frameworks are thus in place to allow boards of directors and shareholders to join forces to strive for the same sustainable objectives and to create sustainable value.

To do so, we need clear liability rules because legal certainty is the basis of a competitive economic environment.  

But legal certainty is not enough: we should also bear in mind that for innovative companies to play their different roles in society we need a dynamic approach to sustainable governance.

In innovative entrepreneurship there is no one-size-fits-all.

We need a flexible framework for companies that allows them to transcend the ticking-the-box approach in order to implement a sustainability approach that is embedded in their strategy. They need to master their own decision making concerning the environment, and the sector in which they operate, to be able to integrate ESG in an innovative and differentiating way and to create their own form of competitive advantage.

Clearly then, ‘to pollute or not to pollute’ is indeed not the only question. A sustainable approach to sustainability should consider all the roles taken up by companies, so that they can help build a safe, fair and prosperous Europe.

Sandra Gobert
Executive Director GUBERNA



[1] The modern concept of sustainable development is derived mostly from the 1987 Brundtland Report. In 1987, the World Commission on Environment and Development, which had been set up in 1983, published a report entitled «Our common future» that came to be known as the «Brundtland Report» after the Commission's chairwoman, Gro Harlem Brundtland. The Brundtland Report stated explicitly that critical global environmental problems were primarily the result of the enormous poverty of the South and the non-sustainable consumption and production in the North. It called for a strategy that united development and the environment – described by the now-common term «sustainable development». In 1989, the report was debated in the UN General Assembly, which decided to organize a UN Conference on Environment and Development. Sustainability is defined as meeting the needs of the present without compromising the ability of future generations to meet their needs. 

[2]A broad but accurate definition is given by Investopedia https://www.investopedia.com/terms/c/company.asp): A company is essentially an artificial person—also known as corporate personhood—in that it is an entity separate from the individuals who own, manage, and support its operations. Companies are generally organized to earn a profit from business activities, though some may be structured as nonprofit charities. Each country has its own hierarchy of company and corporate structures, though with many similarities.

[3] In terms of "gemeen recht, droit commun"

[4] On 20 December 2019 the Dutch Supreme Court directed the Dutch State to reduce greenhouse gases by the end of 2020 by at least 25% compared to 1990 based on article 2 “Right to Life” and article 8 “Right to respect for private and family life” of the European Convention on the Protection of Human Rights and Fundamental Freedoms.

[5] The start of a new era was confirmed with the release of the King IV Report of Corporate Governance for South Africa in 2016, moving away from the traditional view on corporate governance as the system in which an organisation is managed and controlled towards a pioneering outcome-oriented approach, positioning corporate governance as Corporate governance is the exercise of ethical and effective leadership by the governing body towards the achievement of four governance outcomes: ethical culture, good performance, effective control, and legitimacy.

[6] Shareholder engagement is encouraged at different levels: at the level of the issuers and their agents that have to standardise meeting announcements and voting procedures, at the level of the institutional investors and asset managers that need to clear out engagement strategies and policies aligned with their long-term goals, through proxy advisors that have to disclose a code of conduct, explain their voting recommendations and how they prevent conflicts of interest and at the level of companies that will need shareholder approval regarding directors’ remuneration and transactions with related parties.

[7] Robert G. Eccles, Mary Johnstone-Louis, Colin Mayer, Judith C. Stroehle, The Boards role in sustainability, HBR, September- October 2020, p. 49.

[8] Principle 2.1: The board should pursue sustainable value creation by the company, by setting the company’s strategy, putting in place effective, responsible and ethical leadership and monitoring the company’s performance.  Principle 2.2 In order to effectively pursue such sustainable value creation, the board should develop an inclusive approach that balances the legitimate interests and expectations of shareholders and other stakeholders.

[9] Directive 2014/95 as regards disclosure of non-financial and diversity information (Non-financial reporting Directive) that came into effect in all EU member states in 2018. 
Regulation 2019/2088 on sustainable-related disclosures in the financial services sector (Disclosure Regulation): adopted in spring 2019, to be applicable as from March 2021.
Directive 2017/828 as regards the encouragement of long-term shareholder engagement (Shareholder rights II Directive) of which the effects are starting to be shown.
Regulation 2020/852 on the establishment of a framework to facilitate sustainable investments (Taxonomy Regulation): amending the disclosure regulation and setting additional transparency requirements that will apply from 2022 or 2023.