IV. Corporate responsibility
Corporate responsibility encompasses the societal and environmental impacts of a company’s business, the principals which drive a company’s actions and its long term viability. Typical mechanisms aimed at encouraging responsible behaviour include regulation around the company’s environmental due diligence and corporate reporting obligations and directors’ duties.
In 2017, ahead of other countries, France introduced its duty of vigilance law, which requires large companies having 5,000 or more employees in France (or 10,000 in France plus foreign subsidiaries) to establish and implement a “vigilance plan” for the operations of the company and its subsidiaries. Notably, the vigilance plan must identify risks of severe violations of human rights and fundamental freedoms, serious bodily injury or environmental damage or health risks resulting directly or indirectly from the operations of the company. The plan must also include measures for appropriate action to mitigate or prevent such violations.
It will be interesting to follow the case brought by Client Earth in January 2023 in the Paris Tribunal Judiciaire against Danone. Client Earth claims that Danone, as a producer and supplier of food products generally packed in single-use plastic, has never adopted adequate measures to address the harm related to its use of plastics. It demands that Danone maps the impacts of its use of plastics on the environment and puts together a “deplastification” plan and acts on it.
In the meantime, more broadly in Europe, two developments in this area are worth mentioning.
In January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. As reported by the European Parliament, the reporting requirements will apply to all large companies, whether listed or not (large meaning companies that meet at least two out of three criteria: a balance sheet total of €20m; a net turnover of €40m; or an average number of employees during the financial year of 250 or more). Non-EU companies with substantial activity in the EU (i.e. with a turnover over €150 million in the EU) will also have to comply, (as well as listed small and medium sized companies, but they will have more time to adapt to the new rules). Implementation will occur in stages, with the first reporting required for financial years starting on 1 January 2024. The CSRD introduces the concept of double materiality: i.e. the companies must report both on the risks that the company introduces to the environment and society, as well as on the risks that sustainability issues pose to the company. The European Financial Reporting Advisory Group (EFRAG) is responsible for developing draft reporting standards. Notably, one of the reporting topics under development for implementation concerns resource use and circular economy performance.
Secondly, on 23 February 2022, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence. The draft Directive has subsequently been amended as reported by the Council in December 2022. The Directive establishes a corporate due diligence duty which will apply to large European companies. The core elements of this duty are identifying, bringing to an end, preventing, mitigating and accounting for negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their supply chains (noting that the text was amended and moved away from the concept of a full “value chain” towards a more limited “supply chain”). In addition, certain large companies need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement.
The proposal for the Directive initially also introduced duties for the directors of the EU companies covered, which included setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy, as well as having to take into account the human rights, climate change and environmental consequences of their decisions, when fulfilling their duty to act in the best interest of the company. However, these directors’ duties have subsequently been deleted due to the strong concerns expressed by Member States that considered this to be an inappropriate interference with national provisions regarding directors’ duties of care, and potentially undermining directors’ duties to act in the best interest of their companies.
It is expected that the European Parliament will decide on the implementation of the directive in the second quarter of 2023 (with the law becoming effective two years after its adoption).
Finally, as regards the scope of directors’ duties (in the context of climate-change), it will be interesting to follow the developments in the case filed in the UK on 9 February 2023 by Client Earth, supported by institutional investors holding over 12 million shares in Shell, against the board of Directors of Shell. As stated on ClientEarth’s website, it alleges that Shell’s directors have breached their legal duties under the Companies Act (UK) by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement on the basis that, long term, it is in the best interests of the company, its employees and its shareholders – as well as the planet – for Shell to reduce its emissions harder and faster than the Board is currently planning.
In its paper of June 2021 International Developments in Sustainability Reporting, MBIE acknowledged the role Government can play to accelerate New Zealand toward an effective sustainability reporting regime. However, there are no initiatives comparable to those described above requiring increased due diligence in New Zealand.
Having said that, climate related reporting obligations have recently come into force in New Zealand for large financial market participants. As reported on the website of the Ministry for the Environment, The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 amended the Financial Markets Conduct Act 2013 (FMC Act), the Financial Reporting Act 2013, and the Public Audit Act 2001. Under the new Part 7A of the FMC Act, large financial institutions are required to make climate-related disclosures for financial years commencing on or after 1 January 2023, in accordance with climate standards published by the External Reporting Board (XRB).
With regard to directors’ duties (in the context of climate change and environmental decision making), s131 of the Companies Act 1993 (Act) requires that directors act in good faith and in the best interests of the company. Further, under s137 of the Act, a director has the duty to exercise reasonable care, diligence and skill. The Companies’ (Directors’ duties) Amendment Bill (Bill) is currently before the select committee. It proposes amending s131 of the Act by inserting a new s131(5) allowing directors, when acting in the best interest of the company, to take into account, among other things, reducing adverse environmental impacts. The Bill has received a large number of submissions. Some advocate that it does not go far enough and that mandatory duties should be imposed on directors, for example, similar to those in England. Others argue that the directors’ duties presently contained in the Act already allow directors to consider matters beyond simply making a profit for shareholders and that adding the subsection would likely create confusion. Indeed, directors have a duty, within the scope of the existing legislation, to identify (and manage) foreseeable risks material to the company, which can include environmental risks. The extent of the duty to exercise “reasonable care” in the environmental context is evolving as legislation and scientific evidence develops with time. To assist directors address climate change, Chapter Zero New Zealand released its “board toolkit” in March 2023 as a free resource.