Constructing a Framework for Globally Sustainable Business

By Guest Contributor: Michael Ristaniemi (LL.M. Uni. of Turku, Finland)  Currently, a Visiting Researcher at Berkeley Law and Legal Counsel at Metsä Group (on study leave). This piece summarizes the content of a talk he gave at UC Berkeley on 21 September 2017, as a part of the Humanities & Social Sciences Association Interdisciplinary Teaching Series.

Setting the scene

Throughout time, business has had an overwhelmingly positive effect in creating well-being for society. On the other hand, much of the concern about the future of our planet is concurrently a result of the past detrimental action of companies in the process of doing business. A question that is relevant to all of us is how to alter this status quo to one which minimizes the negative externalities of business while retaining the benefits we all enjoy. The relevance of this question is a way of describing the purpose of corporate sustainability since companies are both the main root cause and solution to our current unsustainable way of life.

The UN Global Compact defines corporate sustainability as “(a) company’s delivery of long-term value in financial, social, environmental and ethical terms”. Indeed, executives will be interested in being sustainable to the extent that an action (or inaction) will align with and further its purpose to benefit its owners, thus providing a ‘business case’ for such conduct. From a company’s perspective, natural ways to do this are to harness technology and adopt other practices that are simultaneously sustainable and either bring cost savings or create goodwill with key stakeholders, such as with its customers. Examples include airlines wanting to transition to newer, more fuel-efficient airplanes in order to save on cost and thus becoming more competitive, which also helps conserve fossil-fuel and has the collateral effect of generating goodwill among consumers. Companies might however not naturally possess the incentives to act in a sufficiently sustainable way. This may simply be due to the still-prevailing notion that a company’s purpose is to create value for its shareholders, which may also be codified in legislation. While a company’s leadership does have a degree of discretion in determining how to create maximum shareholder value, this purpose can be interpreted narrowly so as to focus on mere compliance with laws instead of embracing a broader ethos towards being sustainable.

There are however a number of ways stakeholders can incentivize companies to do good. The role of policymakers is crucial, they have a range of options at hand. They are able to either prohibit and restrict undesirable practices or – as a softer approach – to impose more comprehensive reporting obligations on sustainability-related matters of public interest as well as subsidize practices that are seen as beneficial to society. Reporting initiatives seem to be many regulators’ weapon of choice since so-called ‘non-financial reporting’ obligations have increased, an example of which is the 2014 EU Directive on non-financial reporting. Customers, NGOs or – in the consumer business – the general public are all able to set expectations for companies to conduct business in a certain manner, as well, particularly when companies are forced to become more transparent through increased reporting. All of the above amount to hurdles to gain a license to operate – practices that a company is inclined to adopt in order to help ensure the future success of its business.

A number of international policy options exist

Whatever incentives are preferred, corporate sustainability considerations must transcend a nation-state’s borders in order to have enough impact. The differences in various nations’ economies and the resulting imbalance does however not make cooperation simple. There are a number of possible international policy alternatives for cooperation, in general, that apply also for sustainability matters. These include possibilities ranging from both international binding agreements and non-binding standards; convergence among laws of different nations; case-by-case cooperation between authorities; as well as promoting sustainability with leading companies and their supply chains. The current state of affairs in corporate sustainability can be described as a hybrid of all of the above – an unstructured and unsatisfactory approach indeed.

Binding international agreements are generally difficult, particularly when concluded multilaterally. Nations dislike relinquishing sovereignty by constraining themselves in such agreements. Moreover, interests vary greatly among nations, rendering reaching consensus among many nations a tiring mission. Further, international agreements do not usually create obligations that would directly apply to companies, this would require domestic regulation in each contracting nation. However, since territories on our planet are in any case governed by various nations, it is imperative to have their support in ensuring the adequate sustainability of whatever takes place in their respective territory, in whatever way possible.

International trade agreements are an exception. They are a way for powerful nations, such as the EU and the US who are already serious about sustainability questions to leverage the influence they have in trade in order to induce sustainability commitments on the part of the other contracting nations as a prerequisite for entering into such trade agreement. Advancing a sustainability agenda in trade agreements is relevant in both bilateral and multilateral contexts. While said agreements do not impose direct obligations on companies, they do have the potential to pressure contracting nations to create appropriate national legislation to that effect.

Non-binding ‘soft law’ and other voluntary options are easier to generate support for and may actually be the de facto most feasible path towards convergence and consensus internationally. Several examples exist of international non-binding standards concerning corporate sustainability. These include the UN Global Compact, the UN Guiding Principles, the OECD Guidelines for Multinational Enterprises, and the IFC Performance Standards. Multinational companies have a significant role in the utility of such standards: they can impose contractual obligations on actors upstream in their supply chain, which might consequently update detrimental practices in fear of otherwise losing a key customer, i.e. the leading company. However, the efficacy of such voluntary-based alternatives may fall short of what is sufficient, particularly when a company’s business incentives are not aligned with what the environment or society might need.

Concluding thoughts

Corporate sustainability as it currently is practiced is simply insufficient, from a global sustainability perspective. It brings mostly only incremental gains for the global society and it is difficult to see it extending further than what represents cost savings and other ‘low-hanging fruit’.

Companies are not to blame, it is the framework in which they operate that needs updating. We need to truly incentivize businesses to strive towards being sustainable and making a positive social impact in the progress. This would constitute a transformative change, which requires stronger input and requirements imposed by policymakers and society at large, which, in turn, demands more dedicated cooperation internationally.