As the intentions of many ESG-related initiatives are clearly worth striving for, we wish to raise awareness of them because this will create space to develop a sustainable strategy that will benefit everyone.
1. ESG litigation and company directors: not many examples
Compliance with ESG regulation is, as a starting point, a duty of the company and as such not of directors. However, increasingly, company directors are also being called to account for their decisions, at least in public debate. An expanding focus on management is also evident in criminal law. Cases in point are criminal reports and investigations in which the role of directors is explicitly considered.
There are not many examples of civil lawsuits against company directors regarding ESG, at least so far. A well-known example, however, is the case brought by ClientEarth against the directors of Shell before the UK High Court earlier this year. ClientEarth, in its capacity of shareholder of Shell, sought a court order against the Shell directors to implement stricter climate policies and to move away from fossil fuels. ClientEarth claimed that not doing so would go against the interest of Shell as a company. The court rejected ClientEarth’s claim. Among other interesting considerations regarding the limits of the ‘derivative’ action by ClientEarth in its capacity of shareholder on behalf of the company, the court considered that (in short) there was a prima facie case that Shell faces risks as a result of climate change, but “the management of a business of the size and complexity of that of Shell will require the Directors to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere.". The Shell directors could reasonably have concluded that their actions have been in the interest of Shell. ClientEarth failed to show that there was no basis for that.
2. New EU legislation on its way: CSRD and CSDDD
In terms of lawmaking, a lot is happening. In fact, using the word ‘tsunami’ might be a good analogy to describe the wave of highly detailed new legislation on sustainability matters. Apart from all kinds of sector-specific legislation, the most notable are two EU directives: the CSRD (the Corporate Sustainability Reporting Directive), which has already entered into force, and the proposed CSDDD (the Corporate Sustainability Due Diligence Directive), which is currently still in the making. We update you regularly on the developments regarding these directives. In summary:
- The CSRD requires companies to include a report on sustainability matters in their annual reporting, covering a multitude of prescribed indicators of ‘ESG compliance’. This includes, for instance, impact on climate change, biodiversity, and human rights. The CSRD is currently being transposed into national legislation. France was the first EU member state to transpose the CSRD, on 6 December 2023. Meanwhile, at EU level, the first set of European Sustainability Reporting Standards (ESRS) detailing the requirements of CSRD have just been published (link). The first types of companies (certain large companies) basically have to start now: they must report for the first time in 2025 about sustainability matters in the year 2024.
- On top of that, the proposed CSDDD will require companies to identify their actual and potential adverse environmental and human rights impacts and take measures to mitigate them. Currently, the European Commission, European Council, and European Parliament are in a ‘trilogue’ process to bridge their (considerable) differences with a view to determining the contents and wording of the CSDDD. A provisional agreement has just been reached by the Council and the European Parliament (on 14 December 2023; see press release). Timing of the final outcome is not yet known, but according to reports in the press, the European institutions intend to conclude the process before February 2024.
3. Impact of CSRD on company directors’ duties and liabilities
The CSRD does not contain specific rules or impose liabilities on company directors directly. The CSRD is about a company’s reporting duties. However, a company’s non-compliance with the CSRD could also have an impact on its directors’ duties and liabilities. The obligation, for example, to report on the plans of the company, including implementing actions and related financial and investment plans, to ensure that its business model and strategy are compatible with, inter alia, limiting global warming to 1.5 °C and the exposure of the undertaking to coal, oil and gas-related activities, presupposes the existence of these plans. The absence of such plans could also impact directors’ liability.
In that regard, it is important to note that, according to the Dutch draft implementing Act, it seems that the obligation to (timely) file the sustainability report will be made enforceable under Dutch criminal law. Thereby, making both the company as well as the persons having actual control (in Dutch: "feitelijk leidinggevenden") bear the risk.
In Belgium, failure to fulfill CSRD reporting obligations is expected to become punishable by criminal law based on the existing criminal offence of failure to disclose certain subject matters in the annual report. This means that directors can be held liable under civil law for any harm or loss suffered by third parties as a result of the company’s non-compliance with the CSRD, even if such third parties have a contractual relationship with the company. It will be interesting to monitor how case law on this topic will develop, especially in light of two matters: (i) the ongoing debate on the difference between collective and individual harm for shareholders, and (ii) the upcoming reform of Belgian tort law. Regarding the latter, the liability of auxiliary persons (including company directors) towards the company’s contractual parties is the subject of the most vehement debates.
In addition, besides compliance with CSRD, the disclosure of all kinds of information on ESG matters following the CSRD will have an impact on companies and potentially also on company directors. Disclosure of such information is, of course, good for transitioning to a more sustainable business and world. At the same time, NGOs, the press, hedge funds, class activists, financial markets, or governments could use the disclosed information to compare and rank companies more easily. They will therefore have the opportunity to identify and criticize companies that they consider to not improve (or transition) fast or well enough. That could also be an extra reason to sue. For instance, NGOs could seek to enforce stricter ESG policies or to claim compensation for pollution damage caused by an industrial company, possibly invoking the information disclosed by the company in question. Such information could also be used to try to substantiate that the company engaged in so-called ‘greenwashing’ (see also the proposal of the European Commission dd. 30 March 2023 for a Greenwashing Directive and the proposal of 22 March 2023 for a new Green Claims Directive). All that, in turn, could be a stepping stone towards claiming that not only the company, but also company directors have breached their duty.
Companies will need to find the right balance between disclosing enough information on their ESG ambitions and the risk of being overambitious, which could ‘backfire’. In other words, sustainability reporting is no longer without obligation nor without risk. Retrospection is always easy, and failing to report, even unintentionally, can have repercussions years later. These risks may lead to a more conservative approach by companies as to their climate ambitions in order to prevent criticism, which would be a negative side-effect of the CSRD.
4. CSDDD: direct impact on directors’ liability?
The proposed CSDDD, when adopted, could also directly impact a company directors’ duties and liabilities. This upcoming directive requires that companies take measures to mitigate adverse environmental and human rights impacts. It is still unclear what kind of adverse impacts companies should mitigate exactly and to what extent. However, it can already be concluded that this could constitute a potential new legal ground for civil liability of companies, especially given the due diligence basis of these new obligations, which require an in concreto assessment of the company’s acts and omissions. The proposed CSDDD (on the basis of above mentioned press release on the provisional agreement between Council and Parliament) also contains a specific provision on civil liability of companies for damage, resulting from non-compliance with the CSDDD. It is important to note that this civil liability seems intended to be in addition to any other existing liability scheme. Victims, but also unions or civil society organisations, will have standing to bring such claims. The institutions have set the limitation period for claims at 5 years. The agreement also limits the requirement to disclose evidence, the possibility to impose injunctive measures, and the cost of the proceedings for claimants.
Such civil liability of the company could be a stepping stone to director’s liability. Even more, the proposal for the CSDDD by the European Commission includes specific duties for company directors and their ‘duty of care’. This duty includes taking into account the consequences of their decisions concerning sustainability: where applicable, human rights, climate change, and environmental consequences (Articles 25 and 26 in the EC’s proposal). Violation of these duties could trigger directors’ civil liability. However, it is not certain whether these duty of care provisions will eventually be included in the final CSDDD. The Council struck these provisions out in its response because it opposed ‘extra’ duties and liabilities for company directors in this respect. The European Parliament, in its response to the Commission’s proposal, sought to ‘restore’ these provisions in part. It is not clear whether this duty of care of directors made it into the provisional agreement between the Council and the Parliament on 14 December 2023. We will have to await what the eventual CSDDD will say after the ‘trilogue’ will have been completed.
In terms of public enforcement, by the way, the proposed CSDDD (on the basis of above mentioned press release on the provisional agreement between Council and Parliament) gears up supervisory authorities in Member States with the power to impose penalties including “naming and shaming" and fines of up to 5% of net turnover. The CSDDD also provides that compliance with the Directive can be used as a criterion for the award of public contracts and concessions.
Note that in the Netherlands also a draft Bill on Responsible and Sustainable International Business is pending. Belgian Parliament, on the other hand, is discussing a proposal on a Due Diligence obligation for Companies throughout the entire supply chain. These are strictly national initiatives separate from CSDDD, but with the same purpose. The Dutch draft bill also contains a due diligence reporting obligation for companies. This obligation is also envisaged to be enforceable under criminal law, as follows from the draft Bill on Responsible and Sustainable International Business as well. The same goes true for the Belgian draft proposal, which states that non-compliance with obligations give rise to criminal penalties and/or exclusion from public procurements.
5. Opportunities brought by the CSRD and CSDDD
All these developments certainly bring challenges to companies and their directors. However, there are opportunities as well in pursuing the objectives of many ESG-related initiatives. Improving reporting on ESG matters is of course something worth striving for in order to make business strategies more resilient and future-proof, given the global challenges in terms of climate change, environmental pollutions and human rights violations. Also, companies will need to be able to provide such information anyway, for instance to inform investors. The CSRD (and CSDDD) could also serve as a ‘benchmark’ for what is expected of companies when talking about a large and somewhat fluid notion such as ‘ESG’. That could also be in companies or company directors’ favour when defending them against ESG-related actions. Finally, the CSRD and CSDDD will create a more levelled regulatory playing field for all companies and could also provide a business opportunity to beat competitors when it comes to sustainable entrepreneurship.
6. Practical observations
We would like to conclude with some practical observations. First of all, make sure you are well informed and remain well informed about the CSRD, CSDDD, other ESG legislation, and case-law developments. Legislative developments are happening fast, so when it comes to reporting, check very carefully what is included and what is not. If certain disclosures are made, consider how (and how strongly) they should be worded. Make sure that what you report is substantiated and verifiable. Not enough information will make you vulnerable, but so does too much information. In short, be proactive in leading your business in a sustainable transition. Be aware of the possible risks, precisely because we believe that this will create space to develop a sustainable strategy.
The contents of this article is intended to provide general observations on the subject matter. Please contact us if you require more information.