Importance of ESG to business strategy and survival
As part of London International Disputes Week 2023, we hosted a session exploring the increasing importance of ESG to business strategy and survival, and the resulting impact on directors' duties. During the session Partner and Head of Business Advisory, Vernon Dennis, and Chris Osborne, Partner at FRP Advisory, considered the rising influence of investors, employees and consumers on business decision-making and whether this, combined with increasing ESG legislation and regulation, will force directors to adopt a 'triple bottom line' approach to measuring business performance.
Read our key takeaways from the session below or click thumbnail to watch the video.
The rise of ESG strategy means that directors' duties have become more crucial than ever before. Click thumbnail to watch our full session or read our key takeaways below.
Key takeaways
Directors duties will evolve in line with the rise 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.
A failure to take account of ESG could result in a director’s personal liability
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.
ESG claims against both companies and directors will be the biggest growth area for litigation in the next two decades
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.
Drivers for change
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.
Conclusion
The rise of ESG strategy means that directors' duties have become more crucial than ever before. Directors need to adapt to the changing definition of success and adopt ESG policies that demonstrate their commitment to social responsibility. With many companies behind the curve in implementing ESG policies, an increase in regulation can only be a good thing. A move towards standardisation will help to establish a level playing field and make it easier for businesses to benchmark their ESG credentials – something that is likely only a few years away. Directors will need to keep up with these emerging standards and stay one step ahead to safeguard their businesses.
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