Resetting The DNA Of Business

Over the past decade, there has been consistent progress across many jurisdictions in passing legislation that widens the scope of corporate responsibility beyond the interests of financial shareholders. Since 2010, 51 jurisdictions around the world have introduced stakeholder governance statutes, including Italy (Societá Benefit), Colombia, France (Enterprise à Mission), Spain (Empresas con Propósito), Peru, Rwanda, Uruguay, Ecuador, British Columbia, and Canada, as well as 44 U.S. states, Puerto Rico, and the District of Columbia (Washington, D.C.). These laws enable the creation of a new type of company, the “Benefit Corporation,” that is legally focused on a long-term mission beyond delivering short term profits, and is committed to delivering value to stakeholders beyond shareholders.

A significant advancement in this movement to rethink the role and responsibility of business is now occurring in the European Union. Discussions are underway between the European Parliament, the Council of the European Union, and the European Commission regarding the Corporate Sustainability Due Diligence Directive (CSDDD) and within it, Article 25 which will require from directors of large businesses to take into account the repercussions of their decisions on sustainability matters, on those affected by the company’s operations.

I recently talked to Katie Hill, former Executive Chair for B Lab Europe; Wojciech Baginski, a board member of B Lab Global and co-founder of the B Corp movement in Poland and partner at Impactiv.Law; and Maria Correa, Head of Communication and Community Engagement at B Lab Europe about the development of the Interdependence Coalition, which is focused on advocating for this specific legislation in a number of ways.

Our discussion took place at a crucial time as the debates on CSDDD and the potential inclusion of Article 25 now stand at a crossroad, with EU member states deciding whether to champion the cause of a more sustainable economy or resist this transformative shift. In the interview below we examine not only the importance of the article and its significance at the regional EU level, but also its ripple effects globally.

Christopher Marquis: My first question is very basic. What is the Corporate Sustainability Due Diligence Directive, the CSDDD? And within that Article 25? Why is that important?

Wojciech Baginski: The Corporate Sustainability Due Diligence Directive is one of the directives that has been proposed within the packet of different directives, the Green Deal. Among the many directives that are being introduced in the European Union (EU), this one may have the biggest impact on the behavior of companies.

Our work related to this directive began with a draft proposal for the introduction of sustainable corporate governance within the European framework. The B Lab Europe team received a proposal for a directive with the request to consult and provide our comments on the proposed draft. We looked at the draft, and experienced a “Hallelujah” moment, because it closely resembled what B Lab and the benefit corporation movement wants to achieve and has been advocating for the last 18 years.

The proposal is composed of two components. It has a due diligence element that requires directors of companies to identify, monitor and mitigate breaches in the supply chains related broadly to human rights and environmental issues. Whilst the large part of the content of the directive focuses on this due diligence requirement , it is the several provisions at the end of the directive related to directors duties which are fundamental to changing the operating system of businesses. Article 25 within this draft directive basically states that directors of companies, while undertaking decisions should be considering “sustainability matters”, and the effects of their decisions on these issues in the short, medium and long term. The legal requirement to become certified as a B Corp embeds the obligation to consider stakeholder interests explicitly, while Article 25 refers to sustainability matters which in the broad sense may include stakeholders. So we decided to provide our input and support given our history of now over 7,500 B Corporations living by these rules. Why not help the EU in implementing these regulations if we believe we can show that this is the way that modern business should operate.

Marquis: One follow-up question – they use the term “sustainability matters.” Do they give any definition of this term?

Baginski: Yes and no. In the preamble to the directive, there is a reference to another directive that defines sustainability matters as environmental, social and human rights, and governance factors, including sustainability factors. Sustainability factors are defined in yet another regulation – the sustainable finance disclosure regulation. This regulation defines ‘sustainability factors’ as environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.

The definition is therefore open and broad, it captures not only environmental issues, but also human rights. And in our view, stakeholders of corporations. It should be interpreted broadly to achieve its purpose. It is important that it directly refers to consequences of decisions on sustainability matters “over the short, medium and long term”, generating a new focus that allows for the impact of business decisions on future generations, for example.

Marquis: What is the current situation with Article 25? Do you have any predictions or insight into that?

Hill: It’s been two and a half years that the EU has been working on this directive and we are on it since the beginning. It’s been a long haul. We’ve been constantly told throughout the entire legislative process that upholding Article 25 is a lost cause and it will be dropped at various moments in the legislative process. But it is still on the table. It has withstood omission revisions. It has passed through the parliamentary vote. Now it’s at this tricky spot, which is called the trilogue. This is when the three organizations, the Council of the European Union (composed of ministers from 27 Member States), the Parliament and the Commission, work from individual drafts and seek to negotiate a text that everyone can agree on. So you can imagine how that plays out. It’s quite a tricky and exhausting process that requires some compromises.

We also have a six monthly rotating presidency of the European Council of the Member States, and currently it is Spain which is running the trilogue discussions. However, there’s time pressure, because the European Parliament will disband sometime in early spring next year for re-election. So if the Spanish Presidency doesn’t manage to get anything through before the end of the year, it’ll pass the file over to the Belgian Presidency. By then it will all be really up against the clock and everyone is getting a bit impatient.

Marquis: I also know of the CRSD, the Corporate Sustainability Reporting Directive, which requires a broader set of large companies, as well as listed SMEs, to report on sustainability. It sets clearer directions on the social and environmental information that companies have to report. In this sense, CRSD is more reporting oriented. How does the CSDDD intersect with that? Are they connected in some way, or they are entirely separate?

Hill: The CRSD was actually agreed on before the CSDDD proposal was published.This in many ways for us, is a good thing, because it is clearly incongruous for companies to provide detailed sustainability related reports, if at the end of the day there’s no overall due diligence or sustainability related director duties that would address adverse findings in the reports? And the reporting rules have been diluted with some voluntary rather than mandatory requirements. So there’s quite a lot of things at play with both these directives.

Baginski: Within the Interdependence Coalition, we targeted all of the delegations from the Member States and each of the MEPs several times, presenting directly our position on Article 25. What we’ve been told is that we are actually the only organization that is fighting for this Article 25. There were others that were a bit fighting around it, but nobody actually fought directly to first improve and later save article 25. In total so far,we have presented three position papers, shared with 1525 different contact points within these institutions and representations, and sent over 1200 emails to fellow signatories and supporters as part of our campaign.

At one point we actually went to the drafters of this article, and had a discussion with them. It was a bit of a funny chemistry at the beginning, because our initial position that we forwarded to them in writing included proposals for improvement in the language of the article. They thought that we were meeting them in order to criticize the language further. But we were meeting them a year later, with some ideas and proposals for actions and events that would help save article 25 in the directive in the legislative process. It was a fruitful meeting.

Marquis: You mentioned the Interdependence Coalition earlier. Would you mind sharing a little bit about what that is, and in addition to, meeting with these article drafters, writing letters and contacting the various people to really push this. That is, how are you trying to mobilize around making sure this happens?

Baginski: Using Certified B Corps as a proof of concept, we created the Interdependence Coalition to advocate for why this specific article can be fundamental to achieving EU Green Deal ambitions, while rallying businesses in support of it. We decided to form this coalition as a separate public policy arm that was initiated by B Lab Europe but was not only B Corp focused, but also could engage with other companies that are already living by this broader stakeholder governance approach. Our thinking was to help the EU with this piece of legislation, to demystify this concept and explain what it means in practice, and given its importance, make sure our reach goes beyond our existing B Corp community. We received great support from The Good Lobby that helped us set this up.

Maria Correa: Katie mentioned some of the challenges of the perceptions that might stand in the way of Article 25 being adopted. We have a community of over 7,500 B Corps around the world who are operating in this manner –1,500 of those who are in Europe, if you exclude the UK – so there are incredible case studies and data to back up why this stakeholder approach is so important and to demonstrate that it can be done and works. That’s why, as Wojtek said, our primary goal was to unite B Corps and other purpose-driven companies who support a better way of doing business, inviting them to take a stand in support of this policy initiative.

So we drafted a petition signed by over 520 organisations. We sent it individually to targeted EMPs across the region. But in order to gain traction we had to first organize a series of webinars that we conducted to explore the implications of these concepts and explain the importance of this directive, and specifically, Article 25. The educational component to it was key, focusing on equipping both companies and also policy makers with the information that they need to get this through. These webinars and coffee in good company sessions included prominent academics, business managers and owners – the shakers and movers in the EU.

Baginski: We met with Lara Walters, who is the leading supporter – the rapporteur in the European Parliament for this directive. We wanted to let her know in person that this Article 25 is fundamental from the perspective of the whole CSDDD and the corporate law system. That this is a chance to improve and adjust the regulations to the current realities of the twenty-first century.

Marquis: It is great to hear about all these mobilizing tactics, petitioning, education, meetings, and creating a coalition beyond just B Corps. Who is active in mobilization against you? Are there some trade groups, companies? Who is pushing against this?

Hill: It’s so interesting – countries where sustainability is really embedded, such as in the Nordics and Scandinavia, are really resistant, not so much to the concept, but more because we are trying to make something that they are voluntarily leading the way in mandatory for all.Their argument is “You don’t need this to be mandatory. We’re doing it, anyway.” And our answer to that is, well, no, because only about 3% of the entire 23 million businesses in Europe, (28 million, if you include the UK), are actually voluntarily adopting this form of governance. So it’s not enough to rely on voluntary behaviour, given the multiple crises we face.

They also would say, “Don’t tell us how to do it.” And we would say, we’re not. The EU is proposing an overarching principle on what minimal considerations directors should have in undertaking decisions. Member States can implement this in to their national law in whatever way is most appropriate.

Another argument is around competitiveness and proportionality. Scandinavians particularly, and some very big lobbying businesses, and some investors have raised this. Partly because they feel anxious that they can’t be sure of the kind of level of detail they can really bank their financial credibility on. And so if they’re actually saying ‘We’re investing in this business. And this business meets our CSRD requirements.We need to be really sure that we have that visibility at the level that is needed,’ and they’re anxious they can’t. They can’t get that data, and we all know the ESG is riddled with all sorts of problems at the moment of inconsistency of data. So there’s a bit of a backlash from larger investors as well.

Baginski: There is some confusion also. A lot of these arguments that you hear against Article 25 are actually against CSDDD and the due diligence requirements set in this directive. Opponents sometimes confuse what we are advocating for – namely, the overarching obligation placed on directors to consider the consequences of their decisions on sustainability matters and stakeholders. Then there’s the broad concern about the economy in Europe generally. There is worry that these duties might affect a company’s competitiveness. Let’s make this mental exercise: we’re mandating directors to consider the effects of their decisions on sustainability matters. What is the cost of that? The cost of additional board meetings. The cost of retaining additional expertise to properly assess these effects. They’re already doing reporting so they should be getting reports that will make this easier. Of course, we understand a lot of companies would need to educate themselves, and there will be costs involved on the human resources side but it’s all negligible to the potential benefits – especially if we consider that this regulation targets specifically large companies. We don’t think Article 25 is anti-competitive. Just look at B Corps and how they are outperforming other companies. If you are an informed investor – you should actually prefer that directors of the companies that you have invested in consider sustainability matters as part of usual business practices, as this assures you that all business risks are being thought through. Climate change is a huge business risk that you cannot ignore any more if you are running a company with a long term focus in mind. So will this requirement really make EU companies less competitive?

Correa: We actually looked at what data we could use in support of stakeholder governance to challenge these arguments. And one of the things that we did was look at and analyze data from B Corps between their recertification periods. Every B Corp is required to recertify every 3 years, so it was interesting to see the increase in positive impact that those businesses are able to create, and compare that to how their business is performing – their annual revenue growth, the changes in the number of full and part time employees. We were actually able to find, based on the verified data we have, that while improving their impact between recertifications by introducing new business models or increasing their B Impact score, companies also enjoy a positive increase in annual revenue growth, (on average 22% p.a. between three year certification periods, whilst also seeing and 8% average growth in the number of employees. At the same time, these companies were improving their impact, reflected in increased impact scores (by an average of 6% on recertification) and 40% of companies added an Impact Business Model. These focus on materially benefiting a specific stakeholder group with a specific positive benefit / outcome (for example, changing governance structures to be cooperative or worker owned, empowering the economic voice of the underserved, and / or developing products and services that preserves and restores natural environments and ecosystems).

Marquis: One of the things that I as an American, where anti-ESG forces are strong, found appealing about the CSRD is that it will apply to all larger companies doing business in the EU, and so it somewhat like a backdoor to get US companies to address these issues, at least if they want exposure to EU markets. Is that correct?

Hill: In a very simple way the CSRD will. Because it will have an extra territorial effect. If a company is operating in Europe and is within scope, it will have to meet these requirements. China accounts for 16% and US 14% of all EU trade, so this directive is very relevant, and it will have implications for how they then organize themselves.

Baginski: Some lawyers in the States are starting to realize that this concrete piece of legislation, that is, the CSDDD, and Article 25 within it, may have a huge influence on fiduciary duties of directors of companies in the States. There are many ways in which this Directive may affect US companies. First, actions of the US parent company contrary to this Directive (and the international conventions listed in it) may cause compliance failures at its EU subsidiaries.This in turn may have repercussions at the US parent director level – for instance liability under US law for improper oversight, so called Caremark cases. For lack of taking proactive measures to facilitate compliance and to detect, mitigate, and remedy any failure. Second, compliance failures of EU subsidiaries may have financial consequences (e.g. imposition of sanctions etc.) that will be felt in consolidated financial statements of US parent companies, which in turn may also attract derivative litigation against directors of US companies for lack of proper oversight.

An interesting question arises if and how the Caremark doctrine in the States will change in relation to these CSDDD requirements which seem to be more stringent than the current ones in the US. Even more interesting in this context is the requirement from Article 25. US parent companies which will be directly in scope of this regulation will need to apply this rule and in my view it will have an effect on what is required in the US from directors under their fiduciary duties (duty of care and duty of loyalty). Its worth noting in this context that Article 15 of the directive generally requires in-scope companies to adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and limiting global warming to 1.5 °C in line with the Paris Agreement. This plan shall, in particular, identify, on the basis of information reasonably available to the company, the extent to which climate change is a risk for, or an impact of, the company’s operations. This adds another layer of obligations and potential US-EU legal interactions.

Marquis: I think this directive may actually have effects beyond the EU context too on. Could you please elaborate some on that?

Correa: Policy changes for us at B Lab and within B Corp Movement is one of the key levers of achieving our broader theory of change. We’re setting out to change the behavior of companies, the culture around the role of businesses, but also fundamentally the structure of the system in which they operate. When you see the directives that are being discussed across Europe, that, of course, has a ripple effect across the world as well.

Our network is mobilizing in different parts of the world to advocate for similar changes.For example, there’s the Better Business Act in the UK, where over 2,000 businesses have signed up to advocate to amend Section 172 of the Companies Act. I think everybody is waking up to the urgency to take action now and the need to accelerate and scale the transition through legislation. It’s impossible to disconnect what’s happening in one part of the world to others, because it does have tremendous influence.

Hill: All this might open up again some important discussions on the whole purpose of business and how the B Corp movement can act as a proof of concept. Can you do this? Can you run profitable businesses like this? Can it actually work? And if you change the statutes, articles of association of a company introducing a specific purpose along with making profits does it actually change much? I think this discussion that is now taking place is opening up people’s eyes to saying that “actually, this evolution of business is happening, and it’s working.”

It’s actually about redefining the DNA of business, and what stakeholder governance means for redefining its purpose.

Christopher Marquis: How does the community play a role in the movement, and how can others get involved?

Correa: One thing we found through this work with the Interdependence Coalition is that on the one hand, we do need to demonstrate the power in numbers — the scale of businesses who are doing this right and who are supporting these types of directives and policies. But there is also something really powerful about looking individually at each of the companies and analyzing what it looks like for them in practice. There’s still a lot of question marks around what is the G in ESG, and what role does it play, and why it is so foundational. As B Lab we approached policy makers in Europe with an opportunity to hear from multinational companies as well as from smaller purpose driven companies that are the bread and butter of the B Corp movements, about what does stakeholder corporate governance mean for them, how they make decisions, how they enable dialogue, and how they are undertaking actions with the short, medium and long term view in mind.

In some of our work with the Interdependence Coalition, we had one on one conversations, webinars and discussions – Coffee in Good Company sessions as we called them – with different business leaders about what stakeholder governance looks like for them. Those case studies are really powerful to address some of the concerns around this. These materials are all available on our website.

As our community grows, there’s real power in catalyzing collective action. Of course, it’s important for these companies to transform the way that they do business internally. But equally important is the ripple effect and influence that they can have on all businesses in their industry, in their sector, across their entire supply chain. So they should get involved.

There are B Corps like Patagonia which is constantly trying to contribute to different legislation that helps put people and the environment first. We look to amplify those types of actions and initiatives that our B Corp community is engaged with, and try to invite other members of the community to join in.

One example that’s maybe not directly policy related but is an example of how the B Corp community has mobilized to tackle key issues is the Beauty Coalition, which is an organized group of B Corps in the beauty industry. It looked at what are three of the biggest challenges that all the players in our industry who are trying to increase their positive impact are looking at? Greener logistics, sourcing natural products and packaging. How can these companies who are typically competitors really come together to share knowledge, but also look at what resources can they create to really challenge and improve the impact of their entire industry. And I think there are many examples like that as well of companies who have taken a stand to create change. But recognizing that they can’t do that alone, and inviting the rest of the community to take part and take that on. We’re working on facilitating more and more of those collaborations with our community tools and resources.

Baginski: If I may sum up – I think we have powerful arguments for stakeholder governance and specifically for keeping Article 25 in the Directive. Letting go of Article 25 is a step in the wrong direction – we have a once in a lifetime opportunity to restructure our system and make a quick, required shift in corporate law to move companies to more sustainable business models. And what will happen now in Europe will drive the rest of the world – hopefully in a good direction.