3.1 The Risks of Continued Unsustainability

The economic, corporate and financial risks of continued unsustainability^[27] should bring the question of how to reform European business squarely onto the radar of all who are concerned with the resilience of European societies. The argument is accordingly not just one of business contributing to sustainability. It is as much about securing the future of European business. From a systemic perspective, this may come across as an unnecessary and formalistic point to make. Of course, securing a sustainable future for all is also relevant and important for business. Without a sustainable future for humanity on this planet, there is no sustainable future for business either. Business – and the economy in which it operates – does not exist as a bubble separate from society and the environment. Yet, the point is necessary to make in light of the false dichotomy between economic issues on the one hand, and ‘ethical’ issues, encompassing the interest of people and the environment on the other. The emphasis on the financial risks of climate change is one example of an impactful initiative seeking to bridge this dichotomy. I take this as my starting point, and develop this further in a summary of a broader and research-based approach to the corporate and financial risks of unsustainability.

Much of the EU’s sustainability-oriented policy initiatives since the adoption of Paris Agreement on Climate Change in 2015 has concerned the mitigation of the risks of climate change. The EU’s Sustainable Finance Initiative^[28] has a strong emphasis on climate change and the EU’s Green Deal is marketed under the slogan of ‘Striving to be the first climate-neutral continent’.^[29] The recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure^[30] have done much to contribute to awareness of potential financial impacts of climate-related risks and opportunities. The 2019 additional guidelines to the EU’s so-called Non-Financial Reporting Directive are based on these recommendations.^[31] Yet, the Task Force’s report has shortcomings when analysed in the context of a research-based sustainability perspective, as we outline in this subsection, where we discuss the financial and business risks of unsustainability.^[32] First, concerning the Task Force report’s scoping of climate change, it excludes important aspects of climate risks. The report does not speak about societal risks, including risk of societal breakdown. Although the report discusses both acute and chronic physical risks of climate change, it only explores the risks to human beings to a very limited extent. There is only a very brief mention of negative impacts on the ‘workforce’ from acute physical risks,^[33] but business-relevant risks also include the financial risks associated with increased likelihoods of spread of diseases and of unmanageable heatwaves. The report mentions the danger of ‘catastrophic environmental and social consequences’ in its introduction,^[34] but it stops short of explaining the potential severity of the financial risks of climate change. The report does not spell out what climate change, insufficiently mitigated, may entail in the form of global catastrophic risks.^[35]

A broader approach is called for.^[36] Climate change, albeit a crucial issue, is just one of the hitherto identified planetary boundaries, whose breaching has potential to fundamentally change how the world functions.^[37] Biodiversity loss, natural resource use and the release of novel entities are examples of other environmental categories that should be included in assessments of financial risks.^[38] Further, risks concerning social aspects should be included. As examples of the undermining of social foundations, I have selected human rights violations, lack of decent work and tax evasion that undermines the welfare state. Tax evasion is intrinsically linked to an undermining of the economic bases for our societies, the increasing inequality between and within countries, and the rise of populism and the risk of societal instability that this entails. Some of the most disturbing trends in major industrialised countries reflect such a lack of social stability, and corporations and associated financial markets have a role in this.^[39]

The Task Force report divides climate-related risks into two major categories: (1) transition risks, i. e. risks related to the transition to a lower-carbon economy and (2) physical risks, i. e. related to the physical impacts of climate change. In a broader approach, the risk of business model change may be added to the transition risks, and global catastrophic risk to the physical risks. Further, a third major risk category is proposed: Societal risks, including risk of unrest, risk of authoritarianism, and societal breakdown risk.^[40]

The category of transition risks are accordingly financial and business risks for businesses that are not taking part in the transition to sustainability – which we have begun to see the contours of – or not transitioning quickly enough. The risks are caused by action or expected action from other actors or institutions: policy makers, victims of environmental harm or human rights violations, investors or other financiers, or competitors.

Policy risks, as the first category of transition risks, may be seen as increasing now in the EU with its Green Deal and willingness to legislate to promote sustainability. Some business actors may then see lobbying against such initiatives as a protection against risk. However, businesses aiming to mitigate the policy risk will need to see this in connection with other aspects of the financial and business risks of unsustainability, including other transition risks as well as the physical and societal risks. These risks will tend to increase if policy risks are low; i. e. if policy-makers do not regulate efficiently to support the transition to sustainability and to mitigate impacts of unsustainability.

An illustration of this is the liability risk: the increase in lawsuits against corporations, including parent corporations, for environmental or social harm allegedly caused by their subsidiaries, and against lead corporations for negative environmental or social impacts in their global value chains, shows that the liability risk of unsustainability is materialising.^[41] While many cases are rejected for procedural reasons, and many lost, some are likely to be won, and the sheer multitude of cases makes them a risk to be reckoned with.

A further illustration is reputation risk, in the form of customers or clients choosing not to purchase products or services from the business, employees and job seekers looking for work elsewhere, and contractual parties, private and public, not wishing to renew or sign up with the business. With social norms and expectations gradually changing, there is an indication of a shift in consumer preferences,^[42] as well as in the preferences of job seekers.^[43] Media also plays an important role here, in revealing unsustainable business activities, as illustrated for example through the Panama Papers.^[44]

Further related to the above, is the technology risk. The risk of ‘stranded assets’ — assets that no longer have value — to any corporation involved in exploiting fossil fuels is the obvious example here. However, this risk is also borne by corporations indirectly relying on these resources, such as manufacturers of fossil-fuelled cars. Further, with the emerging recognition of the impact of e. g. increasing biodiversity loss, businesses continuing with products that either are based on exploitation of biodiversity resources that are becoming scarce, may find themselves outcompeted by products developed in new ways. The nascent shift from unsustainable linear business models to sustainable circular models involves financial and business risks for businesses not anticipating and adapting to this shift.^[45]Business model change is therefore proposed as a risk category to be taken into account.

The two next broad risk categories, physical risks and societal risks, distinguish themselves from the transition risks category above, in that they affect businesses also seeking to transition to sustainability, and quickly. The severity of the risks depends on the speed with which the global society transitions to sustainability, and will, of course, have local variations. This emphasises the importance for business to work together to mitigate the physical and societal risks as far as possible. This could take the form of lobbying for and not against necessary legislative and policy reforms. It could take the form of transitioning in their businesses and whole sectors towards sustainability, without waiting for policy reforms. Of course, this is not only relevant for business. It also places the onus on the government at national levels as well as on the EU to act to mitigate physical and social risks to citizens.

Ultimately, the physical risks may go beyond that which can be managed through anticipation and adaptation. This is reflected through changes in insurance premiums for certain areas, ‘with some insurers simply withdrawing from the market’.^[46] Unmitigated environmental degradation and continued overshoot of planetary boundaries brings with it global catastrophic risks, defined as the risk of a scenario which takes ‘the lives of a significant portion of the human population, and may leave survivors at enhanced risk by undermining global resilience systems’.^[47] The risks posed to most businesses in global catastrophe scenarios are existential.^[48]

Societal risks include risk of social unrest caused by social inequality, human rights violations, and the corporate undermining of the economic basis of our welfare systems. Tax evasion, or other forms of undermining the economic basis for good welfare societies,^[49] may negatively impact on these societies’ ability to protect their population against physical risks due to environmental degradation, human rights violations and lack of decent work, thereby causing the physical risks to materialise or to be strengthened. Similarly, lack of economic resources in a country undermines its possibility to put into place relevant measures to adapt to environmental change.

Businesses involved in undermining the economic basis of societies, in human rights violations, exploitation of workers, or manipulating the public discourse and democratic processes, may find that these bring a spectrum of societal risks. These may range from societal unrest, via paving the way for increased authoritarianism, to societal collapse. Societal unrest may take the form of rioting and lack of safety for workers, customers and creditors, with negative impacts for the business. An increase in authoritarianism can materialise through sudden regime changes with increased risk of nationalisation or instability in the country that make it difficult to continue with business as planned.^[50]

There are a number of scenarios that can lead to global catastrophic risks, including climate change and other environmental degradation.^[51] Ultimately, there is a risk of societal collapse, which may be caused by a combination of the factors discussed here.

All these risks are not only relevant for business involved in wrongdoings, although they may be more directly at risk from social unrest which targets those perceived to have been involved in wrongdoings. The financial and business risks of unsustainability are also relevant for other businesses in the same country or region. In case of societal collapse, practically all businesses are affected. This strengthens the argument for business recognising these risks and working together, for example in a sector, to alleviate them. It underlines the importance of responsible business behaviour, and the significance of business supporting appropriate policy reforms.

The categories of global catastrophic risk, and the risk of societal collapse, underline that we cannot settle for a mainstream ‘business case’ approach. Recognising the risks of unsustainability does not mean that it is sufficient to only internalise environmental, social and broader governance issues to the extent that a clear cause-and-effect line can be drawn from ignoring an issue to the risk it entails for the corporation. Identifying the risk is not intended as a boundary of what issues are relevant to corporate sustainability. The point is to challenge the dichotomy of profits versus sustainability and show that, however little a business may care about ‘ethics’ and ‘corporate social responsibility’, (un)sustainability will sooner or later, in one way or another, affect most businesses. This is the grand challenge facing our economies, including business and financial markets, and more broadly, our societies.

3.2 The Argument for Reform of EU Company Law

Company law is currently the missing piece in EU’s regulatory reform to promote sustainable business. Starting from the paradigm shift of Corporate Social Responsibility (CSR) in the Commission Communication of 2011,^[52] which was followed up notably in accounting law, with the adoption of the so-called Non-Financial Reporting Directive in 2014,^[53] the next steps were taken in financial market law. Firstly, the revision of the Shareholder Rights Directive in 2017^[54] and moving on to the broader Sustainable Finance Initiative, with its 2018 Action Plan,^[55] already followed up, inter alia, with the Disclosure Regulation in 2019^[56] and Taxonomy Regulation in 2020.^[57] Further work is ongoing under the auspices of the Renewed Sustainable Finance Strategy.^[58] All of these Sustainable Finance actions aim to shift the investments and the governance activities of investors to promoting more sustainable business activities. Currently, the so-called Non-Financial Reporting Directive is being revised,^[59] which is expected to see it closely aligned to the Taxonomy,^[60] and shifting from its rather misleading language of ‘non-financial’ to the more accurate ‘sustainability reporting’.

The EU Green Deal’s ambition that ‘sustainability should be further embedded into the corporate governance framework’, is followed up most recently in its Sustainable Corporate Governance initiative.^[61]In this initiative, the environmental and notably climate change focus of the Sustainable Finance Initiative is merged with the push for mandatory human rights due diligence, informed by the UN Guiding Principles for Business and Human Rights (UNGPs), supported by the European Parliament and a range of national legislative initiatives.^[62]

Company law is crucial to business and to the governance of business. Company law provides the dominant legal form of the company for organising business, and it sets out the organisation and the structure for the decision-making in companies. Many of the above very briefly outlined initiatives aim to influence the corporate board directly or indirectly. As also the European Commission has observed earlier, boards have a ‘vital part to play in the development of responsible companies’.^[63] The EU has in its Sustainable Finance Initiative, in Action 10 of its Action Plan, indicated that it sees a role for legislative intervention in the rules concerning corporate boards.^[64]

As a matter of company law, the corporate board has a crucial role in determining the strategy and the direction of the undertaking, and supervising how this plays out.^[65] The core duty of the board is to promote the interests of the company. The definition of the interests of the company, as a matter of company law, varies across European countries,^[66] from the monistic, concentrating on the economic interest, with more or less emphasis on the shareholders – which we may denote ‘shareholder value’ jurisdictions^[67] – to the pluralistic, including a variety of other involved or affected parties (often misleadingly denoted ‘stakeholder value’ jurisdictions).^[68] Company legislation rarely expressly stipulates what is included in the interests of the company. The interpretation is thereby left to the boards. In light, inter alia, of the business judgment rule,^[69] the question of whether the board has interpreted its duty correctly rarely comes to a head in case law.^[70]

No company system insists on boards focusing only on returns for shareholders,^[71] and certainly not requiring that returns be maximised. In addition to the obvious point that jurisdictions expect boards to ensure legal compliance, company law provides – across this spectrum – a large latitude to the board and by extension the management to shape business in a sustainable manner.^[72] However, as is also evident from the state of unsustainability we are in, boards in aggregate do not predominantly choose sustainability-enhancing options even within the realm of the business case, let alone challenge the outer boundaries of the scope to pursue profit in a sustainable manner by going beyond the business case.^[73]

At the heart of the problem we find the social norm of shareholder primacy, a systemically entrenched barrier to the contribution of business to sustainability. Denoting shareholder primacy as a barrier of such significance is a short form for a complex mix of perceived market signals and economic incentives, informed by path-dependent corporate governance assumptions and postulates from legal-economic theories.^[74] Shareholder primacy should be distinguished from the legal norm denoted shareholder value, which we find notably in the UK.^[75] That this distinction often is not made is symptomatic of the dominance of the shareholder primacy thinking, conflating what is seen as practice and what still dominant legal-economic theories describe as efficient, with what company law actually sets out.^[76]

Shareholder primacy, combined with a lack of understanding of the scope the law gives the board, and by extension management, has given rise to legal myths inspired by law-and-economics postulates, dictating that the board and senior managers are the ‘agents’ of the shareholders and must maximize returns to shareholders as measured by the current share price.^[77] This is contrary to a proper analysis of company law, which shows that any legislation allowing for companies to exist and become a dominant form of business, has done so based on the assumption that this is positive for society. The idea is that companies create value, for themselves, for their employees, their business partners, their local communities and the broader society. There is no company law in any jurisdiction that promotes companies as a business form based on the assumption that this will maximise returns to shareholders to the detriment of society. Yet, that is far too often the consequence.

The capital markets function to funnel and exacerbate the shareholder primacy drive, supported by securities regulation and stock exchange rules that have as their primary aim to protect investors, not the various other interest affected by corporate activity.^[78] The normative impact of the shareholder primacy drive goes beyond the listed corporations, and is exacerbated by the chasm between corporate law’s approach to corporate groups and the dominance and practice of such groups,^[79] and the extensive use of global value chains, and other non-equity modes of control,^[80] allowing for an intensified externalisation of environmental, social and economic costs.

This is not to say that shareholder primacy is in the interest of shareholders or that it is supported by shareholders. Rather, as outlined in Section 3.1 above, continuing on the track of ‘business as usual’, brings with it systemic risks affecting all investors, as we see expressed also in the emerging recognition of the financial risks of climate change. However, having become such a deeply entrenched norm, it is intrinsic to the financial market system that shareholders operate within. Without comprehensive reforms of the whole system, it is not easy to break out from or properly understand the consequences of the system. The legislative initiatives very briefly outlined in the beginning of this Section are important steps towards such a comprehensive reform, based on some degree of recognition that the current system is detrimental for shareholders, for businesses and for society more broadly. Yet, without connecting them to and including the core corporate governance rules in company law, the outlined initiatives have not had their desired effect. The unrealised potential of the Non-Financial Reporting Directive is amply illustrated through the Alliance for Corporate Transparency’s study of 1000 companies’ reports, which shows very limited follow-up.^[81] In addition to lack of EU-level rules on verification,^[82] the gap between the dominant view of the duty of the board being to maximise returns for shareholders and the broader sustainability issues that the board is being asked to report on, has left sustainability reporting susceptible to green-washing, blue-washing and – since 2015 – SDG-washing.^[83]

To push back against the shareholder primacy drive, company law needs to take back the power to define what the purpose of the company is and what the duties of the board are. This has to be done in a way that dismantles the legal myth that shareholder primacy has developed into, clarifying that the purpose of business and the duty of the board is actually not to maximize returns for shareholders. However, that is not enough. In light of the convergence of crises we face, a legislative reform should also facilitate and ensure that business partakes in the transition to sustainability.

The argument for including company law in the legislative toolbox, is not one against the relevance of other areas of law. To the contrary, it is one that argues for coherence in policy-making and legislation, connecting the key governance role of the corporate board to business compliance with legislation on environmental protection, product safety and labour, and promoting business action beyond legal compliance. Competing social norms to the shareholder primacy drive, notably the OECD Guidelines for Multinational Enterprises and the UNGPs, have been crucial in opening up the public debate on what responsible business is and how it should act, and they are relevant sources in the further discussion of how business should be regulated and governed. Yet, these competing social norms are not enough in themselves to change the prevailing system, and the self-regulation or voluntary improvement by business of their activities has proven insufficient.^[84] In such a fragmented regulatory system, it is difficult, time-consuming and even irrational for the individual sustainability-oriented company to attempt to report openly on its actions, with the risk of being out-competed by businesses whose publicly available reporting is neither relevant nor reliable as concerns its sustainability impacts. This is the backdrop for the reforms proposed in the Section below.

3.3 Redefining Corporate Purpose and the Duties of the Board

Corporate purpose has recently re-emerged as a topical issue, disrupting the established truism of corporate purpose being to maximise returns for shareholders. Even the US ‘Business Roundtable’ has, in its statement of August 2019, allegedly moved away from shareholder primacy and towards a broader ‘stakeholder’ approach.^[85] It seems an open question whether this was a strategic step to pre-empt support for US senator Elisabeth Warren’s 2018 proposal for an Accountable Capitalism Act,^[86] or a recognition of the risks of continuing with business as usual, but it certainly has gained a lot of attention, including from Lucian Bebchuck and Roberto Tallarita with their critique of stakeholder approaches.^[87] However, as Colin Mayer points out, ‘the stakeholder-shareholder debate is vacuous and misses the point. It is the wrong framing of the question’.^[88] There may be a danger that stakeholder approaches are used as a deflection device away from the discussion of what changes of the current system are required to achieve sustainable business, as Carol Liao has highlighted in the context of the B Lab-driven Canadian law reform.^[89] Certainly taking some kind of stakeholder approach is not synonymous with business contributing to strong, or real, sustainability.^[90]

Rather, what is the topic here, is corporate purpose understood as the overarching purpose set out for companies in company law. Company law does generally not explicitly set out such an overarching purpose of companies, which has, together with the historically understandable emphasis on the relationship between shareholders and companies in company legislation, given ample space for the development of the law-and-economics based conceptualisation of the purpose as maximisation of returns to shareholders. The first aim of proposing a legislative and explicit redefinition of corporate purpose is therefore to dismantle this legal myth that has dominated so much of also the corporate governance discussion over the last decades.^[91] Secondly, and giving direction to the content of such a redefinition, it should done in a way that supports the transition towards sustainability, securing the future of European businesses, by facilitating the shift in business models and stimulating creative innovation.

Together with Jukka Mähönen, and drawing on contributions of the research teams across two international research projects,^[92] I have developed ideas on how to redefine corporate purpose and the duties of the board, to achieve these aims.^[93] Corporate purpose is, as set out in the newly revised Danish corporate governance code, a ‘considerable driving force in the company’s strategy and decision-making processes’.^[94] Corporate purpose, as I am using the concept here, should be distinguished against the individual and more detailed purpose expressed by the individual business in instruments of constitution or memorandum and articles of association. A redefined corporate purpose should be expressed on an overarching level in EU legislation, without replacing the specific purposes that the legislation governing the various forms of undertakings in the Member States may set out. Our proposal to redefine the overarching purpose of the undertaking is not one that dramatically changes the nature of European businesses or their specific purposes. It does not take away profit as an intrinsic element of the nature of business or of their value creation. It does not change the differences between various forms of undertakings in the European economy, and how profit is used and distributed in them. For example, cooperatives would still be distinguishable from companies, and multinational enterprises from small- and medium-sized enterprises (SMEs). We do not challenge the distinction between for-profit and not-for-profit, nor do we propose to make all businesses social enterprises.

What the proposal does do, is to position the value creation of European business, with profit as an intrinsic element, within the context of the transition to sustainability that we all need to undertake, and in such a way that gives European undertakings a level playing field and legal certainty. Drawing on sustainability research, we propose that sustainable value creation within planetary boundaries is set as the overarching purpose, outlining the scope within which profit will continue to be made.^[95]

Sustainable value creation is an emerging concept in corporate law and corporate governance,^[96] which can become a meaningful contribution if interpreted within a research-based concept of sustainability.

Translated into the governance of business, sustainable value creation encompasses issues such as fair treatment of employees as well as of workers and local communities across global value chains, with respect for international human rights and core ILO conventions as a minimum, ensuring a ‘living wage’ and safe working conditions. This further entails supporting democratic political processes and as a minimum not undermining these through engaging in corporate capture of regulatory processes. It also entails contributing to the economic basis of the societies in which the business interacts by not engaging in so-called aggressive tax planning and outright evasion.^[97]

Turning to the UNGPs,^[98] we see that ‘internationally recognised human rights’ as the ‘benchmarks against which other social actors assess the human rights impacts of business enterprises’,^[99] refer as a minimum to those expressed in the International Bill of Human Rights. These include the Universal Declaration of Human Rights and its main instruments of codification: the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights,^[100] as well as the principles concerning fundamental rights set out in the eight ILO core conventions, set out in the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work 1998.^[101]

An emphasis on vulnerability arguably resonates with the Commentary to the UNGPs Principle 12, which emphasises that business ‘may need to consider additional standards’. These concern, according to the Commentary, the human rights of ‘specific groups or populations that require particular attention’, elaborated on in United Nations instruments regarding the ‘rights of indigenous peoples; women; national or ethnic, religious and linguistic minorities; children; persons with disabilities; and migrant workers and their families’.^[102] The elimination of discrimination in respect of employment and occupation, whether on the basis of gender, race, age, disability or migrant status, is crucial.^[103]

As an intrinsic element of the transition to sustainable business must be included participatory aspects of the social foundations,^[104] of workers, regardless of their labour law status, and of affected communities, including indigenous peoples and ensuring that all affected are fully involved.^[105] And yet, we must avoid merely replacing the ‘shareholder’ in shareholder primacy with ‘stakeholder’.^[106] While involving affected communities, trade unions, and civil society is crucial, a mere canvassing of ‘stakeholder interests’ and giving priority to the ones that make themselves heard the most is insufficient. The backdrop must always be the interconnected complexities and the vulnerability of the often unrepresented groups (whether invisible workers deep in the global value chains, indigenous communities, or future generations),^[107] and the aim of a sustainable future within planetary boundaries.

Positioning sustainable value creation within planetary boundaries has potential significance on three interconnected levels: firstly and most importantly, it brings to the forefront that there are ecological limits (conversely, that being perceived as ‘environmentally friendly’ while not respecting those limits is totally inadequate). Secondly, it highlights the complex interactions between planet-level environmental processes, recognizing for example that climate change, however topical (and difficult to mitigate), is only one aspect of the convergence of crises we are heading towards. Thirdly, it continuously reminds us that state-of-the-art natural science must inform our decisions on a work-in-progress basis, encompassing the uncertainty and complexity of the global challenges.

This entails that a research-based precautionary approach is needed. The conceptual framework for planetary boundaries itself proposes a strongly precautionary approach, by ‘setting the discrete boundary value at the lower and more conservative bound of the uncertainty range’.^[108] The precautionary principle has a basis in EU law. Article 191(2) TFEU includes the precautionary principle in its stipulation of environmental principles that the EU shall follow. It is recognized that the scope is much wider than environmental issues in practice, and where ‘preliminary objective scientific evaluation’ indicates that there are ‘reasonable grounds for concern that the potentially dangerous effects on the environment, human, animal or plant health may be inconsistent with the high level of protection chosen for the Community’, the precautionary principle should be invoked.^[109]

The planetary boundaries framework does not offer a finite set of environmental issues that require recognition and protection. Rather, planetary boundaries as a concept forms the rationale by which new boundaries may be identified and better operational quantifications or metrics adopted.^[110] This entails that a legislative reform integrating the recognition of planetary boundaries^[111] cannot be satisfied with regulating the protection of the hitherto identified nine boundaries. Instead the concept of ‘planetary boundaries’ itself needs to be included, as a general clause, to be interpreted in light of the science as it develops.

With this backdrop, we propose that creating ‘sustainable value’ should be defined as creating value for the undertaking, while respecting the rights of its members, investors, employees, and other contractual parties, and promoting good governance, decent work and equality, and the human rights of its workers and affected communities and peoples. ‘Planetary boundaries’ should be defined as scientifically recognised processes that regulate the stability and resilience of the Earth system within which humanity can continue to develop and thrive for generations to come.^[112]

This overarching purpose of sustainable value creation within planetary boundaries should be operationalised through a redefinition of the duties of the board, outlining in a way that provides legal certainty for undertakings. To clarify a key concept of European company law, which has become somewhat clouded through the influence of the shareholder primacy drive, it should be set out in EU company legislation that the core duty of the board is to promote the interests of the company. This operationalisation would not entail a harmonisation of the definition of the interests of the company in EU company law. Rather, it would draw up the boundaries within which the board shall promote the interests of the company. Developing the understanding of what the interests of the specific company entail in a specific instance should remain with the board to define, within the scope of national legislation, articles of association, and existing contracts and commitments.^[113]

The duty of the board to promote the interests of the undertaking in a way that contributes to the overarching corporate purpose, should be set out as ensuring that the operations and activities of the business create sustainable value and contribute to global society staying within planetary boundaries. Encompassing respect for human rights, ensuring decent working conditions and promoting good governance should be key aspects of sustainable value creation. Contributing to ensuring that global society stays within planetary boundaries should entail complying with the at any time most ambitious politically adopted targets at the EU level or relevant Member State level, and – within the scope of the business of the undertaking – protecting and regenerating natural resources and processes, and avoiding, or reducing as far as possible, contributions to the transgression of currently identified planetary boundaries.^[114]

A legislative reform should specify that the board is to ensure that the business model of the undertaking is in line with the overarching purpose, developing and publishing a strategy that integrates the purpose throughout the business, including in the internal control and risk management systems.^[115] Further, it should define clearly the sustainability assessment – including sustainability due diligence – that the board must ensure is undertaken, to identify ongoing negative sustainability impacts and principal risks of future negative sustainability impacts. The due diligence process should be set out so as to encompass consultative processes for engagement with local communities, including indigenous peoples and other groups and persons affected by the operations and activities of the business, encompassing as relevant in the specific case, workers, subcontractors, and local or national interest groups and community representatives. Follow-up of the due diligence process should also be stipulated, where identified lack of legal compliance should be rectified immediately. For other identified sustainability impacts and risks, an ambitious continuous improvement process should be drawn up under the leadership of the board. The ambitious continuous improvement plan should include qualitative and quantitative Key Performance Indicators where appropriate. EU rules should also provide for external verification that the due diligence process is undertaken in accordance with the rules, and annual reporting on this should be audited. Together this would provide a good basis for legal certainty for the board that it is following this up as it should and a level playing field in the sense that it would know that other undertakings would be subject to the same rules.^[116]

Further, such a process would provide legal certainty for the undertaking as concerns its sustainability impacts, mitigating effectively much of the risks of unsustainability. As Lise Smit and Claire Bright point out, it is important that due diligence does not act as a safe harbour, i. e. that affected parties cannot file a lawsuit against the undertaking or its board, nor must it devolve into a box-ticking exercise.^[117] However, compliance with a thoughtfully formulated mandatory sustainability due diligence regime, would serve as a defence for the undertaking and its board. This will increase the legal certainty for European business, while providing better access to justice for affected workers and communities.

This proposal draws on commonly agreed upon sustainability goals and sustainability science, thereby increasing legal certainty for business in the sense that it would clarify what the boundaries of legitimate business activities are. Followed up by clearly defined rules for sustainability assessment, notably including mandatory sustainability due diligence, risk management would be improved, as would legal certainty in the sense of better knowing the extent of the vulnerabilities of the business. This would give the sustainability-oriented businesses in Europe, of which there undoubtedly are many, the competitive advantage over unsustainable business.