What you need to know about directors' duties and ESG

Authors: Mark Smyth, Partner; Timothy Stutt, Partner

This article is also featured on our dedicated Mining ESG hub, along with a range of other insights and resources to help you navigate the ESG landscape.

ESG presents complex and multifaceted issues for energy and resources companies. While the nature of the challenges is evolving and changes may be uncertain, it is clear that climate change, human rights and indigenous heritage risks will be important factors in many short, medium and long-term decisions for mining companies.

Boards in the energy and resources sector face heightened scrutiny on the standard of care to be exercised with respect to issues arising from ESG impacts – and this will only continue as market expectations and institutional shareholder positions evolve.

In this article we break down the key things you need to consider from an ESG perspective when discharging directors’ duties.

How ESG has changed the landscape for directors

In Australia, directors have a duty to act with due care, skill and diligence and in the best interests of the company. There have been significant regulatory and judicial developments and activist action in the last 12 months that has resulted in heightened scrutiny on the exercise of directors’ duties in an ESG context.

Discharging directors' duties in a climate change context

To discharge duties in relation to climate risks, it is not enough to consider and disclose such risks – directors also need to ensure they have taken reasonable steps to determine the climate change strategy of the business, and that this strategy is supported by the appropriate systems and processes within the business.

Further, although companies are increasingly facing pressure from institutional shareholders and activists to make bold statements on climate change, care should be taken in formulating climate strategies. Over-promising on climate-related statements may give rise to claims of “greenwashing”.

Beyond formulating climate policies, boards need to assess climate change risks in making investment and project approvals decisions or entering into new long term contracts. Consideration of climate risks needs to be balanced against the business’ core objectives, including the need to realise shareholder value. Directors should be aware of, and continue to monitor, novel claims that are being brought by activist groups in relation to project approvals for emission-intensive projects (read more about novel claims here). And when making investment decisions, any action should be aligned with the business’ climate strategy.

Discharging directors' duties in a human rights context

Human rights violations, including in offshore subsidiaries and supply chains, presents key risks to directors. Directors should be aware of their obligations under modern slavery laws and ensure that companies have a robust governance framework in place to identify, assess and appropriately respond to human rights risks. Further, directors may consider standards beyond those imposed by directors’ duties – as markets and shareholders have an increased focus on corporate social responsibility, directors should be aware of the potential reputational damage to the business which may arise from the handling of human rights risks.

Key takeaways

Navigating directors’ duties in an ESG context is becoming increasingly difficult and the landscape is continually evolving. Climate change and human rights will continue to be at the forefront of social consciousness, and we will continue to see novel claims being brought in relation to these issues that will impact how directors should consider their duties. Directors need to be alive to these risks and ensure positive actions are being taken, while understanding the evolving standards in relation to ESG issues.