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|3 min read|26 Jun 2023
Sustainable legal
Integrating sustainability into your business? Make ESG a part of your articles of association!
The world is increasingly focused on sustainability, and companies are being challenged to think beyond mere profit maximization. Taking responsibility for the environment and society is now high on the agenda for many businesses. ESG legislation encourages companies to integrate environmentally friendly, healthy, safe, and social elements into their operations and to manage the company in a responsible manner.
Contents
The main goal of this legislation is to promote sustainable business practices and ensure transparency in operations. With a robust ESG policy, companies demonstrate that not only profit but also the environment and society are important to them. It is now clear that implementing strong ESG goals adds value, both by mitigating risks and by creating value. There are various ways to formally embed ESG goals within an organization, integrating them into the company's articles of association is one of them.
A good example of a Dutch company with sustainable provisions in its articles of association is, of course, Triodos Bank. But companies like Philips, Friesland Campina, and ASN Bank also reflect their sustainable ambitions in their articles of association.
This is the second article in a practical series for entrepreneurs who want to integrate sustainability into their (Dutch) business: how to take this important step and what benefits (and challenges) it entails.
While most of the below benefits and challenges count for many international businesses, this article is written with the Dutch legal framework in mind. So, when you read this article and wish to incorporate your sustainable goals within your company’s articles of association, don't forget to seek legal advice in the jurisdiction applicable to your articles of association!
Why incorporate sustainability into the articles of association?
The articles of association are the internal rules and regulations of a legal entity, as recorded in a notarial deed when the entity is formed. These articles contain important information about the organization and functioning of the legal entity. This includes, for instance, the objectives, the rights and obligations of members, the decision-making process, and the powers of the board.
Incorporating sustainable provisions into a company's articles of association offers several advantages, such as:
Commitment: Including sustainable provisions in the articles demonstrates that the company formally commits to its sustainability ambitions.
Increased transparency: Shareholders and other stakeholders gain a better understanding of the company's sustainability goals.
Enhanced reputation: It contributes to a positive reputation for the company as a responsible and forward-thinking organization.
Challenges of incorporating sustainable provisions into the articles of association
Incorporating sustainable provisions into your Dutch articles of association also presents challenges. It would be too extensive to cover all legal consequences in detail here, but as an entrepreneur, keep the following in mind:
Liability & Third-Party Effects
Sustainability objectives and ESG provisions in the articles give an indication of the principles and values the company pursues in this area. Although these provisions primarily serve as internal guidelines for the board and shareholders, they also inform other stakeholders (third parties) about the company’s social and ecological standards. This can influence how others view the company and whether and how they want to engage with the company. If a company fails to meet the sustainability goals it has implemented within it’s articles of association, shareholders or other stakeholders (including, under certain circumstances, third parties) may hold the board accountable. If directors act outside the company's sustainable statutory objectives and cause damage, they may be held liable.
Acting contrary to these principles, and thus contrary to the sustainable objectives included in the articles, can have consequences. However, in the Netherlands this usually does not lead to direct legal enforceability by third parties, unless specific legislation or contractual agreements support this.
Operational Constraints
There are also operational constraints to consider carefully before incorporating sustainability provisions into the articles of association. Specifying sustainability goals in the articles of association may limit the flexibility of business operations. This can be problematic if the company needs to adapt to changing market conditions or other unforeseen events. Therefore, it is advisable to include provisions in a general sense and elaborate on them in more detail in internal policy documents. For example:
"The company aims to contribute to socially responsible business practices in the pursuit of its main objective."
Furthermore, achieving sustainability goals may require substantial investments, which could increase operational costs and potentially weaken the competitive position if the benefits do not outweigh the costs.
In short: incorporating sustainability provisions is a good idea in many respects, but ensure you do not overlook the challenges!
In five steps to sustainable articles of association
Identify the core sustainability areas and formulate clear objectives: Start by identifying the key sustainability themes that are relevant to your business. What environmental management, social responsibility, and governance (ESG) issues are important for your company? Make these objectives concrete and measurable. Often, these goals are internal policy objectives embedded by the company in its operations. Not every internal objective is suitable for inclusion in the articles of association. The objectives included in the articles of association are usually general in nature.
Ensure support: Ensure sufficient support within the organization. Involve shareholders, management, employees, customers, and other stakeholders in the process to ensure that the sustainability goals are widely supported.
Proposal for articles of association (or amendment thereof): Are the key sustainability goals for the company sufficiently clear and is there support? Then consider which provisions in the articles of association can be adjusted to incorporate these sustainability goals/objectives. For a new to be established company, this is done at the time of incorporation.
For example, one could include a sustainable statutory objective. Including a sustainable statutory objectives can help the company integrate sustainability principles into its operations and meet societal and legal expectations.
An example of a statutory objective might be: "The company aims to conduct its activities in an environmentally friendly and socially responsible manner, adhering to the principles of sustainable development."
Or an example of an amendment to include the company’s sustainability objective, where the old objective reads: "The company's objective is to develop, produce, and sell products." The new objective incorporating the sustainability goals may read: "The company's objective is to sustainably develop, produce, and sell products with respect for people, the environment, and society."
Conditions for share issuance / transferability of shares (linked to sustainability): Tying the issuance and transferability of shares to the sustainability objectives of the company is a way to engage shareholders in and make them accountable for the sustainable development of the company. The company can set conditions during the issuance of new shares that require new shareholders to contribute to the company’s sustainability goals. Another example is that the articles of association can stipulate that the issuance of new shares is subject to approval by the board of directors, which will assess whether the shareholder meets sustainability criteria.
An example of a statutory provision setting conditions for share issuance might be: "The issuance of new shares is subject to the approval of the board of directors. The board shall grant this approval if the acquirer commits in writing to support and promote the company's sustainability objectives."
Allocation of profits - sustainability reserve: When determining profit distribution, the company's contribution to its sustainability goals may be considered. A portion of the profits can be allocated to projects that reduce the company's ecological footprint, promote social justice, or support economic sustainability.
Approval of Board Decisions: The approval process for board decisions regarding sustainability includes the powers of the general meeting of shareholders and the supervisory board. The general meeting can approve and evaluate decisions based on sustainability, while the supervisory board may require prior approval for sustainable partnerships. The general meeting is authorized to subject board decisions to its approval and evaluate them for sustainability. Additionally, the articles of association may stipulate that the board requires prior approval from the supervisory board for decisions concerning entering into or terminating sustainable partnerships with the company.
Approval by shareholders: To formally establish or finalize an amendment to the articles of association, the consent of the shareholders is required. With sufficient support, this is unlikely to lead to much discussion. It is suggested to discuss the proposed changes during the general meeting to achieve formal approval.
Implementation: If all lights are green (and the general meeting has approved the amendment to the articles of association), the formal amendment will be executed by a notary.
To ensure the sustainable objective(s) are upheld, it is crucial to assign the responsibility for implementing and adhering to the agreed sustainability objectives to the board of directors.
Finally, it is important to maintain transparency: ensure that the allocation of profits and investments in sustainability are reported annually to the general meeting of shareholders and included in the sustainability report.
Concluding
Incorporating sustainable provisions into the articles of association firmly embeds sustainability into the decision-making processes of the company. Board resolutions must align with the sustainability objectives, and both the board and the shareholders thus share responsibility for the sustainable development of the company.
While including sustainable provisions in the articles of association can assist companies in ensuring their commitment to sustainability, it also presents various challenges that must be carefully considered. It is crucial for companies to find a balance between pursuing sustainable goals and maintaining the flexibility and efficiency of their operations. A thorough legal and strategic evaluation is essential to weigh the potential risks and benefits.
A less public and less intrusive alternative for embedding sustainability within business operations is to incorporate these sustainable commitments into, for example, the shareholders' agreement, internal policies, the board regulations, and/or management contracts. We will explore these options further in a subsequent article.
Is sustainability high on your company’s agenda? Then including it in the articles of association can be a powerful step towards a more responsible and future-proof business operation.
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