The business of sustainability

Brunel University LLM student Ece Gorgun Balci, a qualified lawyer in Turkey, discusses some of the regulations related to business sustainability, including mandatory reporting, directors’ duties and efforts to curb greenwashing

Companies commonly employ sustainability as a strategy since it is a requirement brought on by globalisation. However, sustainability is more than just a passing fad, and society as a whole is moving toward greater social responsibility. Sustainability is a value that companies integrate into their operations due to their environmental, social, economic and governance effects.

It is necessary for corporate operations because of its effects on the environment and society, but it also plays an important role that promotes the organisation to success. Notably, governments have a substantial role in promoting corporate sustainability by making regulation.

The UK also has enacted many regulations so that companies can be managed in accordance with sustainability criteria. But does the UK’s regulatory curve really promote sustainability in many of the regulations governing the operation of companies?

Mandatory reporting — not for everyone!

The transition to mandatory reporting with regulatory instruments has been made from a time when there was no legally binding regulation on sustainability reporting and when businesses decided cooperatively what information to disclose in their sustainability reports and the degree to which these reports complied with sustainable development policies and requirements.

To ensure that large corporations and limited liability partnerships take into account the financial threats and opportunities that climate change presents in their corporate governance strategies, the UK government regulated the Task Force on Climate-Related Financial Disclosures aligned mandatory climate change reporting requirements. In this way, these strict legal measures support the UK’s green economy while aiding businesses in achieving sustainability goals with an awareness of the environment.

It is important to note, however, that these restrictions do not apply to small and medium-sized businesses (SMEs). Examining how such firms’ CEOs comprehend and respond to climate change-related challenges may provide critical hints on how other SMEs may be pushed to do the same, given that SMEs account for the bulk of the company population in the UK. As a result, removing SMEs from the application area of required disclosure regulations makes it harder to accomplish the regulatory framework’s sustainability goal.

Prevention of greenwashing

Another precaution taken by the UK is to avoid greenwashing, which refers to disinformation produced by a corporation to enhance its image as environmentally responsible while discussing its intentions on climate concerns, which can frequently mislead stakeholders’ perspectives on businesses. Therefore, the company’s sustainability ambitions may deteriorate. In light of these considerations, as many governments deal with the issue, the UK has also implemented legislative measures to guarantee businesses avoid it.

A claim under the Green Claims Code may include not just sustainable products, but also services or activities carried out in accordance with sustainable business standards. Furthermore, the Competition and Markets Authority (CMA) created the Guidance on Green Claims Code to avoid greenwashing and help firms in compliance with legal obligations, notably consumer law, when asserting environmental claims. The fundamental goal of this guidance is to strengthen the reputation and, eventually, the sustainability of the companies by gaining the confidence of consumers, namely the stakeholders.

Although the regulations are not statutorily enforceable, the CMA considers that failing to comply with the applicable regulatory framework should be considered significant evidence of a violation of consumer law. As a result, firms may face legal ramifications from the CMA and Trading Standards. This situation can naturally create a deterrent effect for companies.

Director’s duties

Section 172 of the Companies Act 2006 requires directors of UK enterprises to consider, among other things, employee profits, the obligations to build business relationships, the consequences of corporate operations on society, the environment, and the company image while carrying out responsibilities. A director’s principal obligation, on the other hand, is to promote the company’s success in order to protect the interests of the shareholders.

The UK now takes an approach that fundamentally imposes shareholder precedence in directors’ duty, while also recognising the need to respect other interests. Indeed, authorities seek to encourage transparency and accountability while also ensuring that corporate actions have good social and environmental consequences and that stakeholders’ basic rights are maintained. The prior obligation to act in the best interests of the corporation has been replaced in the hard law approach by section 172, which requires a director to “act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”.

Tackling modern slavery

It is critical to be mindful of stakeholders’ interests and create a positive influence in the outside world while assisting businesses to define and articulate the concept of economically sustainable development. Under the Modern Slavery Act of 2015, firms must submit an annual report describing their efforts to avoid modern slavery in their operations and supply networks. On the one hand, reporting requirements can assist companies in developing a strong awareness of the threats and implications of their primary operations on corporate social responsibility; on the other hand, the publication of these management strategies assists shareholders in allocating investment to more sustainable, responsible companies, bolstering the financial system’s long-term sustainability.

Ece Gorgun Balci is a qualified lawyer in Turkey and an LLM student at Brunel University, London. She is interested in international commercial law, international arbitration, company law and media law, and is an aspiring solicitor in the UK.