ESG and Directors’ Duties

Mayer Brown
Author   James Whitaker

As the world marks Earth Day 2021, and global leaders, and society at large, call for urgent action to combat “the coming disasters of climate change and environmental destruction“, it is an apposite time to consider the role of company directors in promoting positive environmental practices. 

The rapidity with which Environmental, Social and Governance (ESG) issues have come to prominence since the onset of the COVID-19 pandemic has been staggering.  The welcome (re)calibration of priorities away from a purely Hayekian ethos towards sustainability and good corporate citizenship, a trend which has been evident for some years (indeed decades), but which was accelerated by the events of 2020, has necessitated a commensurate (re)calibration of approaches to governance within companies. 

Those who lead, and manage, companies of all sizes, and across all sectors (and jurisdictions) are taking heed of the significance of the broad societal change in favour of demanding sustainability (perhaps most evidently in the context of environmental impact and carbon reduction) as well as, of course, its more immediate implications in terms of emerging legal and regulatory requirements, and reputational imperatives (see here for a fuller discussion of directors’ duties in the context of ESG).  The link between corporate value, and values, is becoming more apparent, in both tangible, and less tangible, ways. 

Having regard to ESG factors is an increasingly important element of discharging directors’ fiduciary – and other – duties satisfactorily; the benefits of doing so proactively and meaningfully are inherent in improving a company’s ESG performance (for example, in reducing the cost of capital), but the downside risk of failing to adhere to developing ESG factors is also becoming acute, particularly as climate litigation continues to gather pace.  Similarly, considering the interests of a (far) wider range of stakeholders – beyond merely shareholders – is an increasingly integral part of the duties to promote the success of the company, and to act with requisite care, skill, and diligence; this manifests very clearly in the context of environmental issues. 

The opportunities for directors, and the companies they lead, in the “ESG era”, are significant, if understood and approached properly.  But so too are the risks.  Failing to discharge the duties owed by directors to their companies, for example by causing the company to fall short of one of the many emerging regulatory requirements, or misstating or reporting the company’s approach, and performance, are increasingly becoming direct litigation risks (particularly – but not only – if stock value is impacted in the context of public companies). 

While the growth of public commitments to sustainability – and wider ESG – goals that has been a prominent feature of the news agenda over the past couple of years is to be welcomed, those responsible for the announcements, and for performance against those announcements, need now more than ever to be mindful of the importance of accuracy and compliance.