To establish a foundation for understanding the potential integration of ESG principles within public shareholding companies in Palestine, it is essential to first analyze the existing legal framework. This article specifically addresses public shareholding companies, given the critical importance of implementing sound governance policies in them, and their substantial influence on the national economy as a whole.

 

According to theDecree Law No. (42) concerning companies of the year 2021, the (“law”), the corporate body mainly consists of shareholders, and the board of directors elected or hired by the company's shareholders. Directors occupy significant and fundamental roles in managing the business and affairs of their companies. Their duties and responsibilities are primarily governed by Article 20 of the law, which outlines the general duties of directors. Furthermore, corporate governance has been defined under Article (1) of the law as “a set of internationally recognized criteria, rules and procedures under which a company is managed, and monitored through the coordination between the board of directors, executive management, shareholders, minority shareholders, and related stakeholders, within the regulatory, administrative, legal, and financial frameworks that define rights, obligations, and responsibilities, thereby achieving institutional discipline”. Additionally, Article (5) of the Guide on Best Practices and Governance for Banks in Palestine, attached to Instructions No. (10) of 2017 issued by the Palestine Monetary Authority, the (“Guide”), provides a similar definition of corporate governance.

 

Consequently, corporate governance serves as the shared space where these elements engage influencing the company's direction and establishing what is permitted and prohibited in this context. As such, this framework holds directors accountable not only toward shareholders, but a broader array of stakeholders.

 

In this context, there is an ongoing debate between two main theories: shareholders’ wealth maximization and stakeholders' wealth maximization. While the former is the traditional form of corporate governance, which deals with the corporation as nothing but a group of owners and their collective economic interests and goals seeking a sole purpose: the shareholder's value maximization. However, due to the dramatic changes and developments, the corporate entity is no longer as simple as this. In contrast, modern legal theories view the corporate body as a diverse collection of stakeholders: employees, creditors, suppliers, communities, customers, etc. [1]

 

Interestingly, these two seemingly opposing views can actually coexist. Companies today are increasingly held liable for their impact on society and the environment, not merely from a philanthropic standpoint, but as an integral part of their governance responsibilities. According to Article 177(1)(a) of the law, “the board of directors of a public shareholding company has the duties and authorities to take the decisions that determine the general framework of the good governance, risk management, and internal auditing in accordance with the provisions of the law and the company’s by-laws.” This obligation implies the necessity for directors to consider the interests of all stakeholders as part of their risk management duties. According to the Sustainable Finance Roadmap and Action Plan issued by Palestine Monetary Authority in May,2024, neglecting ESG considerations can lead to different types of risks, including short-term financial losses, macro-financial shifts, liability risks, reputational damages.

 

The Decision of the Board of Directors of the Palestinian Capital Market Authority No.(1) of 2013 amending instructions No.(2) of 2008, regarding disclosure, mandates public shareholding companiesto include in their annual report a clear, applicable, and non-misleading disclosure of their policies on social responsibility, serving the environment and the local community. However, companies must explicitly state if they have no such activities.

Furthermore, Principle Thirteen of the Guide stipulates that the bank’s board of directors must approve a disclosure and transparency policy that includes a minimum of information, the most important of which are the bank’s objectives and policies regarding professional conduct ethics and the bank’s commitments to the community. While there is no obligation to integrate ESG factors into their operations, companies, including banks, must disclose them if adopted, in accordance with the aforementioned provisions. Currently, there is no unified national reporting framework for ESG, resulting in fragmented reporting efforts.

The current corporate law in Palestine is flexible enough to allow companies to pursue goals beyond mere profit. For instance, Article (137)(1)(k) of the law states that the company’s by-laws must include certain information alongside what is outlined in the certificate of incorporation. Notably, the article concludes with the provision that shareholders may determine “any other matters related”. This wording grants significant discretion to shareholders to define the corporate objectives within the company’s governing documents.

Despite the absence of a solid legal obligation to adopt ESG practices, integrating these principles is essential for long-term success. Companies that embrace ESG can enjoy numerous benefits, including improved market access, increased sales and profits, operational cost savings, and enhanced brand reputation.[2]

 

Reporting isa supportive effort of adoption, as it signals compliance with international standards and best practices, and fosters positive relationships with stakeholders who prioritize ESG considerations. Ultimately, this enhances the company’s brand image, facilitates reputational gains, which subsequently increases financial revenues.

 

In the context of economic downturns, and in addition to the above benefits, adopting ESG principles is crucial for a company’s business continuity and operational resilience. During such difficult times, integrating ESG into corporate decision-making serves as a vital risk management strategy. Conducting thorough risk assessments is an eye-opening approach as it helps identify inefficiencies that may be otherwise overlooked. Consequently, addressing these issues can have significant financial implications, which is directly related to the duties owed by the directors’ to shareholders under the prevailing regulations.

 

-          Integrating ESG considerations into the company’s policies is not only a potential legal requirement, but it is also crucial for companies, particularly during challenging times, as it enhances a company’s resilience and long-term sustainability.

 

-          To facilitate this integration, government authorities, especially the Capital Market Authority, should proactively utilize its regulatory powers to support legislation that promotes ESG compliance. This includes issuing comprehensive instructions and guidelines to help companies navigate their fiduciary responsibilities in relation to ESG. Specifically, it is essential to develop a holistic national reporting roadmap for ESG, which is well-tailored for the risks associated with various sectors. This framework would raise awareness among businesses and incentivize them to strengthen their commitments to human rights, environmental issues, and the interests of all stakeholders by implementing clear and comprehensive ESG policies.

 

---