ESG Challenges:
Directors’ Duties
In the ever-evolving business landscape, ESG considerations have risen to prominence.
Today, industry leaders are increasingly prioritising ESG issues, aligning profit objectives with the welfare of the planet and its people. With this commitment to ESG issues, however, comes a set of unique challenges and legal intricacies that businesses must address. In this article, we explore the changes in ESG accountability, the challenges your business could face, and the actions you should consider taking.
What are the recent developments?
One significant change in the business world is the increased scrutiny of directors’ duties regarding ESG matters. Recent legal claims against major corporations, such as Shell, by minority shareholders have highlighted stakeholders’ readiness to hold decision-makers accountable for their stated ESG objectives and risk management practices, especially concerning climate change.
What are the challenges for businesses?
1. Directors’ duties: in February 2023 minority shareholders, represented by climate activist group ClientEarth, initiated a claim against Shell’s directors, alleging a breach of duty concerning Shell’s climate change obligations. While the claim was ultimately unsuccessful, it generated significant publicity and demonstrated the potential legal ramifications directors may face regarding alleged breach of duty, specifically in relation to ESG issues. Such claims can be costly, time-consuming, and reputation-damaging, regardless of their outcome.
2. Stakeholder pressure: stakeholders such as employees, investors, and consumers are exerting increasing pressure on companies to embrace ESG principles. This includes the use of litigation to advance ESG objectives. Claims of “greenwashing” for example where companies provide misleading or false information about their environmental impact, are on the rise.
3. Extension of directors’ duties: as stakeholders recognise the importance of ESG considerations for businesses, there is the possibility of an extension of directors’ duties to encompass environmental (E) and social (S) factors, in addition to governance (G). Shareholders are increasingly interested in a company’s impact on the planet and its people, not just its profits.
4. Subsidiary company liability: parent companies must also be aware of their subsidiary companies’ practices and importantly this includes those operating overseas. Recent litigation has shown that courts, especially those in England and Wales, are prepared to hold parent companies accountable for the actions of their overseas subsidiaries, particularly in cases of environmental disasters. Jurisdictional issues can be overcome, particularly in countries where the consequences of environmental disasters are not as keenly understood or appreciated and can significantly impact the outcome of such claims.
What actions should your business take?
1.
Directors’ training and accountability: ensure that directors and decision-makers are well-versed in ESG issues and the potential legal consequences of breaching their duties. Develop clear policies and guidelines for addressing ESG concerns within the company.
2.
Transparent reporting: implement transparent reporting mechanisms for ESG initiatives, including climate change objectives. This transparency can mitigate the risk of legal claims and bolster stakeholder trust.
3.
Compliance with ESG regulations: stay informed about the evolving landscape of ESG regulations and ensure compliance. Conduct regular risk assessments to identify potential legal risks associated with ESG initiatives.
4.
Ethical considerations: adopt ethical guidelines that align with industry practices and values. Establish governance structures for responsible development, transparency, and accountability.
5.
Subsidiary company awareness: parent companies should closely monitor the practices of their subsidiaries, particularly regarding ESG issues. Recognise that subsidiary’s actions can have require accountability from the parent company.
6.
Jurisdictional analysis: understand the legal frameworks governing your business’ jurisdiction. Be aware of choice of law clauses governing contractual relationships as well as considering the relevant statutes and common law that may apply in the particular set of circumstances. Remember the courts of England and Wales are often the choice of forum as the legal process here can provide more certainty on outcome and can result in better compensation. Importantly the courts of England and Wales are receptive to such claims and it is likely such litigation will continue to be housed here.
Expert opinion
ESG considerations are no longer “nice to haves” for businesses. They are integral factors to a company’s reputation, stakeholder trust, and legal responsibilities. By proactively addressing ESG issues, staying compliant with relevant and ever-changing regulations, and fostering a culture of transparency, reporting and ethical responsibility, businesses can navigate the complex legal landscape while contributing positively to society and the environment. In a world increasingly focused on ESG, these actions are a strategic imperative for long-term success.
Katie Byrne
Partner