An increasing number of companies are committed to sustainability and transparency. And a new Delaware law will give that state’s more than one million business entities a new way to let the public know about their commitment.
The corporate sustainability movement
Sustainability, in general, refers to a focus on meeting the needs of the present generation without compromising the ability of future generations to meet their needs. Corporate—or business entity—sustainability can be thought of as a focus on providing for a business’ short-term needs while considering the impact its business operations have on the environment and society, and resolving to make that impact a positive one.
Managers of companies large and small are under increasing pressure to govern in a socially responsible manner. The pressure is coming from a variety of sources. Investors, including large institutional funds, are investing more and more in socially responsible companies —not only for altruistic reasons, but because they believe they are better managed, and can therefore produce more long-term value. Consumers have shown they are willing to pay more for products that come from companies with sustainability principles. And the best and brightest have indicated these are the types of companies they want to work for.
The need for transparency
Investors, consumers, job seekers and others may want to support companies that are actually committed to operating in an economically, socially, and environmentally sustainable manner but they can only do so if they know which companies those are. That’s where transparency comes in.
In order to get the word out, these companies must be transparent. They have to publicly report on their sustainability principles and provide an assessment of how successful they have been at achieving their goals of sustainability and responsible governance.
There are several ways to disclose this information. Publicly held corporations can do so in their SEC filings. Any company can release a voluntary sustainability report. And, effective October 1, 2018, Delaware’s corporations, LLCs, and other entities have a new way to send a message that they are committed to sustainability. On that date the Certification of Adoption of Sustainability and Transparency Standards Act (House Bill 310) goes into effect.
Delaware’s new sustainability and transparency law
This Act, which is the first of its kind in this country, allows a Delaware entity to be certified by the Secretary of State as a “reporting entity”. The entity can publicize the fact it is certified as a reporting entity, thereby letting the public know of its commitment to sustainability and transparency.
The Act is entirely voluntary. The decision whether to seek certification is in the sole discretion of the entity.
Steps to receiving certification
In order to receive this certification, the entity must adopt resolutions creating standards and assessment measures. These must be adopted by the governing body in order to signal a commitment to sustainability at the highest level.
“Standards” are defined as principles, guidelines, or standards adopted by an entity to assess and report the impact of its activities on society and the environment. They must be based on criteria developed by a third party—and not the entity itself.
“Assessment measures” are the means by which the entity measures its performance in meeting its standards. The Act does not prescribe which standards or measures an entity must choose nor does the Secretary of State evaluate or pass judgment on the ones chosen.
The next step to receiving certification is to file a Standards Statement with the Secretary of State. In the Standards Statement the entity acknowledges that it adopted resolutions defining its social and environmental standards and assessment measures. If the entity is a corporation, LLC or other entity type that is registered or formed with the Secretary of State it must be in good standing. To remain a reporting entity, it must file an annual renewal statement and remain in good standing.
Transparency is a major focus of the Act. In the Standards Statement the entity must identify a link on its website providing access to its standards and assessment measures. It also has to commit to publishing an annual report which will include a summary of its standards and assessment measures, its actions to achieve its standards, data showing its performance, and the steps it will take to improve its performance. This sustainability report must be filed with the Secretary of State and a copy must be made available to the public via a link on its website. The renewal statement contains an acknowledgment that changes made to the standards or assessment measures, and a copy of the annual report, were made available to the public.
It is in everyone’s best interest that companies truly commit to global sustainability. And Delaware is choosing to support business entities in their sustainability efforts by creating a voluntary filing that certifies their adoption of sustainability and transparency standards and gives the public an opportunity to review and compare sustainability programs.
Managers, owners, and advisers of Delaware entities that want to send a message that they are truly committed to sustainability and transparency may wish to familiarize themselves with this new law and consider seeking certification. Although the Act does not go into effect until October 1, it is not too soon for governing bodies to resolve to assess and report on the impact of their activities on society and the environment.
Those with an interest in non-Delaware entities may also want to take a look at this law as Delaware is often a trendsetter when it comes to business entities, and other states may choose to adopt similar legislation to support their domestic entities with their global sustainability efforts.