Integrating ESG as a Legal Obligation Into Your Business
Updated: Oct 7, 2022
A common decision that startup founders make when they first start out is setting aside the principles of ESG in favor of profitability. This is because when a business is just getting off the ground, it is harder to manage the extra expense that comes with incorporating ESG. This is simply a reality that has to be accepted. It is more expensive to obtain quality materials when a business is offering fair labor incentives. It is more expensive to manufacture materials in packaging to be biodegradable. And it is more expensive to build an HR department to ensure the satisfaction of your employees.
Yet, these changes are not without their reasons. Though it is more expensive to spend money on these things, if you don’t do them it can bring grave consequences. Engaging in unethical business practices puts the company’s reputation at risk and can even ruin it. Treating employees poorly can cause the turnover rate of a company to skyrocket which causes costs associated with recruitment to increase.
However, committing to ESG isn’t only a decision of crisis prevention; there are many incentives to shift to more sustainable and ethical practices. In recent years, investors and venture capitalists have been interested in seeing how companies integrate ESG practices before they make the decision to make an offer. One fundamental way that businesses can legally incorporate ESG into their core business practices is by registering as a social purpose corporation (SCP) or a benefit corporation (B-Corp).
The underlying concept of a SCP and a B-corp is that a company can register itself as a for profit organization but also opt to embed an underlying social benefit purpose into itself. This means that the company can issue stocks and still emphasize making profit, but it also has an obligation to a self identified ESG related goal. Companies are obligated to maximize short term and long term positive benefits and minimize the short term and long term negative impacts on the environment, society, and their stakeholders(employees and suppliers).
Something to note is that SCP’s and B-Corps have a subtle difference in that benefit corporations are mandated to make all decisions in consideration of their said purpose while for social purpose corporations need only consider it in large, organization-wide decisions. An example of an SCP is Purism. Purism is a SCP that has declared its commitment to the importance of privacy. Their business sells software, phone cases, and phones all with different ways of maximizing privacy. As an SCP they only need to demonstrate that their products and services all play a role in furthering their social benefit purpose. On the other hand, with B-Corps they are not only legally bound to their social purpose but also to higher ESG standards in terms of packaging, labor practices, etc.
Regardless, increasing awareness of ESG can be seen by the fact that B-Corps and SCPs are recognized in over 30 states today and 14 more are introducing legislation to formally recognize them. Evidently, ESG is no longer something that businesses do just to look good, it is beginning to become a strategic business decision.