Certifying ‘Good’ Companies: Regulatory Schemes for Corporate Sustainability in a Comparative Perspective

Ensuring sustainability is one of the grand challenges of our times, but nation-states are severely overstrained with this monumental task. Since states’ legislative power is limited, the suitable design of regulatory instruments becomes crucial in order to reach sustainability aims. Market forces need to be leveraged in order to strengthen incentives for companies to act sustainably. Yet it is one of the basic premises of the market economy that companies prioritise their own profits rather than the welfare of society.

Sustainability goals can arguably only be achieved if sustainable behaviour creates extra benefits for corporations. In fact, market actors may have individual preferences for sustainability and intend to behave ethically, be it as consumers (‘political consumerism’) or as investors (‘impact investors’). However, due to information asymmetries it is difficult for these stakeholders to differentiate accordingly. Sustainable corporate behaviour therefore does not create the benefits that could otherwise be achieved. Certification schemes may help to overcome this market imperfection. If designed properly they provide a means for sustainable companies to signal their good behaviour to the market.

While certificates for products (fair-traded coffee, for instance) are widespread and thoroughly researched, certificates for good companies have not yet drawn much academic attention, even though various certification schemes have evolved in different jurisdictions. In a recent book chapter, I compare these different certification schemes and analyse them from a regulatory perspective. The chapter considers whether such certificates are issued by private or by state bodies, and discusses substantive criteria and procedural arrangements relating to the respective certification schemes. Moreover, it analyses such certificates’ legal and economic effects and compares them to similarly motivated regulatory devices such as specific legal forms for sustainable companies (like US benefit corporations) or mandatory disclosure. The main focus is on the regulatory design of certification schemes.

In view of the wide variety of certification schemes in five different jurisdictions (UK, USA, France, Germany and South Korea), the key question is which regulatory design fits best for the economic purpose of signalling ‘good’ corporate behaviour. Which institutional, procedural, and substantive design is most effective for certification schemes? At this stage of legal and economic research on certification schemes, and due to the dearth of empirical evidence on their effectiveness with respect to both corporate conduct and market conduct, it is impossible to provide an unambiguous answer. However, one can provide some reflections with respect to the various issues raised. First, are public or private certification regimes more effective? This institutional difference seems to have surprisingly little effect. Public regimes are not necessarily superior to private regimes, and one private regime, namely the B Corporation scheme, is globally one of the most popular schemes. Second, does the procedure that applicant companies need to follow have an impact on the effectiveness of regimes? Approval requirements seem more trustworthy than self-assessments. The same applies for shorter certification terms with more frequent checks. Whether these merits translate into effectiveness depends on the awareness of addressees. Third, which substantive criteria are relevant for a scheme’s effectiveness? Given the economic, social and ecological importance of different business sectors, the inclusion of for-profit companies into certification schemes is of paramount importance, and it corresponds to the global regulatory trend.

Beyond that, however, the legal form of certified companies is of secondary relevance. The same applies with respect to governance structure and financial order. These criteria help to prevent the misuse of certificates, and the imminent danger of corporate greenwashing, but they do not seem to directly coordinate with most market participants’ own preferences, at least not with those of consumers. The core criterion therefore concerns the business model of applicants; it directly relates to the sustainability of their corporate behaviour. It is difficult, however, to precisely prescribe any particular business model, and certification criteria tend to be either too vague or too narrow. In this respect, a multi-dimensional performance test seems most suitable to reflect the relevant preferences, thereby contributing to the effectiveness of a given certification scheme. Since those preferences may develop and change, however, the proper design of such performance tests – and of certification schemes in general – is likely to require a perpetual learning process. Certification schemes may help to raise public and corporate awareness for sustainability.  Depending on their institutional design, they have the potential to be an effective regulatory tool that may help to reconcile sustainability concerns with the functional mechanisms of market economies.

Florian Möslein is a Professor of Law at the Philipps-University Marburg, Germany