Sustainability Standards and Instruments (Second Edition)

By Alan S. Gutterman

Academics, policymakers, businesspeople, members of civil society and individuals have all recognized the significant effect the activities of the private sector have on employees, customers, communities, the environment, competitors, business partners, investors, shareholders, governments, and others.  It is also becoming increasingly clear that firms can contribute to their own wealth and to overall societal wealth by acting as a sustainable business and considering the effect they have on the environment, community, and the world at large when making decisions and taking operational actions to execute their strategies. 

The commitments and activities associated with any sustainability initiative should begin with compliance with laws and regulations promulgated by the governmental entities have jurisdiction over the firm's activities; however, the law has not been able to keep up and the gap has been filled by sustainability standards promulgated from a variety of sources.  This book describes the most well-known sustainability standards and instruments as of the date of publication referenced below.  While the sheer volume of initiatives can make the process of review challenging and daunting, particularly for sustainable entrepreneurs with limited resources trying to put together an initial set of sustainability commitments and targets for their fledgling businesses, the number and diversity of initiatives available offers the possibility of flexibility, avoids a "one-size fits all approach" and increases the chances that firms will be able to find support to address concerns of particular interest.  Businesses may create their own sustainability guidelines (i.e., corporate codes of conduct); however, many companies publicly commit to be held accountable for adhering to industry-led or multi-stakeholder sustainability initiatives (including submission to auditing and reporting to stakeholders on compliance).  While the various sustainability standards and initiatives were developed separately and intended to operate on a "stand alone" basis, businesses can (and generally do) refer or commit to several initiatives (or parts thereof) when putting together their own codes of conduct and sustainability programs.  For example, sustainable entrepreneurs may integrate the provisions of the ILO Declaration on Fundamental Principles and Rights at Work, the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions, and the UN Global Compact to cover a comprehensive range of labor issues including freedom of association and collective bargaining, elimination of all forms of forced or compulsory labor, abolition of child labor, non-discrimination in employment and occupation, general development, employment promotion, training, wages and benefits, hours of work, safety and health, social protection and industrial relations.  The three initiatives can also be used for sustainability-related issues other than labor including reporting and disclosure, human rights, environment, bribery, consumer interests, competition, and taxation.

• Language: English
• Publisher: Sustainable Entrepreneurship Project
• Release date: Apr 14, 2024
• ISBN: 9781393245124

Alan S. Gutterman

This book was written by Alan S. Gutterman, whose prolific output of practical guidance for legal and financial professionals, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace.  His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business.  Alan has also authored or edited over 80 books on sustainable entrepreneurship, leadership and management, business transactions, international business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Oxford, Quorum, ABA Press, Aspen, Euromoney, Business Expert Press, Harvard Business Publishing and BNA.  Alan has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions and strategic business alliances, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.  He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital and law and economic development,  He has also launched and oversees projects relating to sustainable entrepreneurship and ageism.  He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge.  For more information about Alan and his activities, please contact him directly at [e-mail], follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.

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Copyright Matters and Permitted Uses of Work

COPYRIGHT © 2024 BY Alan S. Gutterman.  All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode.  Version 041424.

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Introduction

ACADEMICS, POLICYMAKERS, businesspeople, members of civil society and individuals have all recognized the significant effect the activities of the private sector have on employees, customers, communities, the environment, competitors, business partners, investors, shareholders, governments, and others.  It is also becoming increasingly clear that firms can contribute to their own wealth and to overall societal wealth by acting as a sustainable business and considering the effect they have on the environment, community, and the world at large when making decisions and taking operational actions to execute their strategies.[1]  A term often used interchangeably with sustainability when it comes to businesses is corporate social responsibility, or CSR, which has been described as the way that firms integrate social, environmental, and economic concerns into their values, culture, decision making, strategy and operations in a transparent and accountable manner and thereby establish better practices within the firm, create wealth and improve society.[2]

The commitments and activities associated with any sustainability or CSR initiative should begin with compliance with laws and regulations promulgated by the governmental entities have jurisdiction over the firm’s activities; however, sustainability and CSR each extend well beyond the law to include corporate governance and ethics; health and safety; environmental stewardship; human rights (including core labor rights); sustainable development; working conditions (including safety and health, hours of work, wages); industrial relations; community involvement, development and investment; involvement of and respect for diverse cultures and disadvantaged peoples; corporate philanthropy and employee volunteering; consumer issues, customer satisfaction and adherence to principles of fair competition; anti-bribery and anti-corruption measures; accountability, transparency and performance reporting; and supplier relations, for both domestic and international supply chains.  The law has not been able to keep up and the gap has been filled by sustainability standards promulgated from a variety of sources.  

Many of the topics generally included within the general subject of sustainability and CSR have previously been addressed to some degree in domestic regulations covering labor rights, environmental and consumer protection, anti-discrimination, and anti-bribery.  Countries vary in the degree to which regulatory standards relating to corporate responsibility are relied upon and empirical evidence suggests that the underlying regulatory standards effectively shape the sustainability culture within countries and have both a strong effect on how companies handle CSR issues and a strong effect on the sustainability.  For example, Williams pointed out that Matten and Moon have argued that in countries with stakeholder corporate governance systems and more expansive social welfare arrangements, corporate responsibility is ‘implicit’ in doing business according to law, so companies do not need to be as explicit about taking on social responsibilities, as do leading companies in more shareholder-oriented countries.[3]

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The Shift from Shareholder to Stakeholder Primacy

SETTING THE STRATEGY for the corporation obviously requires consensus on the purpose of the firm, the goals and objectives of the firm’s activities and the parties who are to be the primary beneficiaries of the firm’s performance.  While primacy of shareholder interests has been the dominant theme of corporate governance, at least in the US, for decades, there is no doubt that one of the most dynamic and important debates in the corporate governance arena, as well as in other areas of society, is the proper future purpose of the corporation. 

Economist Milton Friedman’s writings have served as a primary source for the theory of shareholder primacy, the idea that corporations have no higher purpose than maximizing profits for their shareholders, and it has often seemed that shareholder primacy is treated as something more than just a theory but rather a natural law of the marketplace.  However, other members of the academic community, as well as regulators, politicians, activists and even some of the investors that had grown wealthy during the stock market turbulence that started in the 1980s, have questioned the primacy of shareholder value and called for rethinking the role of the corporation in society and its duties to their owners and other parties impacted by their operational activities and strategic decisions.  Among other things, this meant challenging the long-accepted assumption that the principal participants in the corporate governance framework were the shareholders, management, and board of directors.  For example, Sir Adrian Cadbury, Chair of the UK Commission on Corporate Governance, famously offered the following description of corporate governance and the governance framework in the Commission’s 1992 Report on the Financial Aspects of Corporate Governance: Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.

Cadbury’s formulation of corporate governance brought an array of other participants, referred to as stakeholders, into the conversation: employees, suppliers, partners, customers, creditors, auditors, government agencies, the press, and the general community.  The principles of corporate governance of the Organisation for Economic Cooperation and Development clearly state that the corporate governance framework should recognize the rights of stakeholders (i.e., employees, customers, partners and the local community) as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. 

The Business Roundtable, a nonprofit association based in Washington, D.C. whose members are chief executive officers (CEOs) of major U.S. companies has periodically issued Principles of Corporate Governance since 1978.  On August 19, 2019, the Business Roundtable announced the release of an updated Statement on the Purpose of a Corporation signed by 181 CEOs that redefined the purpose of a corporation as stated in previous principles to move away from shareholder primacy (i.e., that corporations exist principally to serve shareholders, a concept that had been championed in the principles since 1997) to promotion of an economy that serves all Americans and included commitments to operate companies for the benefit of all stakeholders: customers, employees, suppliers, communities and shareholders.  Several of the CEOs explained that the changes were necessary to reflect the way that companies can and should operate and the essential role that companies must be willing to play in improving society through job creation, innovation and delivery of crucial goods and services.  The updated principles also explicitly recognized that CEOs needed to look beyond generating profits and returning value only to shareholders to building long-term value for all stakeholders.

The Statement on the Purpose of a Corporation reads as follows:

"Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

  Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

  Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

  Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

  Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

  Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country."

Articulating a purpose, a meaningful and enduring reason to exist that aligns with long-term financial performance, is an essential foundation for creating a sustainable business and provides a clear context for daily decision making and unified and motivates relevant stakeholders.  However, satisfying multiple stakeholders involves a difficult balancing process and a corporation’s purpose needs to continuously revisited and reexamined as circumstances change.  Throughout the lifecycle of the corporation, governance mechanisms and procedures need to be in place to ensure that the corporation, through the day-to-day actions of its managers and employees, remains faithful to its purpose and accepts accountability and an obligation to report transparently on its progress.  Development and implementation of these mechanisms and procedures will require new skills and innovative approaches to dealing with traditional topics such as corporate governance, investors’ relations, raising capital, organizational culture, compensation, and incentives and measuring and reporting on performance. 

Source: For addition discussion of the debate regarding the purpose of the corporation, see A. Gutterman, On the Purpose of the Corporation (Oakland CA: Sustainable Entrepreneurship Project, 2022).

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Giovannucci et al. observed that governments have tended to focus on traditional lawmaking activities such as basic guarantees or regulations relating contract rules and food safety as opposed to getting directly involved in encouraging the development of sustainability and CSR as a complementary tool for public policy.[4]  However, commentators have suggested that governments can and should play a more active and supportive role in strengthening sustainability and CSR in the private sector by mandating, facilitating, partnering, and endorsing.[5]  Since the late 1990s there has been a proliferation of transnational, voluntary standards for what constitutes responsible corporate action including standards developed by states; public/private partnerships, multi-stakeholder negotiation processes, industries and companies, institutional investors, functional groups such as accountancy firms and social assurance consulting groups, non-governmental organizations (NGOs), and non-financial ratings agencies.[6]

While many of the sustainability-related initiatives are voluntary and thus do not fall within the ordinary governmental responsibilities with respect to interpretation and enforcement that apply to formal statutes and regulations, the government nonetheless has an obligation to participate in the sustainability standards setting processes in order to ensure that the standards support the orderly working of markets in a manner that is clear and fair for people and businesses.  Governmental participation in the development of private sustainability standards is also a good way to confirm that those standards reflect agreed international norms and the principles of governmental agreements on labor and social and environmental goals and standards.  In addition, when governments can agree on the sustainability standards that should apply to businesses that are operating within their borders, they can reduce confusion, promote standardized due diligence and monitoring practices, and create a level playing field across the globe that supports fair competition while protecting the rights of workers and local communities and preserving natural resources.[7]

A 2008 OECD report identified four channels by which governments had endorsed standards relevant to CSR: international instruments developed and formally agreed by governments (and having formal support from business and labor organizations) that reflect agreed international normative principles and are directed mainly to governments for domestic implementation; international initiatives developed by intergovernmental bodies that have either been officially agreed on or recognized by governments and offer authoritative guidance to businesses regarding societal expectations regarding their responsible behavior (i.e., what to do and how to do it); private, and thus voluntary, CSR initiatives that have been developed with the active participation of intergovernmental organizations and/or recognized by governments; and national initiatives developed and endorsed by governments, with the development process including collaboration with business, civil society, and other stakeholders and the end product potentially serving as reference points for international initiatives and/or codes of conduct for businesses operating in those countries (or with suppliers operating in those countries).[8]

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Selected Core Sustainability-Related International Conventions and Declarations

THE CORE INTERNATIONAL conventions and declarations on human rights include the Universal Declaration of Human Rights; International Covenant on Civil and Political Rights; International Covenant on Economic, Social and Cultural Rights; 1998 Declaration on Fundamental Principles and Rights at Work; Freedom of Association and Protection of the Right to Organise Convention, 1948 (No.87); Right to Organise and Collective Bargaining Convention, 1949 (No. 98); Forced Labour Convention, 1930 (No. 29); Abolition of Forced Labour Convention, 1957 (No. 105); Minimum Age Convention, 1973 (No. 138); Worst Forms of Child Labour Convention, 1999 (No. 182); Equal Remuneration Convention, 1951 (No. 100); Discrimination (Employment and Occupation) Convention, 1958 (No. 111); and Convention on the Elimination of All Forms of Discrimination against Women.

The core international conventions and declarations on sustainable development and sustainability include the Convention on International Trade in Endangered Species of Wild Fauna and Flora; Convention on Biological Diversity; Cartagena Protocol on Biosafety to the Convention on Biological Diversity; Nagoya Protocol on Access to Genetic Resources and the Fair and Equitable Sharing of Benefits Arising from Their Utilization to the Convention on Biological Diversity; United Nations Framework Convention on Climate Change; United Nations Convention on the Law of the Sea; The Montreal Protocol on Substances that Deplete the Ozone Layer; International Convention on Civil Liability for Oil Pollution Damage, 1992; The Rio Declaration on Environment and Development (1992); Kyoto Protocol to the United Nations Framework Convention on Climate Change; The Vienna Convention for the Protection of the Ozone Layer; International Convention for the Prevention of Pollution from Ships; United Nations Conference for the Negotiation of a Successor Agreement to the International Tropical Timber Agreement, 1994; United Nations General Assembly resolution 66/288, The future we want, A/RES/66/288; and United Nations General Assembly resolution 68/970, Open Working Group of the General Assembly on Sustainable Development Goals, A/RES/68/970.

The core multilateral and international guidelines for business on human rights and sustainability include the Guiding Principles on Business and Human Rights: Implementing the United Nations Protect, Respect and Remedy Framework; OECD Guidelines for Multinational Enterprises; OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas; Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy; Indigenous and Tribal Peoples Convention, 1989 (No. 169); United Nations Global Compact: A Guide for Business: How to Develop a Human Rights Policy, Second Edition; United Nations Convention Against Corruption; IFC Performance Standards on Environmental and Social Sustainability; United Nations Principles for Responsible Investment; and United Nations Global Compact Guide to Corporate Sustainability.

Source: L. Mooney (Editor), Business, Human Rights and Sustainability Sourcebook (Chicago IL: ABA Book Publishing, 2015).

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The OECD report also discussed private CSR initiatives as a means for businesses to organize their efforts to go beyond the law in their operations to act in a manner that is consistent with societal expectations regarding responsibility.  The process of creating, implementing and monitoring private CSR initiatives allows and encourages dialogue and debate among various actors including businesses, business associations, public authorities, trade unions, intergovernmental organizations and NGOs.[9]  The CSR landscape has long been complex and multi-faceted with hundreds of private initiatives with their own code or set of standards relating to social and environmental issues and substantial variation in objectives, origin, areas covered, and implementation mechanisms.[10]  Initiatives may address a broad range of CSR-related issues or be drawn more narrowly to focus in depth on one or a few of the issues such as business and human rights or environmental standards.  The OECD report classified private CSR