3. Future Trajectories in Company Law

Several emerging developments in and around company law have the potential to shift company decision-making and behaviour on climate change. In thinking about likely future developments in Australia, it is useful to consider regulatory trajectories in leading and comparative jurisdictions like the European Union (‘EU’) and UK.

3.1.  Sustainable Finance Reforms

Following similar developments in other jurisdictions, particularly the EU, the Australian Government released its Sustainable Finance Roadmap in 2024.^[1] Sustainable finance strategies are underpinned by two main objectives: managing the financial risks posed to market actors by climate change and other sustainability risks, and aligning private capital and resources to help address climate change and other sustainability issues in line with relevant international and national goals and targets such as those set out in the Paris Agreement. These strategies involve a range of reforms to company law and associated business regulation.

For example, as part of the EU Sustainable Finance Reform package, the EU introduced a new Corporate Sustainability Reporting Directive (‘CSRD’).^[2] Companies covered by the regulation are required to report sustainability information in line with the European Sustainability Reporting Standards (which have been developed to address climate change along with a wide range of other environmental and social issues, including biodiversity and ecosystems, workers in the value chain, and resource use and circular economy).^[3] Importantly, the EU reporting standards adopt the concept of double materiality, requiring companies to disclose not only the material risks posed to company interests by sustainability issues but also the material impacts of company activities on people or the environment. These include impacts directly caused or contributed to by the company in its own operations, products or services, as well as impacts which are otherwise directly linked to the company’s upstream and downstream value chain.^[4] The reporting standards also require companies to disclose climate transition plans that demonstrate how the business model and strategy is or will become compatible with the 1.5 °C temperature goals of the Paris Agreement.^[5]

The EU has also introduced a Sustainable Finance Taxonomy, a classification system to help investors and other stakeholders understand whether the economic activities undertaken by companies are environmentally and socially sustainable, and to support the direction of capital flows to activities that substantially contribute to climate change mitigation and other sustainability objectives set by the EU.^[6] Finance sector entities such as superannuation funds are obliged to report on the alignment of their portfolio against the taxonomy, and all companies that report under the CSRD are also obliged to report on the extent to which their activities align with, support a transition to or detract from the sustainability objectives set out in the taxonomy (taxonomy activity reporting).

In a related development, the EU has also introduced the Corporate Sustainability Due Diligence Directive (‘EU CSDD’)^[7] and a number of European countries have introduced mandatory human rights and environmental due diligence laws,^[8] which have the potential to significantly enhance corporate accountability for social and environmental harms like climate change.^[9] These laws require large companies to assess actual and potential adverse impacts on human rights and/or the environment caused or substantially contributed to by the company’s activities, or which may be directly linked to the company’s operations, products or services by its business relationships. Companies are required to take reasonable steps to prevent harms occurring, and where harms occur, to address these. These laws provide a civil remedy for victims of harms in some instances.^[10] Some of these laws are framed broadly to encompass company impacts on climate change^[11] or indeed explicitly address climate change harms. For example, the EU CSDD requires covered entities to take specific measures to address climate change impacts, including through the adoption and implementation of Paris-aligned transition plans, which include emissions reduction targets for scope 1, 2 and 3 emissions.^[12]

3.2.  Novel Sustainability Duties

The building momentum around sustainable finance reforms internationally has reinvigorated long-running debates about the role and purpose of the company in society and particularly the role that companies should play in addressing climate change. As discussed in part 1.1, in many ways, company law provides the structural foundations for growth-based capitalist market economies, which externalise and undervalue social and environmental problems such as climate change.^[13] Further, current formulations and interpretations of directors’ duties (which focus on material financial risks to the company, and which tend to equate the best interests of the company with short-term, profit-focused interests of shareholders) can disincentivise company directors from taking timely steps to address climate change (see part 2.1). These barriers are only tempered to some degree by the stewardship activities of long-term, diversified investors like superannuation funds that are increasingly focused on systemic risks posed by climate change and aligning company-level risk management with Paris Agreement goals.

Scholars of company law from a range of jurisdictions have proposed reforms to directors’ duties to help counter the short-term focus on profit maximisation at the expense of inadequately regulated social and environmental externalities and longer-term sustainability considerations. A range of formulations for novel sustainability duties have been proposed that would explicitly require directors to take reasonable steps to prevent environmental harm and to improve environmental performance.^[14] Some scholars also argue for the introduction of clear statements in company law that the purpose of the company is to create sustainable value by balancing the interests of shareholders with the interests of other stakeholders and by operating within agreed environmental limits that reflect global environmental goals (eg the Paris Agreement).^[15]

Some jurisdictions have taken tentative steps to implement reforms to directors’ duties to clarify and emphasise the relevance of environmental and social considerations and stakeholder interests to the best interests of the company. For example, directors’ duties under the Companies Act 2006 (UK) were reformed in the early 2000s with the aim of shifting corporate governance beyond a shareholder primacy approach. The directors’ duty to promote the success of the company now explicitly adopts an enlightened shareholder value approach, requiring directors to act in the way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to a range of stakeholder considerations, including the impact of the company’s operations on the community and the environment.^[16] However, there is some evidence that the practical impact of these reforms has been minimal and that UK directors still consider their overriding objective is to maximise shareholder profits.^[17]

Similarly, in 2023, the New Zealand Companies Act 1993 was amended to expressly state that in acting in the best interests of the company, directors ‘may consider matters other than the maximisation of profit (eg environmental, social and governance matters)’.^[18] This amendment attracted considerable opposition, including arguments that the amendment was unnecessary given that prudent directors would already be considering environmental and social matters when determining the best interests of the company, and arguments that the weak phrasing of the amendment (‘may’ instead of ‘must’) would be of little practical impact.^[19] As part of the sustainable finance reform process, the EU also explored reform options that would explicitly require company directors to balance stakeholder interests and identify and mitigate sustainability risks and impacts.^[20] At this stage, these reforms have not been pursued. While expansion of the ‘best interests of the company’ concept offers certain advantages, it also creates a potential loophole, allowing directors to justify a decision with harmful environmental consequences by arguing that it advances other interests encompassed within the broader best interests test.

3.3.  Alternative Business Structures

Given the role that the modern investor-owned company has played in creating the conditions for catastrophic climate change, it is useful to conclude this chapter by considering alternative business structures that are less focused on short-term profit generation for shareholders and more focused on societal contribution. Here we consider the cooperative and the benefit corporation and explore whether these may be better suited to addressing climate change in a timely and effective way.

As a business structure, the cooperative has a long history, including in Australia, where it has been used in different sectors, including agriculture and finance, and remains a small but important part of the economy.^[21] A cooperative is a registered legal entity (governed by specific cooperative legislation),^[22] which differs from a for-profit company in several ways. A cooperative is owned and controlled by its members, who must commit to active membership. Unlike companies, all members have an equal vote at GMs, irrespective of their level of investment. Members can be customers, staff, suppliers, producers or residents, or a combination of these. A cooperative can be for profit or not for profit,^[23] and members choose what to do with any profits (eg distribute among members, reinvest in the business or give to the community). The main purpose of a cooperative is not to maximise profits but to maximise benefits through provision of goods or services to members. Many cooperatives provide employment, goods or services that would not otherwise be available or affordable to members.

In the early 2000s, several jurisdictions, including the US, Canada and the UK, legislated to allow for voluntary adoption of the benefit corporation as an alternative business structure.^[25] Benefit corporations are for-profit entities, but they differ from ordinary companies in the way in which they address corporate purpose and the associated duties of company directors. The purpose of the benefit corporation is not solely to make a profit but also to pursue a social benefit. Directors and company officers are subject to legal duties to consider not only the financial interests of shareholders but also the interests of a wide range of stakeholders. Benefit corporations must also report on actions taken in pursuit of their social purpose.^[26]

In Australia, legislation to provide for benefit corporations was advocated but never introduced. However, a growing number of ordinary companies have been certified as benefit corporations by the international B Lab Global third-party certification network.^[27] To be certified, Australian companies must meet a number of requirements, including amending the company constitution to include a purpose statement (which clearly states that the purpose of the company is to deliver returns to shareholders while having an overall positive impact on society and the environment) and a stakeholder clause (which provides that, in discharging their duties, company directors must consider the long-term interest of the company; the interests of company employees, suppliers and customers; the impact of the company’s operations on the community and the environment; the desirability of maintaining a reputation for high standards of business conduct; the interests of shareholders; and the ability of the company to create an overall positive impact on society and the environment, with no priority given to any of the above).^[28] There has however been substantial critique of the benefit corporation model, with some arguing, for example, that ‘directors’ duties owed to the traditional corporation do not preclude the consideration of other stakeholders and that the arguments in favour of the hybrids skew our understanding of the traditional corporation and obscure the need for socially responsible conduct on the part of traditional corporations’.^[29]