CORPORATE GOVERNANCE AND ENVIRONMENT SUSTAINABILITY: LEGAL PERSPECTIVES

CORPORATE GOVERNANCE AND ENVIRONMENT SUSTAINABILITY: LEGAL PERSPECTIVES

This Article is written by Sharvi Goyal of BBA.LLB of 1 st Semester of O.P. Jindal Global University, Haryana, an intern under Legal Vidhiya.

Table of Contents

ABSTRACT

Business management, particularly in the framework of corporations, is one of the most sensitive problems discussed in modern legal and economic sciences. The paper aims to analyze the relevance of these two domains, and how laws create legal structures that enforce corporate environmentalism. In the process of research, the legislative gap determining the degree of legal regulation of corporate environmental responsibility is revealed in a systematized form, as well as the identified advantages and disadvantages are defined, including in the legislative instruments, judicial precedents, and compliance with international standards. The study reveals that corporate sustainability obligations are increasing through legal frameworks, owing to the voice of the stakeholders and through the assimilation of sustainability Key Performance Indicators (KPIs) into governance codes. It also looks at the subtopic of enforcement and monitoring problems especially in developing areas of the globe and the resistance companies put up mainly because of short-term profit chases. Moreover, the paper recalls technological advancement, capacity development measures as well as improvement in the regulatory frameworks as possible ways of increasing corporate responsibility for environmental management. By using this analysis, the paper provides suggestions for measures that legal frameworks for businesses need to assume to enhance responsible corporate governance for environmental sustainability.

Keywords

Corporate governance, environmental sustainability, legal frameworks, corporate social responsibility, stakeholder theory, integrated reporting, regulatory gaps, sustainability governance, capacity building, and technological innovations.

INTRODUCTION

Corporate governance exists as the fundamental structure of business ailment consisting of procedures, both bleak and explicit to check on the corporations and guarantee to check on the corporations and ensure they perform optimally, rightly, and aptly. It started with a focus on mere managerial effectiveness and shareholder returns, but the current versions of the idea embrace questions of social and environmental responsibility. Environmental sustainability is one of these pillars, aimed at making business as friendly as possible to the surrounding world, as well as preserve as many resources for the future generations. In combination, corporate governance and environmental sustainability represent a growing awareness of the necessity of a connection between business and its impact on the need in today’s world.

Environmental sustainability aims at developing organization structures that do not harm the environment and loss of species come in great hesitance, pressing the button. Today’s commerce world expects a company to apply measures that reduce its negative impact to natures and at the same time help restore the balance of the ecosystem. It affords an organization total synchronization with corporate requirements and other global frameworks like the United Nation Sustainable Development Goals. However, SDG 13 on Climate actions and SDG 15 on Life on Land respond to the risk of climate change and loss of biodiversity urging countries for enhance transparency and accountability. As these principles take root within organizational systems and structures governing the management of corporations, the organizations have not only met ecological responsibilities but also played part in sustainable human advancement.

Switching from conventional profit-oriented approaches to sustainable management marks a new era. It doesn’t matter anymore just how financially successful a business is, but how it solves social or ecological problems. Sustainability therefore occupies a central strategic place in corporate governance and encourages organizations to become responsible economic agents, which oversee business success as well as environmental care. But this is not without its issue that hampers the overall change effort. It further pointed out that despite the economic liberalization undertaken as part of the globalization process, the environment and society both were being victimized. Governance and accrued legal measures of structures are necessary in achieving the right balance between the ever-expanding market and the conservation of ecological systems.

Governance frameworks cannot be fully functional without the active participation of the legal framework in the integration of environmental decisions into a company’s management. Climate change initiatives, for instance the Paris Accord put pressure on corporations to manage climate change risks and ensure that sustainability is included as a business strategy. Equally, the United Nations Guiding Principles on Business and Human Rights also require business to address the environmental responsibility across their value chains. On the national level, regulatory frameworks which include the Indian Companies Act, 2013 make CSR spending compulsory meaning that business have to dedicate resources on social justice and environmentalism. These legal instruments work in both ways; promoting and enforcing compliance by corporations with strategies that support sustainability and punishing corporations that fail to do so.

Nevertheless, there us still a myriad of challenges. Ineffective regulatory standards combined with poor enforcement becomes a point where corporations can easily escape the hook of their environmental wrongdoings. Developing regions for instance have a critical problem of weak governance structures and corruption that hampers enforcement. Furthermore, there is always a tendency by different companies to oppose sustainability due to their self-interest being motivated mainly by their short-term gains. Sustainability activities are often seen as expenses that only lower the firm’s earnings, rather than recognizing environmental management as value-added investments. To overcome these challenges, legal provisions also need to be made stronger, the capacity building activities have to be raised at a higher level and technology should be adopted ensuring transparency and accountability.

This paper will thus endeavor to examine the rather complex nexus between corporate governance and environmental sustainability with recourse to enabling laws. It also focuses on the analysis of the current proposed policies worldwide and in Asia-Pacific region with some cases, as well as judgments to point out the strengths and weaknesses. It also focuses on the responsibility of stakeholders in change processes and increased attention to integrated governance structure as well as consequences associated with legal and regulatory actions for corporate decisions. It also investigates new frameworks including integrated reporting and a look at the degree of technological innovation to drive change in governance paradigms.

In summary, corporate governance with environmental sustainability is simply not a mere concept, vision or goal in the abstract, but rather a reality and inevitability for organizations. Global change demands that business organizations enhance their governance structures to respond to these emerging concerns. Through the implementation of strong systems, executives can build organizational durability whilst also working towards the United Nation’s sustainable goals. The focus of this paper is to review the literature on how legal systems can facilitate such changes so that corporate governance becomes relevant to the fast-changing environment.

THE NEXUS BETWEEN CORPORATE GOVERNANCE AND ENVIRONMENTAL SUSTAINABILITY

Corporate Responsibility and Environmental Protection

The legalization of corporate social responsibility (CSR) has gone a long way, and it has become distinguished from being voluntary to mandatory in some jurisdictions. As firms come under increasing pressure to tackle environmental issues, CSR is now an important pillar of contemporary business governance leading to enforcement of environmentally friendly practices. Government legislation has forced changes within firms where voluntary CSR carried out by organizations has evolved to mandatory environmental reporting.

The Unilever Sustainable Living Plan (USLP) model shows that sustainability can be incorporated into a company’s governance system for the betterment of the firm’s performance. Through goals and targets goals on waste, carbon, and sustainable material, Unilever incorporated its business with the concepts of environmental responsibility and regulation by reducing its impact on the environment. This approach illustrated how the dynamics of corporate projects could champion sustainability and viability at the same time. Also, uplifting sustainability as a policy helped better Unilever’s image as a company, increase stakeholders’ confidence, and increase utilization of its social responsibility through education concerning smallholder farmers, and assisting women among other CSR. They preserved a favorable brand image, appealed to the endeared consumer with a social subconscious, and influenced sustainable value creation for the company as well as stakeholder retention. The two cases of Unilever are relevant to demonstrating how corporate governance and sustainable development may intersect so that the corporation and society may benefit from them. Unilever Sustainable Living Plan which prioritizes sustainability as a part of governance systems explains how organizational performance can be manufactured to totally adhere to sustainable environment legal frameworks for environmental management and sustainable improvement.[1]

Stakeholder Theory and Environmental Accountability

As corporate governance recognizes the expanded role of such groups as shareholders, employees, and communities it is extending itself to encompass environmental stakeholders. Stakeholder theory requires not only shareholders’ interests but also take into consideration other affected participants when estimating a firm’s environmental impact. Companies are no longer pressured by shareholders to make high profits, they are under increased pressure from shareholders to share information about environmental risks, while from the employee and community perspective, there is increasing pressure to adopt better eco-friendly practices and be held accountable for the companies’ environmental impact. They stress that boosting environmental performance is critical to corporate plans and initiatives, thus establishing environmental performance as the key element of long-term value creation for companies and winning public trust.

The case of ExxonMobil captures shareholder expectations for climate risk liability. Exxon Mobil Corp. is currently defending a Securities and Exchange Commission complaint filed in 2019 that accused the oil giant of defrauding its investors over Climate Change and green regulation risks, demonstrating the growing pressure that shareholders are placing on companies to disclose climate risks. [2] Several shareholders filed a derivative lawsuit against the company accusing the company of presenting a distorted impression concerning the effects of climate change and environmental regulation while neglecting to present such effects as the financial risk they really posed and as unadvisable to the company’s duty of presenting investors with clear and precise information. This case shows how we can see the growing assertiveness of environmental actors as global shareholders develop a better appreciation of future environmental performance and become more demanding about their management of climate risks. It emphasizes that such measures as the legal and legislative initiatives are promoting the shifts to sustainable business models and setting long-term environmentally motivated goals are exerting pressure on the corporate actors to focus on the climate imperative to safeguard corporate and environmental assets. Some demands of shareholders represent how environmental interest groups are forcing changes in corporate governance by pressurizing firms to mitigate climate risks by protecting the environment.

Integrated Reporting

Integrated reporting is viewed as a vital approach to applying by organizations that want to include financial and non-financial information in the reporting process. This approach allows firms to explain how they create value and evolve by combining financial returns with environmental, social, and governance implications. Integrated reporting guidelines are produced by the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). GRI is concerned with the overall sustainability picture, and the organization inspires enterprises to report their sustainability impacts on the environment and society, while SASB develops industry-specific guidelines for the company’s reporting of material financial impacts originated by sustainability considerations, thus making it easier for investors to evaluate these risks and opportunities.

One such example that can be used to explain how Marks & Spencer incorporated an integrated reporting concept is the firm’s Plan A. Although Plan A launched in 2007, it had strategic environmental and social objectives such as cutting carbon emissions, managing waste, and sourcing ethically. The Plan A that Marks & Spencer introduced in the year 2007 encompassed making the company carbon zero, wasting less, and sourcing well, proving that sustainability is not an option but is a business proposition.[3] Apart from achieving the objectives of explaining the organization’s sustainability initiatives and impacts, the company used the concepts of sustainable development and KPIs to demonstrate that its efforts would help create value in the long run. This company’s holistic view caused improved responsibility and gave the public confidence that sustainability is a great business model.

LEGAL FRAMEWORKS GOVERNING ENVIRONMENTAL SUSTAINABILITY IN CORPORATE GOVERNANCE

International Instruments and their Impact on Corporate Governance

Instruments of international law occupy a crucial place in the process of forming the concept of corporate governance, including environmental protection and human rights. The most popular framework is the one known as United Nations Guiding Principles on Business and Human Rights or the UNGPs for short, and they were set up in 2011. These guidelines detail the duty of care that companies have for human rights in their organizations and within their entire supply chains. The ten UNGPs provide a framework to undertake risk assessments to identify, prevent, and minimize human rights abuses so that businesses can play due diligence roles that meet the growing international human rights norms.

The other international instrument that has important implications for corporate governance is the Paris Agreement signed in 2015. This is a legally binding international agreement whose central goal is to hold the increase in global average temperature below 2°C and to pursue an effort limit of 1.5°C. Business entities have been forced to aim at the implementation of sustainable policies and practices through the Paris Agreement. The implementation of the Paris Agreement has pushed companies to factor climate risks into their structures, resulting in policy and practice changes for sustainability.[4] It is noticeable that climate risk assessments and sustainability targets are being introduced into corporate governance frameworks due to corporate responsibility for climate change. The Paris Agreement has therefore realigned corporate plans by incorporating climatic factors as a core constitutional aspect of business.

The OECD Guidelines for Multinational Enterprises are guidelines for companies, that give recommendations for business behavior in different spheres, including environmental, anti-corruption, labor, and human rights. While these guidelines are stating no laws that are set in stone, they are almost universal and give companies best practices to achieve ethical standards of the world marketplace. The OECD advises multinational enterprises to report how they affect the various stakeholders and the environment, for transparency and accountability. It proposes measures that help companies manage risk in their global supply chain and embrace sustainability throughout the organization.

The one that stands out, as a violation of international environmental standards is the 2015 Volkswagen scandal which cost the company billions of dollars and significantly eroded its reputation. This is because information emerged that Volkswagen had installed cheat–generating software in some of its diesel-engine cars to make them meet emission control standards when tested, but not during actual operations. The violation of global environmental laws and agreements like the Paris Agreement remained costly and completely eroded public confidence to corporate governance responsibilities. As Kell and Rasche (2020) suggest, ‘ Corporate malfeasance in the environmental arena not only destroys public trust but also shows the urgent need for strong international regulatory frameworks to ensure corporate accountability in solving global climate concerns.’[5] The issue highlighted the need for corporate governance and compliance, disclosure, and compliance to sustainable development guidelines and stated that failure to do so leads to penalties.

National Regulations and their Role in Corporate Governance

National requirements are central determinants of CGL in globalized businesses, especially where environmental accountability is concerned. There are different laws adopted by the leading jurisdictions providing for the incorporation of environmental concerns into business operations. In the United States, the Clean Air Act and Clean Water Act control pollution, and the SEC demands that corporations report significant environmental threats. Greener trade mechanisms include the EU Emissions Trading System (ETS) of carbon prices, as well as the REACH Regulation over chemicals in the European Union. As for climate actions from corporations, the Indian government provides the National Action Plan on Climate Change, while China’s government has established severe environmental legislation including the Environmental Protection Law and shifts its emphasis toward corporate obligation for pollution and environmental destruction. Together these regulations compel organizations to pursue sustainability, respect ecological principles, and guarantee environmental and social sustainability.

Environmental Impact Assessments (EIAs) are central to organizational decision-making, especially where companies have large footprints in the environment. In connection, EIAs make companies assess the impact of their projects on the environment and, therefore, make sustainability part of the planning process. Such assessments assist organizations in managing undesirable effects which range from destruction of habitats to pollution. In most places, EIAs remain mandatory, and organizations have to factor in the findings when seeking permission or a license to embark on massive projects. They are indispensable to the efficient accomplishment of the concept of corporate governance, as well as to the utilization of the themes for economic progress without detriment to negative impacts on the environment.

The Companies Act of India 2013 has introduced a CSR concept that ensures that a definite portion of the firm’s profit must be spent on social and environmental corporate activities. According to Section 135, every company that has a net worth exceeding prescribed limits, as well as the turnover and net profit during the immediately preceding three financial years, is mandatory to spend at least 2% of their average net profit on CSR. This provision brings a dramatic change in the management of the national business as it requires organizations to relate to the social and environmental set benchmarks. As stated by Sharma and Kiran, 2017 ‘CSR in India has gone from optional to required, encouraging sustainable company practices and incorporating corporate responsibility into the national framework.’[6] This is an indication of the rising interest in corporate governance that progressively develops stakeholder responsibilities.

India has passed the Companies Act, 2013 that makes Corporate Social Responsibility (CSR) compulsory for corporate entities to spend a percentage of their profit on social and environmental causes. As stated in Section 135 of the Act, every company having a net worth of more than a defined threshold and earning a specific amount of revenue must spend not less than 2 percent of the average net profit of the last three financial years for CSR. This provision has established a great stride in national management within the business sector where they have been forced to operate in tandem with social and environmental standards. It also modifies the Act by encouraging companies to address environmental concerns and incorporating social responsibility to require that companies spend money on programs for social and environmental improvement within their areas. This is an emerging trend in which national legislation requires corporate behavior to deliver sustainable business solutions and a significant development where corporate governance addresses environmental and social responsibilities.

Judicial Precedents and Corporate Environmental Responsibility

This paper seeks to establish that previous jurisprudence for corporations is central in defining their legal obligations, specifically as they relate to environmentalism. Courts around the globe have, however, continued to pursue corporate legal systems that enable businesses to view and address their implications to the environment. In two landmark cases to be discussed later, courts have affirmed the idea that organizations owe individuals not only a negative duty to refrain from polluting and violating existing environmental laws but also a positive one that aims to protect society. These precedents have brought change to corporate management where environmental responsibility is not an extra, but a legal requirement. The Courts have been