Benefit Corporations & ESG

Benefit Corporations are a growing trend that startups should take note of. They are increasingly becoming a pre-requisite for investors and legislation is making it easier and clearer on how to become one. In tandem with the “ESG Movement” (Environmental, Social and Corporate Governance), these trends are important to understand and can have a positive business impact.

Summary

· The move towards Benefit Corporations and ESG is a rejection that the sole focus of a corporation should be for its shareholders’ financial gain.

· Recognizing the potential for inclusion in rapidly growing and emerging passive ETFs and index funds, public companies like Danone and Kronos Advanced Technologies are adopting Benefit Corporation legal status or becoming B Corp certified.

· Market forces will likely require new and existing companies to eventually become Benefit Corporations through changes to their legal documents and adopting public-facing designations.

How Can I Make My Company a Benefit Corporation?

A Benefit Corporation is a corporation that is managed for its shareholders, but also for the benefit of other stakeholders. These stakeholders may include employees, suppliers, social groups and community members who may indirectly contribute to and benefit from the corporation. In Canada, there is only legislation in British Columbia for provincial corporations to become Benefit Corporations. However, companies outside of British Columbia can proactively become Benefit Corporations in anticipation that similar legislation will eventually be introduced across Canada.

Under the newly introduced legislation in British Columbia, there are two main elements to becoming a Benefit Corporation:

1. Making a statement to the public that the company is a Benefit Corporation that is committed to promoting public benefits; and


2. Providing language in the corporate records specifying the public benefits to be promoted consistent with the publicly made statement.


Will Having a Benefit Corporation Affect How I Manage My Business?

Directors of federal and provincial corporations in Canada are already implicitly required to balance public benefits when making business decisions. Since directors already have this requirement, transitioning to a Benefit Corporation for most startups would involve explicitly identifying the public benefits they intend to promote in their corporate documents and be willing to be held accountable for efforts made to achieve those benefits.

In the seminal business law case of BCE Inc. v 1976 Debentureholders (2008), the Supreme Court of Canada found that directors had to “act in the best interests of the corporation viewed as a good corporate citizen” and that this duty “was affected by the various interests at stake.” Since it can be argued that directors should make business decisions as though their corporation is a Benefit Corporation, it is hard to justify not becoming a Benefit Corporation. Another perk of adopting Benefit Corporation language in the corporate records is its ability to potentially reduce legal risk for socially-focused business decisions.

Under Canadian corporate laws, actions of directors may be permitted or restricted by the corporation’s corporate records. By having language in the corporate records that permit directors to incorporate social elements into decision making, corporations and their directors may be protected from shareholders that are dissatisfied with decisions based on those social elements. Those inclusions can help prevent shareholders that are dissatisfied with those decisions from successfully challenging them through legal means such as seeking an oppression remedy. This is becoming more important as corporations incorporate ESG factors into their decisions.

What is ESG?

ESG (Environmental, Social and Corporate Governance), is the evaluation of companies based on their environmental and social impact, in addition to their governance and financial performance. Benefit Corporations fall under this classification. ESG draws its roots from the investment industry. It is intended to encourage companies to make sustainable business decisions and promote the allocation and investment of capital into responsible projects. Many companies that promote social causes such as climate change, racial injustice, renewable energy and public health have become beneficiaries of this trend. The result globally so far has been:

· Over $100 billion invested in ESG ETFs


· Over 100 socially responsible ETFs


· Over 50 ESG index funds


· 12% of private equity firms have publicly reported ESG portfolio companies

Many leading public companies like Unilever, PepsiCo and Adobe have become champions for the movement and its effect on creating healthier societies. In recent years there has been a shift to the belief that ESG measures are no longer just beneficial but also necessary for the long-term success of businesses. Public companies like Danone and Kronos Advanced Technologies have taken things a step further by either becoming B Corp Certified and planning to legally become a Benefit Corporation, respectively.

Credit rating agencies have taken note by transitioning parts of their businesses to rating companies based on ESG factors. For example, Moody’s threatened to strip the sterling triple-A credit rating of a major oil producer based partially on the ESG factor of a projected lower-carbon emission world in the future. The impact that ESG has on business will become more prevalent for all companies, which is why it is important to proactively embrace this new business dynamic.


Conclusion


The belief that a corporation should be mindful of its social impact is a positive evolution from the previous view of shareholder primacy- that the sole purpose of a corporation was to maximize shareholder value. With its brisk adoption and strong impact on business, startups should consider embracing a Benefit Corporation structure early on and adopt ESG factors into their decision-making to their benefit. Many emerging businesses win customers based on their product offerings and price. However, being able to communicate a business’ social impact can be a separate avenue of value-creation to potential customers that can separate a business from its competition.


*Cover photo credit to Helena Lopes