United States: Delaware Launches Its Certificate Of Adoption Of Transparency And Sustainability Standards

Delaware Companies: Apply for your Sustainability Certificate starting October 1

As of October 1, 2018, Delaware entities can begin applying for the state's new voluntary Certificate of Adoption of Transparency and Sustainability Standards through the Secretary of State, passed in June 2018.1 The innovative reporting program allows Delaware corporations, partnerships, limited liability companies, and statutory trusts, among others, to design and implement a flexible sustainability program to meet their organization's needs.

The Certificate program, the first of its kind, responds to growing demand from organizations (and their customers) to have their sustainability commitments recognized and acknowledged by state entities. Sustainability action and reporting is nothing new among Fortune 500 companies, 80+ % of which issue sustainability reports.2 However, such reports are occasionally criticized for their marketing-like nature and superficial accomplishments and commitments. The Certificate, though voluntary and broadly self-directed, requires affirmative commitments by the governing body of participating entities that are likely to positively affect the entities' sustainability efforts.

What does the Certificate require?

The Certificate program requires the governing body of a participating entity to adopt resolutions setting forth the entity's standards and assessment measures, which must be based on "third-party criteria." The entity must annually evaluate its performance against such metrics, and such information must be reported to the Delaware Secretary of State. All reporting must be made available through a public-facing website, and the entity cannot charge for website access.

To be clear, by issuing a Certificate, the State of Delaware is not confirming that an entity either implemented the standards or the assessment measures as it declared. The Certificate is simply an attestation by the Delaware Secretary of State that the entity filed an appropriate standards statement. The Secretary of State will not conduct investigations to verify entities' annual performance reports. Nonetheless, the program does transcend mere "greenwashing" because it will allow the public, investors, and others to clearly assess an entity's sustainability performance against set metrics.

Note that if an entity falls out of compliance, it may revive its Certificate by filing a restoration statement acknowledging changes to its standards and assessment measures. Any such restoration statement must include a description of the process by which the changes were identified, developed and approved, together with the third-party criteria used to develop any such changes.

What does an application include?

A Delaware entity can apply for the Certificate from October 1 to December 31 annually. An application requires:

  1. Resolutions by the governing body of the entity adopting "principles, guidelines, or standards" for sustainability. Such standards must be based on or derived from "third-party criteria," such as standards issued by a government, an NGO, or an independent consultant.
  2. Resolutions by the governing body of the entity adopting performance metrics—"policies, procedures or practices"—that will allow the entity to assess how it is performing relative to the standards it chose to adopt.
  3. Commitment to publish a publicly-available annual report.
  4. Application fee of roughly $250.

What are the risks?

It is clear that Delaware expressly attempted to relieve entities of liability for participation or non-participation in the Certificate program. No party can bring a claim for an entity's decision to participate, or not to participate, in the Certificate program. Further, no claims can be brought for an entity's failure to actually meet its sustainability standards, as assessed annually.

Such failures to meet sustainability goals will be adjudged in the court of public opinion. Reputational risk will be present for entities setting idealistically ambitious or easy targets, or if their annual reports appear insufficient.

However, an entity may nonetheless be legally liable for perjury in falsely reporting performance metrics or assessed performance.

Conclusion

In sum, the Certificate is not a seal of approval from the State of Delaware, it is a public affirmation of a company's commitment to sustainability. In lieu of simply suggesting the publication of an annual sustainability report, the Certificate program involves important involvement by the governing body of the entity with tangible and attainable sustainability goals, while promoting greater corporate transparency in the reporting and performance against such goals. Given that more than 50% of U.S. publicly traded companies are incorporated in Delaware, the Certificate program is likely to have an important effect on corporate sustainability measures in the near future.

Footnotes

[1] https://legis.delaware.gov/BillDetail?legislationId=26304

[2] https://www.ga-institute.com/press-releases/article/flash-report-85-of-sp-500-indexR-companies-publish-sustainability-reports-in-2017.html

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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