The Visible Hand of the Market
I’m dreaming of a clean planet… Wikimedia Commons
In a future where the world is heating, melting, flooding, and otherwise becoming uninhabitable, the ire of regulatory mechanisms has shifted from those who hold paper straws to those legislating the mandates for placing those straws there.
Corporate Social Responsibility (‘CSR’) as a model for corporate governance is no new concept — the idea of the existence of a social contract between organisations and their societies has been around since at least 1953, [1] taking hold in the US in 1971. This contract refers to allowing organisations to have a ‘licence to operate’ meaning that they are required to contribute more to society rather than to simply maximise value for shareholders. [2]
A broader examination of Environmental, Social, and Governance (‘ESG’) policies demonstrates a divide in companies’ approaches to implementing ESG practices — one group reacts to legislation to achieve compliance, whereas the other groups preempts the laws by proactively implementing ESG practices. But with greenwashing and similar scandals increasingly making the front pages of our business and financial publications, one is left to wonder whether CSR is too much for companies to handle and whether its future as a practical philosophy is set in stone, as regulators expect us to believe.
The Rise and Rise of ESG
“The more laws and orders are made prominent, the more thieves and bandits there will be.” ~ Lao Tzu
Following social uproar like most law seems to do, the prominence of ESG-related legislation and case law is steadily rising across jurisdictions, demonstrating an emphasis for organisations to respond to regulatory changes and stakeholder pressures rather than proactively integrating ESG considerations into practice. With well over 2000 climate change cases being filed worldwide, [3] several common areas of regulation appear, some of which include disclosure and financial case management, green-washing cases, personal responsibility, enforcing climate standards, contractual disputes, and much more. [4] Aside from the ACCC’s remit regarding consumer and competition law breaches under the ACL, the Corporations Act 2001 (Cth) sets out a variety of such regulations within the Australian federal jurisdiction, with cases against organisations such as the Mercer Superannuation (Australia) Limited [5] and Vanguard Investments Australia Ltd [6] the first of its kind to be seen in Australia. While ASIC’s prosecution of such cases has put companies on guard for compliance issues, the watchdog’s resourcing issues has called into question the effectiveness of comprehensively prosecuting organisations for failures within their remit. From another angle, private litigation offers an additional avenue for which companies face pressure from strategic litigants, public interest groups and other stakeholders to handle ESG risks. The threat of litigation may encourage organisations to improve their commitments to ESG practices to mitigate legal liability and reputational harm.
Complexities and Concerns
While one can intentionally seek to develop some habit, the latter is born only once the behaviour, posture or frame of thought underlying it has become so internalised that it takes effort to bring it back to conscious awareness. ~ Sylvie Delacroix [7]
On the other side of the coin, proactive CSR action is described as something that goes above and beyond compliance, shifting from risk management to practices that actively contribute positively to the world in which organisations find themselves in. Stakeholder activism appears to be at the heart of this, with growing pressures for organisations to commit to these measures described as somewhat of a modern-day gold rush due to the scramble to cover all bases. [8] However, companies appear reluctant to continue to go above and beyond in this respect — and for good reason too. One of the most damning criticisms of ESG practices beyond compliance is the idea that boards must choose between ESG and their fiduciary duties to the success of their companies and their clients. In jurisdictions where fiduciary duties are only extended to shareholders, it becomes understandable to set ESG priorities to the side, especially if the investment in ESG takes away significantly from the success of the organisation. [9]
Conclusion
With the world bound to keep spinning, it appears that ESG is here to stay. Nonetheless, it would be naïve to suggest that it can survive unaided in its current state. Significant reform is needed from regulatory, doctrinal, and social perspectives.
[1] Howard R Bowen, Social Responsibilities of the Businessman (University of Iowa Press, 2013) https://books.google.com.au/books?id=ALIPAwAAQBAJ.
[2] Association of Corporate Citizenship Professionals, 'Corporate Social Responsibility: A Brief History' (Web Page, 2024) https://accp.org/resources/csr-resources/accp-insights-blog/corporate-social-responsibility-brief-history/.
[3] Joana Setzer and Catherine Higham, ‘Global Trends in Climate Change Litigation: 2022 Snapshot’ (Report, London School of Economics and Political Science, August 2022) https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2022/08/Global-trends-in-climate-change-litigation-2022-snapshot.pdf.
[4] University of Melbourne, 'Climate Change Law: A Research Project' (Web Page, 2024) https://law.app.unimelb.edu.au/climate-change/research.php?researchID=2.
[5] Australian Securities and Investments Commission v Mercer Superannuation (Australia) Limited [2024] FCA 850.
[6] Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308.
[7] Lizabeth Cohen, ‘A Consumers' Republic: The Politics of Mass Consumption in Postwar America’ (2003) 60(1) The Business History Review 155 https://www-jstor-org.simsrad.net.ocs.mq.edu.au/stable/48561008?seq=5.
[8] Aimée Girdwood and Christina Bartholomew, ‘Promoting Long-Term, Healthy, and Sustainable Businesses through Responsible and Proactive Legal Practice’ in Christina Bartholomew et al (eds), Responsible Business Practices (Routledge, 2023) https://www.taylorfrancis.com/chapters/edit/10.4324/9781003316077-32/promoting-long-term-healthy-sustainable-businesses-responsible-proactive-legal-practice-aim%C3%A9e-girdwood-christina-bartholomew.
[9] 'The Trouble with Tibble: Environmental, Social, and Governance (ESG) and Fiduciary Duty' (2023) The University of Chicago Business Law Review https://businesslawreview.uchicago.edu/online-archive/trouble-tibble-environmental-social-and-governance-esg-and-fiduciary-duty.
This article was originally published under the title ‘The Visible Hand of the Market: The Fate of Corporate Social Responsibility’ in The Brief Edition 3, 2024 — Ad Aeternitatem.