In-House Counsel

5 Steps To Navigating Fiduciary Duties In The ESG Era

Boards that prioritize governance and fiduciary responsibilities are well-positioned to navigate the complex challenges and opportunities that lie ahead.

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2022 ESG ATL ArticleThe landscape of fiduciary duties is evolving rapidly, and ESG (Environmental, Social, and Governance) considerations are at the forefront of this transformation. Corporate boards find themselves under the scrutiny of various stakeholders, including investors, politicians, regulators, clients, and activists, each with strong opinions on how ESG should be integrated into corporate decision-making.

Strong corporate governance is essential in this context. Fiduciary duties are the bedrock upon which responsible corporate governance is built.

Fiduciary duties are enshrined in corporate law to ensure that board members act in the best interests of the company and its shareholders. Failure to meet these obligations can lead to legal consequences, including lawsuits and personal liability for directors. Conversely, good governance builds trust and enables corporations to contribute positively to society while minimizing legal and reputational risks. In an era where ESG considerations are increasingly vital, boards that prioritize governance and fiduciary responsibilities are well-positioned to navigate the complex challenges and opportunities that lie ahead.

When it comes to evaluating fiduciary duties, it’s crucial to remember that courts focus on the decision-making process rather than the specific outcome. Boards must approach ESG matters with appropriate expertise and exercise their best business judgment. Proper documentation of the decision-making process can also help shield boards from potential liability.

Here are five key steps for boards to follow in fulfilling their fiduciary duties in the ESG era,

Review Business Context

Boards should refrain from adopting a one-size-fits-all approach to ESG challenges. Instead, they should start by assessing how ESG risks and opportunities apply to their specific circumstances. Considerations may include the industry in which the company operates, its locations, strategic goals, operational realities, and risk profile. Each company’s ESG strategy should be tailored to its unique context.

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For example:

  • Fashion companies need to consider consumer perceptions regarding waste and labor conditions.
  • Tech companies must weigh the impact on talent acquisition and retention.
  • Industrials should evaluate regulations and opportunities for operational efficiency.

Develop The Business Case

Boards must ensure that the business case for ESG is firmly linked to shareholder value, business opportunities, and risk mitigation. This linkage is particularly crucial in the United States, given the political context and the rise of the anti-ESG movement. A strong business case can help boards justify their ESG decisions to stakeholders and demonstrate the value of ESG initiatives to the company’s overall success.

Communicate

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It’s not enough to build a solid business case and file it away in board minutes. Effective communication is key. Board members, executives, investors, and other stakeholders must consistently communicate the business case for ESG. Transparency and engagement with stakeholders can enhance trust and support for the company’s ESG initiatives.

Integrate

ESG considerations should not exist in isolation as a separate, siloed activity within the organization. Such isolated efforts are unlikely to succeed and can become targets for criticism. Instead, boards should integrate ESG into every facet of the business, including operations, strategy, and budgeting. By incorporating ESG principles into the core of the business, companies can demonstrate a genuine commitment to sustainability and responsible practices.

Document

General counsel plays a pivotal role in documenting the decision-making process. It’s essential to incorporate time for ESG discussions into board agendas, consider ESG expertise when discussing board composition, and provide ongoing board education on ESG matters. The adage that “process matters” holds true in the ESG era, where transparency and accountability are paramount.

In addition, EU boards must be particularly vigilant, given the introduction of the Corporate Sustainability Due Diligence Directive (CSDDD). This directive expands directors’ duty of care to include oversight of due diligence and climate-related requirements. Boards must stay informed about these regulatory changes and ensure they are well-prepared to meet these expanded responsibilities.

The ESG landscape is rapidly changing, and boards must adapt to meet the evolving expectations of various stakeholders while fulfilling their fiduciary duties. By following these five key steps — reviewing the business context, developing the business case, communicating, integrating, and documenting — the board can navigate the complexities of ESG and ensure that their decisions are aligned with the best interests of the company and its stakeholders. In this era of heightened ESG awareness, responsible corporate governance is not just a choice but an imperative for long-term success.

Christine_UriChristine Uri is a Top 100 Voice in Sustainability. She advises general counsel on the development and implementation of environmental, social, and governance (ESG) programs. As a former Chief Legal Officer and Chief Sustainability Officer for a global sustainability company, Christine knows what it takes to move ESG to the top of the corporate agenda. Christine believes that improving corporate performance on ESG measures is critical to building a more sustainable world. She is passionate about inspiring and empowering in-house legal teams to provide ESG leadership. You can follow Christine on LinkedIn. 

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