As the business climate and the environment continue to change, the issues being confronted by those who run corporations are also taking a new dimension. From climate impacts to clean energy and efficiency, modern corporations have to respond to calls by their stakeholders asking them to take more proactive planetary actions. In addition, corporations also have to navigate emerging and complex legislative and regulatory frameworks, mitigate greenwashing by communicating their sustainability efforts transparently, avoid climate-related litigation, respond adequately to the ESG activism of its stockholders, maintain a balanced approach in its communication strategy on Environmental Social and Governance (ESG) reporting in the face of rising Anti-ESG campaign, and ultimately, ensure that the reputation of the corporation remains undented. How well a corporation does in the management of these risks lies at the doorstep of those who run corporations, the Directors.
Traditionally, the duties of directors as fiduciaries were known and straightforward; namely:
(i) Duty of Loyalty: Corporate officers and directors must prioritize the interests of the corporation and its shareholders and avoid a conflict of interest.¹
(ii) Duty of Care: Directors must exercise reasonable care, skill, and diligence in the performance of their duties. (iii) Duty of Good Faith: Directors must act honestly and in the best interests of the corporation.²
While these traditional duties remain critical, they are fast becoming basic for modern directors. This is because fiduciaries who run corporations have to address issues that constitute material, financial, and systemic risks to the corporations and their investors, which can seriously impact the duties of directors and the disclosure obligations for companies.³ To minimize potential risks, modern directors, depending on the nature of the corporation's business, require more than just a beginner’s skill and awareness of climate and sustainability risks associated with the corporation’s operations. These skills have become crucial in providing long-term strategy on corporate risk management, overseeing corporate sustainability strategy, improving transparency of climate disclosures to better meet investors’ expectations, and ensuring that a company does not lose the trust of its stakeholders and the general public.
The World Economic Forum4 recommends eight principles for addressing climate change in order to achieve effective climate governance. These principles are divided into three different areas: Principles 1-4 cover integration of climate issues in a corporate board’s responsibilities: (i) Climate Accountability (ii) Subject Command (iii) Board Structure (iv) Materiality Assessment. Principle 5 is on strategic integration of climate issues. Principles 6-8 are steps to facilitate a long-term and sustainable focus on climate change issues: (vi) Incentivization (vii) Reporting and Disclosure (viii) Exchange.
These expanded duties of the Board have become more recognized and are frequently tested. For instance, in the United States, where a Board of Directors fails to perform its duties in line with the above requirements, the law makes provision for a shareholder to file a shareholder proposal with the Security and Exchange Commission (SEC) under Rule 14a-8(d) of the Security Exchange Act of 1934 (as Amended).
A shareholder proposal is a recommendation or requirement that the company and/or its board of directors take action that the stockholder intends to present at a meeting of the company's shareholders. The proposal should state as clearly as possible the course of action that the proponent believes the company should follow.5;
To be eligible to submit a shareholder proposal, the shareholder must amongst other requirements show that: He has continuously held:
(A) At least $2,000 in market value of the company's securities entitled to vote on the proposal for at least three years; or
(B) At least $15,000 in market value of the company's securities entitled to vote on the proposal for at least two years; or
(C) At least $25,000 in market value of the company's securities entitled to vote on the proposal for at least one year…”6
In 2023, up to 122 climate-related proposals were filed, which was a rise of 11% from 2022. 60% of climate-related proposals focus specifically on emissions reduction and reporting, while the majority of the remaining proposals focus on strategy and risk assessment. In 2024, over 600 proposals on environmental, social, and sustainable governance were filed.7 In another development, in March 2023, SEC rejected Exxon’s attempt to exclude a proposal requesting climate-related risk disclosure.8 It however allowed Amazon to exclude a request for Scope 3 emissions disclosure, citing micro-management.
As mentioned above, modern Boards have a number of risks to worry about: Litigation Risk; Failure to take climate action can expose a Board and the company to litigation that may also lead to reputation and financial losses. In ClientEarth case, the Plaintiff, ClientEarth, alleges that Shell’s eleven directors have breached their legal duties to the company by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement. The court however rejected ClientEarth’s application. This dismissal has been described as a missed opportunity to examine the operation of the relevant Companies Act provisions.10
Although there is yet a precedent on climate-related shareholder litigation against directors, it will be interesting to see what the attitude of the court would be if such action is founded on the duty of the Board of directors to prevent or avoid foreseeable risks that could arise from failure to take climate action.
Greenwashing is an unethical practice of making an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly.11 Greenwashing can arise from incorrect information or false story.12 For a corporation to avoid the greenwashing risks, the directors should set clear and measurable sustainability goals, provide honest disclosure and reporting, and an alignment with SBTi.13
Boards are also now being confronted for their leadership roles in the corporations for Climate actions. This may come in the form of civil investigation demands, lawsuits, Anti-Boycott, or Green Hushing. Although this can be argued to have political undertones, campaigns against climate and sustainability issues are expected to continue to remain a burning issue for the foreseeable future. Directors will therefore do well to continue to pursue their company’s sustainability strategy steadfastly in order to reduce implementation risks.
Finally, given the current climate and societal pressure, modern Boards;
1 Section 174 of the United Kingdom Companies Act
2 Sections 172 of the United Kingdom Companies Act
[3] Climate Governance Initiative; Primer on Climate Change: Directors’ Duties and Disclosure Obligations
[4] World Economic Forum; How to set up Effective Climate Governance on Corporate Boards;
[5] https://www.law.cornell.edu/cfr/text/17/240.14a-8
[6] Ibid.
[7] ProxyView; Climate Change
[8] https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2023/lylesexxon032423-14a8.pdf
[9] https://www.sec.gov/files/corpfin/no-action/14a-8/gccmamazon040723-14a8.pdf
[10] The London school of Economics and Political Science;
[11] Investopedia: What Is Greenwashing? How It Works, Examples, and Statistics;
[12] Harvard Law School Forum on Corporate Governance: Greenwashing: Navigating the Risk;
[13] Science Based Target Initiative.