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Greater clarity needed over directors' duties and sustainability

A fundamental shift is under way to embed sustainability into everyday corporate decision-making. This will require changes to governance regimes – and a new focus on directors’ duties.

Until recently, little serious attention had been paid to the role of corporate governance in tackling the climate challenge. There has, however, been a marked shift, with policymakers increasingly seeing governance reforms as an important part of the solution.

What’s changed? There is a slow but steady recognition that climate transition cannot simply be an adjunct to the day-to-day issues businesses face.

Much regulation treats sustainability as an externality and focuses on driving greater transparency through the publication of modern slavery statements, ESG policies, emissions reduction targets and so on.

However, a fundamental shift is under way to embed sustainability into everyday corporate decision-making. A good example will be how transition plans need to be implemented within an organisation.

Governance regimes need to evolve

Ultimately, this change will require governance regimes to evolve in a number of significant ways. This is overdue; governance standards serve multiple purposes, including to protect investors, but they need to reflect the expectations and norms of the societies in which businesses operate.

While embedded in long-standing principles, governance models therefore need to be highly flexible and organic.

Sustainability cannot be delegated to a nominated director or a committee. All directors need to feel a responsibility, which requires greater clarity over their statutory duties as regards sustainability

So how could they evolve? First, many are calling for greater focus to be given to the role of directors’ duties. Directors are increasingly cognizant of ensuring that sustainability is woven through their decision-making. This has led some to demand a more explicit expression of those duties in statute. 

Boards need expertise for ESG data

Boards also need to ask themselves whether they have the expertise to understand the ESG data their companies generate, and the fast-evolving regulatory and policy landscape. 

This is not something that can simply be delegated to one nominated director or a sustainability committee. All directors need to feel a responsibility, which again takes us back to greater clarity being required over their statutory duties in this regard.  

Boards need to take a fresh look at the governance infrastructure of their businesses. How sustainability is integrated into, rather than simply bolted on to, existing frameworks remains a key challenge, particularly in large financial institutions. Ensuring appropriate oversight, monitoring and decision-making on sustainability issues is critical. 

Greenwashing claims are increasing pressure

These challenges are coming into focus thanks to the broadening nature of greenwashing claims and regulator-led investigations. We expect to see more intense “under the bonnet” scrutiny of businesses’ governance systems and decision-making structures, particularly as shareholders, NGOs and other stakeholders look carefully at corporate transition plans.  

Reforms are on their way, largely driven by the EU. Aside from a more explicit iteration of statutory duties, we are seeing proposals for mandatory environmental and human rights due diligence across value chains, among other things. 

This may sound like something only likely to excite lawyers, but companies should keep a close eye on where these measures head as they, too, are likely to provide avenues for NGO-driven challenges.

Demand rising for sustainability disclosure

The demand for corporate sustainability data is also set to explode. Investors want it and climate reporting standards will necessitate it. Companies could outsource this work to third parties, although they may want to be masters of their own fates. 

Those that choose to tackle the challenge themselves will need robust systems and processes in place to generate and verify data that will be scrutinised by regulators and the wider market. 

A clearer picture of what is expected from boards – and the governance standards and systems they oversee – is needed. We remain in a phase of slow evolution, but faster reform is needed to ensure directors are clear about the scope of their duties and our governance systems are fit for the challenge sustainability presents.  

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