News Analysis

Could company directors be sued for bad ESG practices?

by Stephen Conmy on Sep 15, 2021


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If a board of directors governs an organisation that knowingly carried out environmentally or socially damaging activities, could they be held accountable in the future? Could directors be sued for bad ESG, even when they leave the company?

As the planet’s climate emergency gathers pace, environmental, social, and governance (ESG) is now a prominent issue for corporate boards and their directors.

Many big corporations are very keen to show their stakeholders and customers that they are ‘doing something’ to help the planet and its people.

However, corporate activity, by its nature, is driven by profit. So, what could happen to company directors if, in the future, it is revealed that while they were aware their business was damaging the planet and its people, they did little to change their strategy while in charge?

Can directors be held responsible when they leave the company?

Do you mean, once a director, always a fiduciary? The Cambridge Law Journal suggests not, but this doesn’t mean that in the future, directors who were antagonistic towards environmental, social and governance (ESG) won’t face repercussions.

Technically, a director owes their fiduciary duty to the company. When they leave the board, the fiduciary duty is left behind. However, it all depends on the laws of the country in which the directors acted.

Could they, in the future, be held responsible and prosecuted for their actions?

It’s a difficult one to answer, and it depends entirely on the governance laws of the company’s jurisdiction.

Shareholders entrust directors with the power and authority to manage and run the company. As a result, directors should be held accountable for any actions that cause loss to the company. So the keywords here are ‘loss to the company’.

In general, and in most countries, if a board of directors knowingly does something that causes the share price to fall, resulting in a loss for the company, shareholders may sue or take action.

However, a director must be seen to have deliberately and intentionally breached their duties. In the U.S., for example, the “business judgment rule” insulates a director from liability for simply making bad decisions.

So long as the director acted in good faith, did not engage in self-dealing, and maintained a reasonable level of knowledge of corporate activities, they should be protected by the business judgment rule.

The business judgment rule is also designed to give directors space to exercise independent judgment without fear of a lawsuit from someone who disagrees or is dissatisfied with the outcome of a decision.

Can a member of the public sue a board of directors for wrongdoing?

Legally, board directors who commit misconduct can face fines, lawsuits, and possible jail time.

Even though most lawsuits are filed by shareholders against individual directors, non-shareholders may sue directors if their actions have personally harmed them.

Directors can be liable for civil attacks, such as breach of employment contracts, defamation, or sexual harassment.

However, ESG may become the next significant cultural movement. Think about it. Did any of the individuals caught up in the #MeToo movement believe that their ignorance and sense of entitlement might not come back to haunt them years later?

Turning a blind eye or not taking action was simply no excuse when it came to past behaviours. The same could apply to ESG. Corporations that have lousy track records regarding the environment and managing employees could face extremely damaging future backlash. This is a risk that all boards need to be aware of.

Are there examples of people suing corporations for damage to the environment?

A majority of climate litigation focuses on seeking damages from those responsible for greenhouse gas emissions.

One recent example is a suit filed against the German utility, RWE by a Peruvian farmer (Mr Lliuya).

The claimant claims that RWE knowingly contributed to climate change by emitting substantial volumes of greenhouse gases and, thus, bears some responsibility for the melting of mountain glaciers near his town of Huaraz. The case is ongoing.

If the farmer wins his case it will set a precedent for the proposition that an individual company can be held liable for particular climate change damages arising from greenhouse gas emissions, potentially encouraging similar lawsuits in the future.

So far, there have been no UK or Irish case decisions along these lines. Lawyers broadly agree that bringing a lawsuit seeking damages for climate impacts caused by companies – without evidence of a direct connection between activities and harm – is a very difficult task. Any claimant would find it difficult to prove the specific harm caused by the defendant’s actions.

What should boards do?

They should act now; who knows what the future will bring, what future corporate laws and regulations will look like. As climate change destroys our precious environment, future regulators could look very harshly upon the past misdeeds of certain corporations, sectors and the people in charge. Boards and their directors must prepare. Below are four first steps.

  1. Create an ESG policy. Write down a list of the things that might go wrong in your company regarding ESG. This will form the basis of your ESG policy.
  2. Set up an ESG committee. The committee should be responsible for reviewing key ESG risks regularly.
  3. Each time the board meets, ask management about any ESG concerns.
  4. Ensure that a formal reporting and monitoring system is in place. Ask the CEO to create an ESG policy that clearly states that anyone who sees an ESG problem can call this number, and their issues will go directly to the board.

Have a clear ESG policy

Company directors supervise the work of the company. Think about what could go wrong when it comes to ESG, try to get the management to think about those things, and then create structures to prevent those things. Have a clear ESG policy in place, and make sure minutes of board meetings record the fact that the board was aware of any ESG-related issues and took action to address any problems.

Boards of directors that monitor and oversee ESG risks will have a better chance of leading their organisations to success. However, the elephant in the room remains as big and immovable as ever, which is the climate emergency.

If living on the planet become unsustainable for humans, corporate life as we know it will end.

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