Directors duties and the ascendancy of ESG strategy

ESG strategy will become increasingly important to businesses. In fact, it may become the single most important factor in a business’s decision-making. This is because businesses are recognizing that they cannot achieve long-term success without considering their impact on the environment, society, and governance issues. Directors currently have a duty to promote the success of the company, but the definition of success is changing. The rise of environmental, social, and governance (ESG) strategy is driving change in businesses, and directors must take this into account when making decisions.

This is a growing area of concern, and we are likely to see an increase in claims over the coming years. At the heart of any successful business is solid governance, which binds the structure, organization, and culture of a company together. When governance fails, businesses can suffer significant financial and reputational harm, as demonstrated by recent high-profile cases. When a company becomes insolvent, its directors’ decisions will be scrutinized to determine if they acted in the best interests of the company. If ESG issues were not taken into account, this could result in personal liability for the directors. As ESG becomes increasingly linked to risk, directors will need to ensure that they are aware of ESG issues and that they are taking steps to address them.

What is considered morally wrong today will be unlawful tomorrow, which makes the potential for ESG litigation vast. The Sequana case has potentially opened a Pandora's box in terms of stakeholder duties. This ruling extended directors duties beyond shareholders to creditors in appropriate circumstances and may set a precedent for promoting the interests of wider stakeholders, suggesting a transition from shareholder to stakeholder supremacy is imminent. Climate litigation is currently leading the way – and while the direct action against directors in ClientEarth vs Shell (read more about the High Court's decision here) may fail, other such ESG-related claims are likely to follow.

Legislation and regulation are hard drivers for change but soft factors – including investment, lending, insurance, employees, consumers and the procurement process – are also increasing pressure on businesses to make ESG change. For instance, investors are driven by the need to ensure their investments are ESG-compliant, while consumers are increasingly drawn to businesses that offer ethically sourced products and whose brand and reputation is concerned with 'doing the right thing'. While environmental issues have dominated the conversation thus far, social policy is now starting to dictate legislation, making the social responsibility of a business central to its operations.