Delaware – The First State in Sustainability?

Posted on March 21, 2019 by Robert Whetzel

Long known as the corporate capital of the United States, Delaware is home to over 50% of publicly-traded U.S. companies, and approximately 1.3 million legally incorporated or formed entities representing companies large and small. Businesses choose to organize under Delaware law for many reasons, including its well-developed body of corporate and alternative entity law, flexible and enabling corporate and alternative entity statutes, and highly regarded business courts. Until recently, Delaware law was largely silent on issues of sustainability as they relate to corporate and entity governance. In an effort to support the global sustainability efforts of its entities, the State of Delaware recently enacted first of its kind legislation creating a path for Delaware entities to adopt and implement sustainability standards in a rigorous, systematic and transparent manner.

On October 1, 2018, the Delaware Certification of Adoption of Transparency and Sustainability Standards Act (the “Delaware Sustainability Act” or “DSA”) took effect. The Delaware Sustainability Act establishes a voluntary program for Delaware entities to adopt sustainability standards and to report on sustainability performance with the Delaware Secretary of State. Entities that satisfy the DSA’s requirements receive a certificate from the Delaware Secretary of State indicating compliance with the DSA.

Although many companies have adopted sustainability standards, there is no universal framework for identifying, evaluating or comparing the implementation of sustainability standards.  By and large, businesses are free to adopt standards of varying scope with no common approach to reporting or performance evaluation. As a result, there are widely varying degrees of transparency in the adoption and implementation of sustainability standards. Delaware has attempted to change that model (at least for Delaware entities) by adopting the DSA, which requires participating entities to report publicly on their sustainability standards and performance and establishes a centralized, public database of sustainability reports that those entities have generated.

A Delaware entity may elect (but is not required) to become a reporting entity under the DSA. To do so, its governing body must adopt resolutions setting forth its sustainability standards and assessment measures, and file a statement to that effect with the Delaware Secretary of State. The DSA defines “standards” as the “principles, guidelines or standards” that the entity adopts to assess and report the impacts of its activities on society and the environment; those standards must be based on or derived from third-party criteria. The DSA does not mandate the specific sustainability standards that an entity should choose to adopt. Instead the entity is free to adopt standards developed by a third-party organization, including both governmental and NGO sources.  Once standards are adopted, a reporting entity must file an annual report with the Delaware Secretary of State containing a summary of the standards and assessment measures, actions taken to meet the standards, and a description of any additional efforts that will be taken to improve performance.

Delaware has a long-standing tradition of leadership in matters of corporate governance, and has now developed a framework for its corporate citizens to adopt best practices in governance and sustainability.  The DSA is entirely optional and voluntary, and it remains to be seen whether Delaware will become the First State in Sustainability.