The Impact of Environment Law on Corporate Governance: International and Comparative Perspective

By | November 19, 2021
Impact of Environment Law

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This article titled ‘The Impact of Environment Law on Corporate Governance: International and Comparative Perspective’ is written by Aryan Tikoo and discusses the impact of environmental law on corporate governance.

I. Introduction

Most parts of a company’s operations are now governed by environmental regulations. Environmental issues and principles must be integrated into corporate strategy at all stages of invention, raw material extraction, product manufacture, distribution, marketing, transportation, and disposal.

This article avoids simply describing the content of corporate environmental regulation in light of this corporate environmental reality. Instead, it investigates if environmental factors play a role The progressive reform of corporate governance law is justified by principles and norms produced by international law and applied in domestic jurisdictions. [1]

The goal here is to see if, and if so, how far, environmental protection has progressed from its current place in the external legal framework governing business behaviour to play a role in internal corporate governance.

This area of investigation is significant because it is suggested that corporate environmental protection cannot be fully realised until it is successfully incorporated into the corporate governance regime, rather than remaining an external regulation to be adhered with at the very least level conducive to a company’s balance sheet.

As Parkinson notes, while external regulation helps to bring corporate conduct in line with social expectations, its scope for control is limited.[2]

As a result, corporations, like individuals, are increasingly required to consider the environmental consequences of all of their actions, regardless of whether particular legal duties obliging them to do so exist. The appropriate decision-making level for these consequences to be examined, according to this article, is in the corporate boardroom, as an integral component of a business director’s responsibilities.[3]

II. Trends in Corporate Environmental Liability and Trends in Corporate Environmental Management Systems 

There is a mounting indication that the environmental liability trend is moving beyond its current concentration on corporate legal personality. Individuals directly linked with the corporation, such as company directors, corporate executives or managers, and even (under US federal law) shareholders, are now implicated in various countries.

Other common-law nations, such as the United Kingdom, Canada, Australia, and Hong Kong, have noticed this tendency. The nature of corporate environmental liability is a related development. This relates to the establishment of stringent legal, and possibly criminal, culpability for corporate environmental harm on company leaders, as opposed to more traditional types of liability based on blame.

This trend is particularly noticeable in domestic environmental law in the United States. Environmental regulations and related case law in the United Kingdom have also combined to eliminate the concept of fault-based liability and replace it with strict liability.

The first tendency, which involves broadening the scope and type of corporate environmental liability, contrasts with a second approach that is gaining traction in certain continental European states. A legal requirement to implement some type of business environmental management system is the second trend.

This legal obligation almost always entails the designation of a business officer who is responsible for the company’s overall environmental performance. The second trend may be found in at least four continental European countries: Germany, Austria, Belgium, and the Netherlands. The latter component of this trend, requiring the appointment of a dedicated corporate environmental officer, is also prominent in domestic environmental legislation in the United States.[4]

These two external trends in company environmental liability and corporate environmental management systems have put pressure on traditional corporate governance law to be reformed internally. Environmental concerns should be included in the scope of directors’ obligations, either expressly through legislation or implicitly through the extension of existing fiduciary duties given to the company. [5]

III. Trends in International and Domestic Corporate Environmental Liability

1. The Development of General Environmental Principles

International environmental law creates universally applicable goals and norms for states to follow when it comes to environmental stewardship. The 1972 Stockholm Declaration on the Human Environment and its 20-year follow-up, the 1992 Rio Declaration on Environment and Development, are the two most important international environmental treaties in this regard.[6] While the concepts expressed in these agreements are not legally enforceable, they do represent the clear policy aspirations of the vast majority of nations.

These Declarations also obligated states to establish detailed norms and enforceable standards through domestic legislation in order to achieve these broad goals and ideals. The preventive and, more recently, the precautionary principles, the polluter-pays principle, and the integration principle are among the most well-known and widely applied of these ideas.

These principles, taken together, potentially provide a roadmap toward the ultimate goal or objective of any environmental laws: achieving sustainable development. Several of these environmental concepts are now enshrined in general and specialised international environmental treaties, as well as state environmental legal frameworks.

These environmental principles are also extensively featured in the financing criteria of several international financial organisations, such as the World Bank and other regional development banks, such as the Inter-American Development Bank.[7]

Although the provisions of multilateral environmental treaties are expected to have an impact on the actions of enterprises and companies across the world, these entities are not specifically acknowledged, or even catered for, at this level. Furthermore, international environmental legislation is typically sectoral and ad hoc in nature.

‘[Environmental] law-making by a treaty has been fragmentary rather than systematic,’ writes Schrijver. ‘[t]here is still no binding international legal instrument of global application that establishes general principles of law in relation to environmental protection,’ according to a UN report from 1993. [8]

Companies are not expected to play a special role in the implementation of these general environmental principles. ‘While it is true that private parties engaged in industrial and technological activities create the majority of environmental risks, it is also true that [state] control over such activities is retained,’ as Francioni points out. Despite the rising understanding of commercial activity persistent negative impact on overall environmental quality, this remains the case.

Companies can only be indirectly compelled to apply relevant environmental principles to their own actions in the absence of corresponding national or EU legislation. ‘Unlike the European Union, which is fast transforming into a constitutional organisation, international environmental law is based in the voluntarist heritage of international law,’ as Bodansky points out.[9]

2. The Evolution of Corporate Environmental Management Systems

Now we may go on to the second important trend in environmental law that has impacted corporate governance. This is due to the growing importance of environmental factors in all elements of company strategy and management. The implementation of environmental regulations and environmental quality standards on businesses has resulted in the creation of corporate environmental management systems.

For example, the latest OECD Guidelines for Multinational Enterprises require businesses to design and maintain an environmental management system that includes, among other things, collecting data on their environmental impact, setting objectives and targets, and monitoring progress towards these.[10]

The need to implement corporate environmental management systems is also a result of rising environmental awareness among the general people, who make up the existing and intended market for most company goods. Environmental activism, particularly in the form of environmental non-governmental organisations (NGOs) becoming increasingly relevant actors in the public sphere, has combined with ‘green’ consumer patterns to wield a growing influence in the global marketplace, necessitating a corporate response to their combined challenge.

‘[t]he role that organised communities, environmental groups, and others have played in persuading transnationals to change their behaviour is an achievement that most corporate environmentalists refuse to appreciate,’ Karliner writes in the context of multinational corporations. Environmentally friendly goods are also more popular among consumers, providing market incentives for businesses to enhance environmental quality standards.[11]

IV. Reforms of the Corporate Governance Regime to Incorporate Environment Environmental Concerns.

The fundamental point raised here is whether environmental factors have now become important enough to be included in a corporate director’s legal responsibilities. The emphasis here is on the internalising impacts of the aforementioned environmental legal changes, particularly as they relate to the corporate governance framework.[12]

Is environmental concern now a significant interest group or stakeholder within a corporation, either on its own or as a result of the corporation’s or shareholders’ interests?

In either case, the case for expanding traditional corporate stakeholders to include environmental concerns poses a challenge to board members. Their major responsibilities would have previously been limited to maintaining the company’s well-being and the interests of its shareholders.[13]

There is currently no visible evidence, either in terms of international legal regulation of comparative domestic legislation and precedent, that environmental factors are included within the current scope of company directors’ responsibilities. This isn’t to say that the following conversation is entirely hypothetical.

Indeed, the purpose of this section of the article is to demonstrate that there are enough international and domestic legal indicators, as well as supporting doctrinal writing, to suggest that a normative case for incorporating environmental interests into the overall corporate governance regime can be made.

Environmental policy is gradually filling the gaps that allow corporate environmental free-riding, as Welford points out. Trends in corporate environmental liability and corporate environmental management systems have already had an impact on corporate governance: first, by imposing direct environmental liability on company directors, senior management personnel, and even (corporate) shareholders; and second, as part of proposed changes to corporate management structures designed to reflect environmental values, which must include the critical role of directors.

The legal scope of directors’ duties under domestic company rules has not been explicitly enlarged to encompass known environmental issues, which is noteworthy.[14]

What are the principal benefits and costs that can derive from the inclusion of environmental interests within corporate governance law? These are summarized as follows:

  1. Shareholder action will have more leeway to ensure directors’ accountability. However, if shareholders refuse to take action, it may be difficult to hold business directors accountable for their acts or omissions, even if they are plainly not in the firm’s or shareholders’ best interests.[15]
  2. The requirement to prepare environmental and social audit reports on a firm’s impact on the environment and society will add to the reporting obligations faced by company directors.
  3. Due to the inclusion of environmental factors in the corporate governance matrix, the breadth and degree of company directors’ fiduciary duties will be expanded, but the impact will be unpredictable.

V. Conclusion

The implementation of the provision for inter-state liability for environmental damage is currently limited under customary international law, and many international environmental accords do not include it. Another tendency is for states to enact civil liability systems that require corporations operating inside their borders to contribute directly to the creation of either an international compensation fund for environmental damage or mandatory insurance schemes for such harm.

Even so, this trend is now limited to environmental harm caused by ultra-hazardous activities such as crude oil shipping by sea and nuclear power plant operating.[16]

Domestic regimes have become bolder in their attempts to ensure corporate governance consideration of environmental concerns, notwithstanding the lack of international law on the subject. This is mostly accomplished by the imposition of strict civil and criminal culpability in various jurisdictions, which pierces the corporate veil to the point that both directors and (company) stockholders may be held liable for corporate environmental damage.

Many states use the mandated inculcation of corporate environmental management systems as another major tool to ensure corporate environmental responsibility. These domestic trends in corporate environmental liability and corporate environmental management systems signal a new era in the development of environmental law in the context of businesses.[17]


References

[1] Institute for Global Environmental Strategies. “Environmental Governance Problems and Business: -Soil Pollution and Waste Problems-.” Business and Environmental Governance, Institute for Global Environmental Strategies, 1998, pp. 84–94, Available Here.

[2] Institute for Global Environmental Strategies. “Environmental Governance and the Industries: – Strategy and Response to Global Environmental Problems by Keidanren -.” Business and Environmental Governance, Institute for Global Environmental Strategies, 1998, pp. 95–108, Available Here.

[3] Kock, Carl J., and Byung S. Min. “Legal Origins, Corporate Governance, and Environmental Outcomes.” Journal of Business Ethics, vol. 138, no. 3, Springer, 2016, pp. 507–24, Available Here.

[4] Fox, Merritt B. “Required Disclosure and Corporate Governance.” Law and Contemporary Problems, vol. 62, no. 3, Duke University School of Law, 1999, pp. 113–27, Available Here.

[5] Dickinson, Gerald S., and Sheila R. Foster. “STASIS AND CHANGE IN ENVIRONMENTAL LAW: THE PAST, PRESENT AND FUTURE OF THE FORDHAM ENVIRONMENTAL LAW REVIEW.” Fordham Environmental Law Review, vol. 24, no. 1, Fordham Environmental Law Review, 2013, pp. 1–24, Available Here.

[6] Cutler, A. Claire. “Constituting Capitalism: Corporations, Law, and Private Transnational Governance.” St Antony’s International Review, vol. 5, no. 1, St. Antony’s International Review, 2009, pp. 99–115, Available Here.

[7] Konschnik, Kate. “PRIVATE ENVIRONMENTAL GOVERNANCE IN OIL AND GAS: UNLOCKING THE COMPLEX UNIVERSE OF LEADING MANAGEMENT PRACTICES.” Journal of Land Use & Environmental Law, vol. 33, no. 2, Florida State University College of Law, 2018, pp. 251–308, Available Here.

[8] Winkler, Adam. “Corporate Law or the Law of Business?: Stakeholders and Corporate Governance at the End of History.” Law and Contemporary Problems, vol. 67, no. 4, Duke University School of Law, 2004, pp. 109–33, Available Here.

[9] Babcock, Hope M. “CORPORATE ENVIRONMENTAL SOCIAL RESPONSIBILITY: CORPORATE ‘GREENWASHING’ OR A CORPORATE CULTURE GAME CHANGER?” Fordham Environmental Law Review, vol. 21, no. 1, Fordham Environmental Law Review, 2010, pp. 1–78, Available Here.

[10] Haddock, Beth, et al. “WHY CORPORATE ATTORNEYS AND OTHER GATEKEEPERS SHOULD CONSIDER ESG AND SUSTAINABILITY PRINCIPLES.” Fordham Environmental Law Review, vol. 30, no. 1, Fordham Environmental Law Review, 2018, pp. 1–12, Available Here.

[11] Monsma, David. “Equal Rights, Governance, and the Environment: Integrating Environmental Justice Principles in Corporate Social Responsibility.” Ecology Law Quarterly, vol. 33, no. 2, Temporary Publisher, 2006, pp. 443–98, Available Here.

[12] Toohey, David E. “Diffusion of Environmental Governance vs. Corporate Power in the Context of Global Environmental Crises.” International Journal of Peace Studies, vol. 18, no. 1, International Peace Research Association (IPRA), 2013, pp. 1–26, Available Here.

[13] Toohey, David E. “Diffusion of Environmental Governance vs. Corporate Power in the Context of Global Environmental Crises.” International Journal of Peace Studies, vol. 18, no. 1, International Peace Research Association (IPRA), 2013, pp. 1–26, Available Here.

[14] Bigg, Tom, and Halina Ward. Linking Corporate Social Responsibility, Good Governance and Corporate Accountability Through Dialogue. International Institute for Environment and Development, 2004, Available Here.

[15] SCANLAN, MELISSA K. “Corporate Purpose and Governance for a Livable Planet.” Prosperity in the Fossil-Free Economy: Cooperatives and the Design of Sustainable Businesses, Yale University Press, 2021, pp. 24–38, Available Here.

[16] Usman, Adamu Kyuka. “Corporate Environmental Responsibility and Corporate Social Responsibility of Oil and Gas Corporations.” Nigerian Oil and Gas Industry Laws: Policies, and Institutions, Malthouse Press, 2017, pp. 357–78, Available Here.

[17] Jordan, Cally. “VOLUNTARY CODES OF CORPORATE GOVERNANCE: Evolution and Implications.” Corporate Citizen: New Perspectives on the Globalized Rule of Law, edited by Oonagh E. Fitzgerald, McGill-Queen’s University Press, 2020, pp. 209–28, Available Here.


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