"Now, more than ever, the world needs transformational leaders - not to cultivate change for its own sake, but to lead through the inevitable evolutions in business and human society." ? Hendrith Vanlon Smith Jr, CEO of Mayflower-Plymouth Capital, LLC

Environmental, Social, and Governance (ESG) criteria have undoubtedly been one of the most notable and transformative trends in corporate governance, management, and investment in the past two decades. From being a vague and largely ignored concept to becoming a business and investing priority, ESG has been at the center of the largest debates in contemporary corporate and securities law. ESG elements are now being actively incorporated into investment decisions and investors are viewing adherence to ESG norms as one of the prime means of maximizing long-term shareholder value. Such investor focus has resulted in boards of companies across the globe face a new mandate: oversight of the organization's adoption of ESG programs.

Amidst a rapidly evolving regulatory landscape and growing attention of consumers and society, corporate boards can no longer see ESG issues as "soft" reputational issues. Directors of companies worldwide need to become mindful of the interplay between ESG norms and the discharge of their fiduciary duties of care, skill and diligence that have long been recognized by Indian laws1. Moreover, directors are required to act in good faith and discharge their duties for the company's overall wellbeing and interest as well as for the protection of the environment2. In fact, a directors' specific duty towards 'protection of the environment' has also been recognized by the Supreme Court of India (SC). In M.K. Ranjitsinh v. Union of India3, the SC, while addressing the issue of fatalities of the critically endangered Great Indian Bustard due to collisions with overhead power lines, ordered such power lines be laid underground. The SC held that the Companies Act, 2013 ordains the director of a company to act in good faith, not only in the best interest of the company, its employees, the shareholders and the community, but also for the protection of environment. The Great Indian Bustard case clearly demonstrated that there is no fixed hierarchy in the duties owed by directors to the company and other stakeholders as identified. Interests of all affected parties, including non-human interest, need to be considered by directors as failure to obey the orders of the court may expose directors to legal action including contempt proceedings.

In addition to their fiduciary duties, another facet of directors' duty in relation to ESG norms revolves around making adequate disclosures in the interests of utmost transparency and optimum governance. The Companies Act, 2013 (Companies Act) provides that the annual report, to be placed by a company's board of directors before the shareholders of the company at every annual general meeting, is required to contain several disclosures relating to ESG risks. For instance, the board's annual report is required to set out details of material changes affecting the financial position of the company. It must also contain details with respect to the steps taken by the company towards conservation of energy and utilization of alternative sources of energy. Albeit generic and standard in nature, these disclosures ensure that ESG matters are duly captured by corporate boards in the company's annual report.

Particularly in the listed space, ESG disclosures and reporting requirements have recently become comprehensive and well-structured. The Ministry of Corporate Affairs, in 2019, issued the National Guidelines for Responsible Business Conduct ("NGRBC") which, inter alia, pertain to businesses being ethical, transparent, and accountable, coupled with providing goods and services in a sustainable manner, and being protective of the environment. The NGRBC consists of nine principle wise disclosures, each of which is categorized into 'essential' indicators, which every company must disclose, and 'leadership' indicators that may be voluntarily disclosed by such entities. Taking a cue from these guidelines, in May 2021, India's securities regulator, the Securities and Exchange Board of India (SEBI) amended the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 to introduce Business Responsibility and Sustainability Reporting (BRSR Framework), which is aligned with principles of the NGRBC. Effective from the financial year 2022 -2023, making disclosures as per the BRSR Framework is mandatory for the top 1,000 publicly listed companies. Failure to make adequate disclosures may also expose the company as well as its directors to regulatory action by SEBI.

Undoubtedly the Indian legislature has taken steps in the right direction by directing the incorporation of ESG-related considerations into the decision-making process of a company's board of directors. However, the big question in this regard is about enforceability - are fiduciary duties of directors as envisaged under the Companies Act enforceable in practice? Moreover, who can bring an action against directors for breach of their fiduciary duties? While the Companies Act does not specifically clarify to whom directors owe their fiduciary duties, Indian jurisprudence and common law dictate that directors primarily owe these duties to the company4. As a result, typically legal action for breach of directors' duties as set out in the Companies Act would be initiated by the company. Having said that, failure to initiate such legal action may trigger shareholder-led actions which can take the form of oppression and mismanagement claims and class action suits. Such actions may be taken on the ground that, by not considering ESG factors, the company/shareholders may suffer a loss. In these circumstances, shareholders holding the prescribed quantum of shares in the company, could potentially initiate derivative action in their capacity as shareholders to preserve and enhance the value of their shareholding in the company.

While Indian laws do provide for multiple avenues of relief to shareholders of the company, enforcement of directors' fiduciary duties in the context of ESG matters bears considerable uncertainty. Till there is no judicial precedent recognizing and enforcing directors' fiduciary duties vis-à-vis ESG, reliance will have to be placed on the high standards specified for directors under the Companies Act in the exercise of functions as fiduciaries of the company. It is now become a pressing priority for directors to keep themselves informed about the activities of the company, issues and concerns in the external environment of the company including its sector of operations, which include ESG risks to the company, as well as steps and initiatives being taken by competitors to address such challenges. Such continuous upskilling can reasonably be expected to drive enhanced participation by directors in boardroom discussions on adherence to ESG norms, and for directors to rise up to the challenge of actively adopting best practices prevailing in the industry with respect to ESG-related adaptation including making a fair disclosure of any material information relating to ESG and its risks as faced by the company. And this responsibility is not merely restricted to executive directors of companies. Though there have been judgements that provide a certain level protection to independent directors5, independent directors need to be mindful that provisions of the Companies Act that deal with director's fiduciary duties do not make any distinction between independent non-executive directors and executive directors. Resultantly, independent directors would be advised to take active part in overseeing the company's ESG performance, including monitoring and evaluating the company's ESG initiatives, and ensuring compliance with relevant laws, regulations, and industry standards.

From the above discussion, it would not be amiss to say that the onus is now on directors to make a conscious effort to engage with and seek counsel from subject matter experts with specific ESG capabilities to help them respond to the ever-evolving regulatory framework governing ESG disclosures, not only to avoid regulatory and reputational risks, but also actively steer their companies in the direction of better governance, greater accountability and enhanced stakeholder value. The question is, are directors up for this challenge? Only time will tell.


1 Section 166 (3) of the Companies Act, 2013

2 Section 166 (2) of the Companies Act, 2013

3 2021 SCC OnLine SC 326

4 (2005) 11 SCC 314

5 2022 SCC OnLine Bom 1505

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.