How-to guide: How to navigate the interaction between directors’ corporate governance duties and ESG (Global)

Introduction

This How-to guide will assist in-house counsel, private practice lawyers, boards of directors and compliance professionals to understand the interaction between directors’ corporate governance duties and environmental, social and governance (ESG). The general principles will be applicable in many jurisdictions and the guide has a specific focus on the UK.

This guide covers the following:

The importance of corporate governance
The impact of existing and new legislation
The interaction between ESG and directors’ corporate governance duties
Compliance risks for directors
Practical tips

It can be read in conjunction with How-to guides: Understanding environmental, social and governance (ESG), What general counsel (GC) need to know about environmental, social and governance (ESG), How-to guide: Understanding environmental, social and governance (ESG), and How to consider and navigate the consequences of ESG risks.

Section 1 – The importance of corporate governance

The classic UK definition of corporate governance can be found in the 1992 report ‘The Financial Aspects of Corporate Governance’ (the Cadbury Report), which described it as ‘the system by which companies are directed and controlled.'

As part of corporate governance, company directors are subject to fiduciary duties to ensure that they act appropriately when making decisions on behalf of the company. These duties are set out in legislation, common law and in various corporate governance codes.

All directors (irrespective of whether they have an executive position) have a supervisory oversight role and are responsible for ensuring that the necessary controls over the activities of the companies they lead are in place and working effectively.

Directors’ responsibilities include:

the company’s long-term success;
effective decision-making;
setting the company’s purpose, values and strategy;
effective framework of controls; and
effective engagement with shareholders and other stakeholders.

Some of the primary UK and US fiduciary duties of directors include:

Duty of care: Directors should exercise reasonable care, skill and diligence in the discharge of their stewardship functions, including taking reasonable precautions against reasonably foreseeable harms.
Duty of loyalty: Directors should act in the best interests of the company, avoiding conflicts of interest and self-dealing.
Duty of good faith: Directors should act honestly and with integrity, making decisions that they genuinely believe are in the best interests of the company without intentional misconduct, neglect or a conscious disregard for their responsibilities.

These duties provide a framework for directors to act responsibly and ethically, which in turn promotes investor confidence, protects the company from legal and financial risks, and supports sustainable business practices. As the corporate landscape evolves, integrating ESG factors into these duties has become increasingly significant.

Directors’ statutory duties in the UK are set out in Chapter 2 of the Companies Act 2006 and include:

to act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred;
to promote the success of the company for the benefit of its members;
to exercise independent judgement;
to exercise reasonable care, skill and diligence;
to avoid conflicts of interest;
not to accept benefits from third parties; and
to declare an interest in a proposed transaction or arrangement.

In addition, companies are subject to statutory controls as a separate legal entity and directors are responsible for ensuring the company complies with these statutory controls.

Section 2 – The impact of existing and new legislation

ESG is an overarching term used to refer to environmental, social and governance aspects of an activity. For further information about ESG generally, see How-to guide: Understanding environmental, social and governance (ESG).

The legal landscape surrounding ESG and directors’ duties is rapidly evolving, with significant implications for corporate governance. Some examples of the relevant legal drivers from different jurisdictions are provided below.

2.1 UK Companies Act 2006 (CA 2006)

The CA 2006 sets out the general duties of company directors in the UK. The following duties are particularly relevant from an ESG perspective:

the duty to promote the success of the company (section 172, CA 2006);
the duty to exercise reasonable care, skill and diligence (section 174, CA 2006); and
the duty to prepare a strategic report that includes a sustainability information statement (section 414A, CA 2006).

The duty to ‘promote the success of the company for the benefit of its members as a whole’ in good faith (section 172, CA 2006), often referred to as the ‘Section 172 duty’, requires directors to have regard to the following non-exhaustive list of factors:

the likely consequences of any decision in the long term;
the interests of the company’s employees;
the need to foster the company's business relationships with suppliers, customers and others;
the impact of the company's operations on the community and the environment;
the desirability of the company maintaining a reputation for high standards of business conduct; and
the need to act fairly as between members of the company.

A strategic report must be prepared for each financial year by all companies that are not small or micro-entities. It must contain:

a fair review of the company’s business; and
a description of the principal risks and uncertainties facing the company.

Section 414 CZA, CA 2006 requires boards to include a statement in the strategic report setting out how they addressed their section 172 duties.

In 2016, the CA 2006 was amended to place additional requirements on certain publicly quoted companies and large private companies to include a non-financial information statement in their strategic reports, covering topics such as environmental matters and human rights. In 2022, the CA 2006 was further amended to incorporate a requirement to provide climate-related financial disclosures that are aligned with the Task Force on Climate-related Disclosures (TCFD) recommendations.

As a result, those companies that fall within the definitions set out in section 414CA, CA 2006 (certain public companies, large private companies and LLPs) must include a non-financial and sustainability information statement (NFSIS) (previously called a non-financial information statement) within their strategic report. The requirements for the NFSIS are contained in section 414CB, CA 2006 and include:

the climate-related financial disclosures of the company; and
information relating to environmental matters (including the impact of the company’s business on the environment), the company’s employees, social matters, respect for human rights and anti-corruption and anti-bribery matters.

For further details, see the non-binding guidance from the Secretary of State for the Department of Business, Energy and Industrial Strategy, Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs.

In October 2024, the Company Directors (Duties) Bill was presented to Parliament to amend section 172 of the Companies Act 2006 to require company directors to balance their duty to promote the success of the company with duties in respect of the environment and the company’s employees. The Bill is currently going through the House of Commons with its 2^nd reading scheduled for 16 January 2026.

The increase in ESG-related reporting requirements for companies in the UK brings ESG matters squarely within the responsibility of company directors, demonstrating a clear need for directors to keep ESG factors in mind when exercising their fiduciary duties.

2.2 EU ESG reporting requirements

Directive (EU) 2014/95 – the Non-Financial Reporting Directive (NFRD) has been a cornerstone of ESG disclosures, requiring large, in-scope companies to report on environmental, social, and employee-related matters, as well as human rights, anti-corruption, and bribery issues.

Directive (EU) 2022/2464 – the Corporate Sustainability Reporting Directive (CSRD) expands these reporting requirements, making ESG reporting more detailed and standardised across the EU. These reporting requirements increase the accountability of company directors in managing ESG risks and opportunities. Under the CSRD, members of the administrative, management and supervisory bodies of a company have collective responsibility for ensuring that financial statements and management reports are drawn up and published by the requirements of the CSRD. Specifically, the management report must include information to understand the company’s impacts on sustainability matters and vice versa. This information includes a description of:

The company’s business model and strategy;
The time-bound targets related to sustainability matters;
The role of the administrative, management and supervisory bodies concerning sustainability matters, and of their expertise and skills to fulfil that role;
The company’s policies in relation to sustainability matters;
Any incentive schemes linked to sustainability matters which are offered to members of the administrative, management and supervisory bodies;
The due diligence process implemented by the company regarding sustainability matters, including identified adverse impacts and actions taken to address them;
The principal risks to the company related to sustainability matters; and
The indicators relevant to the above disclosures.

The CSRD came into force in January 2023, and each EU member state was required to transpose it into national legislation by July 2024. There are central requirements to CSRD that must be transposed, but there are also areas where CSRD leaves some discretion for a member state to impose more stringent rules, known as ‘gold plating’. This includes a discretion for member states to change or enhance directors’ duties. For example, France has introduced specific and enhanced duties concerning the sustainability report for directors, stipulating criminal sanctions for directors with both a fine and jail time of up to five years (see Ordinance No. 2023-1142 of 6 December 2023).

In February 2025, an ‘Omnibus’ Directive was proposed by the European Commission, aiming to simplify and streamline the regulatory framework to reduce the burden on companies resulting from certain corporate sustainability reporting and due diligence requirements. If adopted, it will limit the obligation of sustainability reporting to large EU companies with 1000+ employees during the financial year, excluding small and medium-sized companies. Part of the Commission’s Omnibus package was the ‘Stop-the-Clock’ Directive which was adopted in April 2025, and which postpones by two years the entry into application of the reporting requirements for the second and third wave of companies (those which would have to report for financial years starting on or after 1 January 2025 and 2026 respectively). Member states must transpose this directive by 31 December 2025.

2.3 Other reporting legislation

There has been a growth in legislation around the world that requires companies to produce reports on information related to human rights and environmental matters, including both general information and information relating to a specific product or service. Within most of this legislation, boards are required to approve and attest to the steps and the information included in the reports (eg, by signing the reports). By undergoing this approval and attestation process, boards are familiarising themselves with their management’s approach to addressing these issues within the company and its supply chains, and also taking responsibility for the accuracy of the information provided. Some examples of such legislation include:

the Corporate Sustainability Due Diligence Directive (CSDDD) 2024 (EU);
the Modern Slavery Act 2015 (UK);
the Modern Slavery Act 2018 (Australia Commonwealth);
the Fighting Against Forced Labour and Child Labour in Supply Chains Act 2023 (Canada);
the Act on Corporate Due Diligence in Supply Chains 2021 (Germany);
the Transparency Act 2021 (Norway); and
the Duty of Vigilance Act 2017 (France).

Section 3 – The interaction between ESG and directors’ corporate governance duties

ESG factors have increasingly become central to corporate governance and decision-making. Traditionally, directors' duties have focused on maximising shareholder value and acting in the company’s best interest. However, the rise of ESG has broadened the scope of these responsibilities, requiring directors to consider the long-term impacts of ESG risks. One example can be seen in a 2024 Gartner Survey, which revealed that 69% of the CEOs surveyed across the world and in different industries view sustainability as a leading business growth opportunity. In the 2025 Gartner CEO and Senior Business Executive Survey, sustainability remains a top 10 CEO priority in 2025. This reflects a growing recognition that sustainable business practices are essential not only for ethical reasons but also for long-term financial performance. This evolution presents a unique challenge for directors, who must balance these considerations with their traditional fiduciary duties. Understanding these duties and their importance is crucial for directors aiming to navigate this complex landscape effectively.

3.1 Decision making

In the current business climate, ESG considerations often align with directors’ risk management and corporate oversight duties. Directors are expected to oversee the company’s risk exposure, and ESG factors represent significant risks, from climate change and resource depletion to social issues such as labour practices and diversity.

When making decisions – whether short or long term – it is more important than ever for directors to have ESG factors at the forefront of their minds. For example, when contemplating expanding a business into new territory, directors will have to balance the potential increased market share and financial gain with any ESG risks, which could include:

climate impacts resulting from available infrastructure in the new territory and any necessary transportation requirements;
climate risks, such as flooding or other natural disasters;
human rights impacts due to labour standards in the new territory; and
supply chain issues arising from a need to source raw materials, production or sales partners, or to service facilities such as offices or factories.

Every business decision must take ESG factors into account. Even a seemingly small decision to switch suppliers for cleaning services or office stationery could have potential implications if supplier due diligence is not properly performed. Where decisions are not made by directors but are delegated to others within a company, effective governance procedures should be in place to ensure that relevant factors are taken into account by the decision maker. For further information about supplier due diligence, see Checklist: Conducting environmental, social and governance (ESG) due diligence in supply chains (UK).

3.2 Reporting

As set out in section 2 above, the requirements for companies to cover ESG in their annual reports are increasing across many jurisdictions.

In the UK, when directors are preparing their Section 172 statements (see section 2.1 above), they must take into account stakeholder interests, legal requirements, ESG impacts, ethical standards, potential risks and have transparency in the decision-making processes (see section 414C, CA 2006 for the contents of a strategic report). In addition to the legal requirements relating to ESG issues outlined in section 2.1 above, many stakeholder interests are starting to revolve around ESG factors and as a result, companies are under pressure to address ESG factors and report them in their Section 172 statements.

In addition, ESG factors are being increasingly included in companies’ annual reports. For example, in construction company Morgan Sindall’s 2024 Annual Report, the CEO’s statement states: ‘As the business grows, we must remain committed to operating as a responsible business by creating value for communities and decarbonising our activities. In 2024, we published our ﬁrst Transition Plan for meeting our science-based carbon-reduction targets and identiﬁed new opportunities to achieve emissions reductions across the Group. […] We have also expanded our ways of measuring and increasing the social impact of our projects.’ The fact that ESG was given equal prominence to financial performance in the opening statement demonstrates the extent to which ESG is becoming a top consideration for company directors.

Section 4 – Compliance risks for directors

The growing need for directors to take ESG factors into account in their decision-making brings with it a heightened risk of liability for directors. If a director fails to consider ESG factors when making a decision that could affect the success of the company, they could be in breach of their duties.

Directors’ duties are owed to the company, and in general terms, the company is the proper claimant for a remedy in respect of breaches of duty. In the UK, the consequences for a breach of directors’ duties include compensation, injunctive relief, disqualification from acting as a director, criminal liability and individual liability under a regulatory regime (see Company law guide: Liability of directors and relief).

As a result of the increased focus on ESG in both legislation and more widely, there have been several cases related to the alleged failures of directors to fulfil their ESG-related duties. There has been an increase in pressure brought by activists and shareholders who seek to ensure that boards of directors prioritise ESG commitments.

One such case was brought by ClientEarth against Shell’s board of directors in February 2023 (ClientEarth v Shell [2023] EWHC 1897 (Ch)). This was the first case of its kind to attempt to hold corporate directors personally liable. ClientEarth alleged that Shell’s long-term commercial viability was at risk due to the board’s poor handling of the company’s energy transition strategy, and accordingly the directors breached their duties under the CA, including section 172 (see section 1.1 above). While the case was ultimately unsuccessful, litigation like this brings reputational damage to companies and is a reminder to directors of the possible consequences when failing to consider ESG factors.

In light of the evolving legal frameworks, ignoring ESG issues can constitute a breach of directors' duties, as it may compromise the long-term interests of the company and its shareholders. For example, in Australia, it has been suggested that directors can now be found liable for the failure to disclose nature-related impacts that pose a material risk of harm to the company (see invest ESG article).

Section 5 – Practical tips

Some practical tips for lawyers and compliance professionals when advising boards on their duties in relation to ESG are set out below.

Integrate ESG into the corporate strategy: Encourage directors to incorporate ESG considerations into their strategic planning by setting clear, measurable ESG goals that align with the company’s mission and long-term objectives. For more information on the role of in-house counsel and their teams in approaching and embedding ESG, see How-to-guide: How to approach and implement an ESG strategy and What general counsel (GC) need to know about environmental, social and governance (ESG).
Have a director responsible for each area of ESG: Assigning a director to oversee each area of ESG ensures focused leadership and accountability within the board, facilitating better decision-making, risk management, and alignment with the company’s sustainability goals.
Stay informed on ESG legislation: ESG-related legislation and regulations are evolving rapidly across different jurisdictions. It is important that the board’s advisors continuously update their knowledge of ESG-related developments to provide accurate advice.
Enhance board competency in ESG: Organise and recommend training sessions for board members on ESG issues. Understanding key ESG concepts and frameworks enables directors to make informed decisions and integrate ESG into their oversight functions and highlight where there are gaps in skill set on the board.
Encourage diverse expertise: Advise on board composition to include members with diverse backgrounds and expertise, particularly in sustainability and social governance. This diversity can enhance the board’s ability to address ESG issues effectively.
Ensure accurate and transparent reporting: Ensure the company establishes reliable systems for collecting and analysing ESG data. Accurate and transparent reporting can bolster the company’s reputation, meet stakeholder demands for accountability, and equip boards to make good, considered decisions.
Strengthen documentation and board minutes: Encourage directors to record discussions and decisions on ESG issues clearly in board and committee minutes. This creates an evidential trail showing ESG matters were properly considered, which can be crucial if decisions are later reviewed in the context of directors’ duties or regulatory scrutiny.
Use established reporting frameworks: Use established ESG reporting frameworks, such as the Global Reporting Initiative (GRI) and the IFRS Sustainability Disclosure Standards. These frameworks offer structured approaches to ESG reporting, facilitating consistency and comparability.
Embed ESG into risk and internal control frameworks: Advise boards to integrate ESG factors into existing enterprise risk management and internal control systems, ensuring they are monitored, escalated, and mitigated with the same priority as financial and operational risks.
Conduct ESG risk assessments: Perform comprehensive risk assessments to identify ESG-related risks and develop mitigation strategies. This proactive approach helps prevent potential issues that could impact the company’s reputation and operations. See Checklist: Conducting environmental, social and governance (ESG) due diligence in supply chains (UK).
Promote stakeholder engagement: Encourage directors to engage actively with stakeholders, including investors, employees, customers and communities. Regular dialogue can provide valuable insights, help build trust and provide directors with the information they need to make good decisions.
Be aware of shareholder activism: Ensure ESG disclosures and ESG-related conduct are not misleading to minimise the risk of greenwashing and bluewashing, as well as the risk of shareholder legal action for ESG-related conduct.

^* This practical resource was produced in partnership with Ardea International.

Additional resources

Stibbe, ESG and potential director’s liability: taking the lead in the transition to more sustainable business operations
Seeds of Law, Towards sustainable governance: The role of the director in ESG issues
InvestESG, Australian directors can be found liable for a failure to disclose nature-related impacts, a legal opinion found
Reuters, ESG liability for companies and directors: a shifting landscape
Corporate Sustainability Reporting Directive
Corporate Sustainability Due Diligence Directive
Companies Act 2006 (Chapter 2)
Modern Slavery Act 2015
Modern Slavery Act 2018 (Australia Commonwealth)
Fighting Against Forced Labour and Child Labour in Supply Chains Act 2023 (Canada)
Act on Corporate Due Diligence in Supply Chains 2021 (Germany)
Transparency Act 2021 (Norway)
Duty of Vigilance Act 2017 (France)

How-to guide: How to navigate the interaction between directors’ corporate governance duties and ESG (Global)

Introduction

Section 1 – The importance of corporate governance

Section 2 – The impact of existing and new legislation

2.1 UK Companies Act 2006 (CA 2006)

2.2 EU ESG reporting requirements

2.3 Other reporting legislation

Section 3 – The interaction between ESG and directors’ corporate governance duties

3.1 Decision making

3.2 Reporting

Section 4 – Compliance risks for directors

Section 5 – Practical tips

Additional resources

Related Lexology Pro content

How-to guides:

Checklists:

Other:

Filed under

Topics

ESG

Corporate governance

USA

United Kingdom

Company & Commercial