The role of company law, accounting law, and capital markets law in climate protection
It is not only politicians for whom climate change poses a challenge. German and international firms are increasingly confronted with questions surrounding the protection of the climate. Thus, headlines are made when claims for damages are filed against companies like Shell, BMW, Mercedes, or Volkswagen. But what is the situation with the regulatory mechanisms found in company law, accounting law, and capital markets law? Holger Fleischer, Director at the Max Planck Institute for Comparative and International Private has made a point of studying the extent to which these specialized disciplines can contribute in combating climate change.
Ideas about how companies should address the major social issues of the day – from gender equality to human rights protection in global supply chains – are currently in flux. Against this backdrop, two recently published essays authored by Fleischer shed light on the question of which steering instruments and paths of action corporate law (inclusive of accounting and capital market law) is able to use to effectively counter the consequences of climate change.
“The realities of legal policy have overtaken the classic division of roles, according to which corporate law was purely organizational law, while the fight against negative externalities was reserved for public law and certain components of private law”, says the legal scholar and economist. “Of significance in this regard is the enormous economic importance of large corporations, an importance which has continued to grow with globalization.The revenue of multinational corporations indeed sometimes exceeds that of an individual country, and their behavior has a deep impact on civil society.”
Within the framework of a comparative survey Fleischer gives an overview of the situation in Europe. For the area of corporate reporting, he notes that the first steps towards climate reporting have already been taken at Union level with the 2014CSR Directive. Proposals for the further development of this Directive provide for even more detailed requirements and a standardization of the envisioned sustainability reports. By contrast, the USA does not yet mandate sustainability reporting.
„In the future, shareholders are likely to be the main impetus for a more climate-conscious corporate strategy.“
– Institute Director Holger Fleischer –
Most of the mechanisms capable of establishing a firmer company-internal commitment to climate protection are found in the area of corporate governance. Here, ESG criteria play an important role, with ESG standing for environment, social responsibility and governance. In Germany, for instance, an executive board can pursue ESG targets as an exercise of its managerial discretion, meaning that directors can undertake climate protection efforts, e.g. by drawing up a climate transition plan. Additionally, there exist organizational measures such as the appointment of a chief sustainability officer or the establishment of a sustainability committee on the supervisory board.
ESG targets are demanded, not least, by shareholders who take environmental and social concerns into account in their private lives. “In the future, shareholders are likely to be the main impetus for a more climate-conscious corporate strategy”, says Fleischer. This would begin with the appointment of climate-conscious supervisory board members, as supported by large institutional investors. And, Fleischer continues, there are now also many calls for the introduction of a “say on climate” in respect of the concrete climate plans of the management board, this being analogous to a “say on pay” as regards management board compensation. Finally, he finds it conceivable that a climate protection clause could be included in the articles of association of a stock corporation or that climate protection will be a fundamental feature of a new, dual-purpose company form based on the model of the US benefit corporation.
Fleischer’s examination of the topic ends with a mixed conclusion: “The high visibility of large corporations tempts lawmakers to hold them accountable consistent with their prominent and visible role at home and abroad. While recourse to company law for climate protection purposes can make sense in individual cases, some reform measures run the risk of having a counterproductive effect. Their individual evaluation will need to be the subject of future analysis."
Header image: Landscape graphic © shutterstock / Betelejze
Portrait Holger Fleischer: © Max Planck Institute for Comparative and International Private Law / Johanna Detering