The Corporate Flexibility Act of 2011 created two new forms of for-profit corporate entities in California, both created to bridge the legal gap between the traditional for-profit corporate purpose and an additional ESG purpose. This Act created both the (a) Flexible Purpose Corporation (later renamed the Social Purpose Corporation (“SPC”), see below) and the (b) Benefit Corporation (“BC”).
Historically, there had been a clear dividing line between for-profit and non-profit corporations. Traditional for-profit corporations have been able to promote environmental or socially beneficial causes, but these activities, either by law or in practice, are subservient to the long-term economic interests of shareholders. Directors risk liability otherwise. In contrast, traditional non-profit corporations are required to act for the benefit of society, but they risk losing tax-exempt status if they fund their mission by engaging in profit-making activities. SPCs and BCs are hybrids that bridge this historical divide. They are each for-profit entities, but they offer protection from liability for officers and directors who pursue societal objectives at the expense of corporate profits.
An SPC is required to adopt and state in its Articles of Incorporation an additional corporate purpose, which can be: (a) any charitable purpose for which a non-profit entity is allowed to pursue and adopt, which is broadly defined but includes purposes like the relief of poverty, advancement of education or religion, promotion of health, etc. and/or (b) operating the SPC for the purposes of promoting the SPC’s beneficial activities on or minimizing adverse actions of the SPC activities on the SPC’s (i) employees, suppliers, customers, and creditors, (ii) the community and society, and/or (iii) the environment. In making its corporate decisions, the SPC’s management must weigh the interests of the company, the shareholders, and the enumerated additional purpose(s) in its Articles. The SPC must issue an annual report to the shareholders which must contain a section on management’s discussion and analysis (generally “MD&A” and in this context, the “Special Purpose MD&A”) as to the SPC’s additional special purpose, its progress, its actions taken, expected impacts, etc. The special purpose MD&A must also be made available to the public on the SPC’s website. There is no third-party standard required to assess the performance of the SPC special purpose.
BCs are required to adopt and state in its Articles of Incorporation an additional corporate purpose, which must be that the BC shall create a general public benefit, meaning a material benefit upon both society and the environment. A BC may also designate a specific public benefit, which can be anything of a particular benefit to society or the environment. The BC must independently select a third-party standard that is used to assess its performance in terms of its general public benefit and any specific public benefit. The BC must also issue an annual report that includes a narrative as to process and rationale for selecting the third party standard, the ways the BC pursued their general and any specific public benefits, and any hindering circumstances in pursuit of achieving such general and any specific public benefits.
An act to add Section 38532 to the California Health & Safety Code, which would require all domestic (CA) and foreign (non-CA) entities with total annual revenues in excess of one billion dollars ($1,000,000,000) and who do business in California to annually and publically disclose their Scope 1, 2, and 3 greenhouse gas emissions. Introduced and passed in the California Senate. The first hearing in the California Assembly was held on August 3, 2022, was passed as amended in committee on August 11, 2022, read a second time, amendment, and order to an additional second reading on August 15, 2022, and was read a second time and ordered to a third reading on August 16, 2022. The third reading will be held on August 22, 2022.
A bill that required public companies that hold their principal executive office in California, including publicly held domestic or foreign corporations, to have at least one female on its board of directors. The bill was signed into law but struck down as unconstitutional in Crest v. Padilla, No. 20-STCV-37513 (see below).
A bill that required any publicly held domestic or foreign corporation with its principal executive office in California to have a minimum of one director from an underrepresented community on its board of directors. The bill was signed into law but struck down as unconstitutional in Crest v. Padilla, No. 19-STCV-27561 (see below).
California AG filed a greenwashing suit in against two bottled water companies and their plastic resin supplier, alleging that they made misleading claims by marketing plastic water bottles as 100% biodegradable and recyclable. The parties settled.
The Financial Stability Board (FSB) established the TCFD for the purposes of issuing standardized climate-related financial disclosures to provide better corporate information in support of informed capital allocation. The TCFD first issued its standards in 2017 and the standards center around four thematic disclosure areas: Metrics and Targets, Risk Management, Strategy, and Governance. The interrelated core disclosure areas also include eleven other disclosure recommendations. The TCFD standards are adopted in both the adopted EU sustainability focused disclosure requirements as well as the proposed counterpart requirement from the SEC in the US.
The Task Force on Nature Related Financial was established in 2021, with funding or direct support from UN GC, the UN Environment Programme Finance Initiative, the UN Development Programme, and other major players in the global sustainability community. The standards being developed are set to be introduced in 2023. The TNFD disclosure standards are meant to directly build upon and supplement TCFD standards, being centered around the same four main thematic disclosure areas: Metrics and Targets, Risk Management, Strategy, and Governance. Where TNFD differs from TCFD is greater focus on ecosystems and environmental degradation, metrics without often more difficulty in quantification, as opposed to, for instance, greenhouse gas emissions.
The IFRS Foundation establishes two major standard setting boards under the IFRS Foundation umbrella: (a) the International Accounting Standards Board (IASB) and (b) the International Sustainability Standards Board (ISSB).The IASB issues international accounting standards that are not generally used in the US (where public companies are generally required to use GAAP accounting), but are used throughout the international community. The ISSB was agreed upon at and formed following the UN COP 26. ISSB’s mission is to consolidate various other sustainability and climate-change focused disclosure standards into a single, comprehensive international standard. The ISSB’s forthcoming standards are a consolidation of the Climate Disclosure Standards Board (CDSB) standards and recently of the Value Reporting Foundation (VRF). The VRF standards were themselves the consolidation of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) standards. The ISSB standards are currently concluding their comment period on draft standards, separated by sustainability-focused disclosures and climate change-focused disclosures, and aim to issue the final standards by the end of 2022. Both the IASB and the ISSB are jointly working on an Integrated Reporting Framework, enabling financial and sustainability disclosures as a single, integrated reporting framework.
GRI was created in 1972 and as of 2022, is used by 72 percent of 250 of the world’s largest companies and 67 percent of the 100 largest firms in 52 countries. GRI refers to itself as “the world’s most widely used standards for sustainability reporting.” It publishes standards and formats for mandatory, recommended, and voluntary disclosures. Such standards are meant to highlight a company’s global impact and are based on materials, energy, water, biodiversity, emissions, pollution, waste, and supply chains.
CDP was created in 2000 and since 2022 is used by over 13,000 companies and about 1,100 cities, states, and regions, as well as approximately 600 investors with over $110 trillion in assets under management. CDP “supports thousands of companies, cities, states, and regions to measure and manage their risks and opportunities on climate change, water security, and deforestation.” It prioritizes on quantitative impact data and employs an independent approach to evaluate reports and assign letter grades. In 2021, over 270 companies received an A rating for climate change, forests, or water security.
The Greenhouse Gas Protocol (GHGP), a joint initiative of World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), establishes comprehensive global standardized frameworks to measure and manage greenhouse gas emissions from private and public sector operations, value chains and mitigation actions. GHG Protocol supplies the world’s most widely used greenhouse gas accounting standards. The Corporate Accounting and Reporting Standard provides the accounting platform for virtually every corporate GHG reporting program in the world.
The UN GC describes its organization as “the world’s largest corporate sustainability initiative.” UNGC sets forth its “Ten Principles” of corporate sustainability, focusing broadly on the areas (a) Human Rights; (b) Labor; (c) Environment; and (d) Anti-corruption (https://www.unglobalcompact.org/what-is-gc/mission/principles).
The UN PRI is a partnership of the UN GC and the UN Environment Programme Finance Initiative. UN PRI sets forth six principles of responsible investment, in which UN PRI aims to help the international investment community incorporate ESG factors in investment decisions. Signatories to the UN PRI commit to consider the following six principles in their investment strategy and decisions: (1) We will incorporate ESG issues into investment analysis and decision-making processes; (2) We will be active owners and incorporate ESG issues into our ownership policies and practices; (3) We will seek appropriate disclosure on ESG issues by the entities in which we invest; (4) We will promote acceptance and implementation of the Principles within the investment industry; (5) We will work together to enhance our effectiveness in implementing the Principles; and (6) We will each report on our activities and progress towards implementing the Principles.
In August 2021, the SEC approved Nasdaq listing rules implementing new board diversity disclosure requirements that will apply to most Nasdaq-listed companies. Subject to certain exceptions, these Nasdaq Board Diversity Rules will generally require Nasdaq-listed companies to: (1) have, or publicly disclose why they do not have, at least two diverse directors (including at least one self-identified female director and at least one director who self-identifies as an “underrepresented minority” or LGBTQ+); and (2) publicly disclose board diversity statistics using a standardized format on an annual basis. As of August 7, 2023, listed companies will need to have, or explain why they don’t have, at least one (and by later specified dates, two) diverse directors. Certain relief is provided for Smaller Reporting Companies and Foreign Issuers, as well as companies with five or fewer directors.
B-Lab is a non-profit entity that administers one of the most well-known, global ESG related certifications for companies. Companies that qualify and are approved by B-Lab obtain the B-Corp Certification and are known as B-Corps. In a terminology sense, B Corps are often mischaracterized or synonymized with Benefit Corporations, which are not the same thing. However, the B Corp Certification does require slightly differing requirements across jurisdictions. In California, this means that to obtain a B-Corp Certification, a California corporate entity must become a Benefit Corporation or a Social Purpose Corporation, though Benefit Corporation is the preferred choice to achieve B-Corp status. SPCs, LLCs, and LLPs may also obtain the B-Corp Certification by adding specific governance language in their governing documents.
TCLP is a collaborative effort of legal and sustainability industry experts that develop contract clauses that are sustainability aligned, including alignment with net zero targets, with the Paris Climate Accord, and with other international agreements. Climate clauses range in their context and application, but include the following areas: real property, corporate governance, commercial, capital markets, insurance, supply chain, etc. US law translations for many of the most used clauses are available as well.
The Dow Jones Sustainability Indices (DJSI) are float-adjusted market capitalization weighted indices that measure the performance of companies selected with ESG (Environmental, Social, Governance & Economic) criteria using a best-in-class approach.
The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body for assessing the science related to climate change. The IPCC was set up in 1988 by the World Meteorological Organization (WMO) and United Nations Environment Program (UNEP) to provide policymakers with regular assessments of the scientific basis of climate change, its impacts and future risks, and options for adaptation and mitigation. IPCC assessments are written by hundreds of leading scientists who volunteer their time and expertise as Coordinating Lead Authors and Lead Authors of the reports. IPCC reports undergo multiple rounds of drafting and review to ensure they are comprehensive and objective and produced in an open and transparent way.
ISO is a worldwide federation of national standards bodies (ISO member bodies). The work of preparing International Standards is normally carried out through ISO technical committees. For companies and organizations of any type that require practical tools to manage their environmental responsibilities, there’s the ISO 14000 family. ISO 26000 emphasizes the importance of results and improvements in performance on social responsibility but is not intended to provide a basis for legal actions, complaints, defences or other claims in any international, domestic or other proceeding, nor is it intended to be cited as evidence of the evolution of customary international law. ISO 37101 establishes requirements for a management system for sustainable development in communities, including cities, using a holistic approach, with a view to ensuring consistency with the sustainable development policy of communities.