Becoming a B Corp – the legal implications
Corporate Associate, Hugo Brown and junior client advisor at Rothschild & Co, Tom O'Keeffe, outline what a B Corporation is, why more businesses no longer regard ESG as optional and the legal implications involved.
What are they?
B Corporations (“B Corps”) are businesses that “meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose”. There are now almost 3,500 B Corps around the world. In order to become a B Corp a business must:
- Conduct an impact assessment;
- Pass the “Legal Test”, as discussed below;
- Complete an assessment review and submit supporting documentation; and
- Sign a declaration of interdependence and pay an annual fee, starting at £500 and scaling with annual revenue.
The impact assessment results in a numerical score. There are a total of 200 points available and 80 is the pass mark. The B Corp, once certified by the non-profit B Lab, must update their assessment every three years.
Why become one?
Investors and consumers are becoming more and more aware of the environmental and social impact businesses have on the world. Little wonder then that B Corps are becoming an interesting and popular step for businesses trying to prove their alignment with their customers and investors in this regard. There has been much talk about ESG (“Environmental, Social and Corporate Governance”) investing but an issue identified by many is that there has, so far, been a fragmented approach to measuring ESG performance. B Corporations may not be the solution but they are certainly a step in the right direction.
Tom O’Keeffe (a junior client advisor in Rothschild & Co’s Wealth Management business) notes: “An increasing number of our clients – high net worth and ultra-high net worth individuals, family offices, charities, trusts and corporates – no longer regard ESG as optional, but as an important ingredient when investing responsibly.” Moreover, Rothschild & Co takes the view that, in the long term, the businesses which are better at managing their ESG risks and responsibilities are more likely to prosper and, as a result, this aligns responsible investing with achieving risk-adjusted financial returns. Tom concludes: “As well as being the right thing to do, by investing responsibly, it enables us to deliver long-term sustainable returns for our clients. In addition, the recognition of B Corps is another important step forward for increasing transparency in the world of ESG.”
In order to pass the “Legal Test” and meet the legal requirements for a B Corp in the UK, a business must adopt governing documents that:
- include an updated objects clause; and
- explicitly have regard to the interests of stakeholders.
B Lab has developed some wording which is designed to meet these criteria. Those familiar with the Companies Act 2006 will note that the Legal Test wording provided follows the general shape of section 172. However, whereas section 172 provides that directors have a duty to promote the success of the company for the benefit of its members as a whole, the Legal Test wording goes further – the purpose of the Company is additionally to “have a material positive impact on society and the environment, taken as a whole”.
The aim here is to turn directors’ focus away from the bottom line and towards the so-called ‘triple bottom line’, originally an academic economic idea that social and environmental matters should be just as important as profits.
The suggested Legal Test wording does include a paragraph carving out causes of action by or for any person other than the Company, meaning directors are better protected from stakeholder claims. Directors are not abrogated from all responsibility, however, and the Legal Test wording adds a requirement directors procure an annual strategic report to enable members to understand how they have implemented the triple bottom line approach.
The invitation here is really to reframe how you, as an entrepreneur or business owner, view success. If you are interested in learning more about B Corps and how you could implement changes to your company or LLP, please get in touch with Hugo Brown at HBrown@boodlehatfield.com. If you are interested in learning more about Rothschild & Co’s approach to investing, then please contact Tom O’Keeffe at Thomas.OKeeffe@Rothschildandco.com.