ESG concerns are disrupting boards’ agendas and executives’ responsibilities: practical reasons for thinking broadly

Friday 19 November 2021

Natalia Nicolaidis

Dynamic Counsel Ltd, Nicosia


Amelie Dueckelmann-Dublany

University of Konstanz, Baden-Württemberg

Note: This article was prepared by Dynamic Counsel, in alliance with Moussas & Partners[1].

The role of boards and the remit of executives are changing

Various macro themes, including some that have been occasioned by the pandemic, have created a wave of ESG expectations. Boards and senior executives must be aware of them and assess their interplay with corporate strategy. Investors, however, are not a homogeneous body and, as such, value the integration of ESG into corporate strategy differently to board members and executives. Until legal tools provide more board flexibility, boards need to keep an open mind in their deliberations as to the alignment of ESG goals with corporate strategy.

Mega trends

In May 2020, the Anglo-Australian mining corporation, Rio Tinto, demolished caves in Western Australia’s Juukan Gorge. This was done despite the fact that Juukan Gorge was the sole inland site of 46,000 years of continuous Aboriginal occupation. Rio Tinto acted in compliance with the requirements of Western Australia’s Aboriginal Heritage Act 1972, as it prepared for the extraction of AUS$135m of high-grade iron ore. However, the year after the company had gained approval for the destruction, an archaeological dig confirmed the cultural importance of the site, where 28,000-year-old bone tools were discovered. Regardless of this, the 1972 Act did not require Rio Tinto to change its plans in light of this discovery.

An internal company review published in August 2020 detailed that ‘a series of decisions, actions and omissions over an extended period of time’[2] prompted Rio Tinto to proceed, nonetheless.

The blast at Juukan Gorge led to global press coverage. Investor disquiet followed, which led to the internal examination of Rio Tinto’s decision-making and judgements.

Rio Tinto acknowledged the concerns of significant stakeholders regarding executive accountability. The corporation cut executive bonuses before issuing an apology. These initial measures were considered insufficient by both shareholders and bodies such as the Australasian Centre for Corporate Responsibility (ACCR). Consequently, in September 2020, Rio Tinto announced the resignation of its Chief Executive Officer (CEO) and two senior executives[3]. A statement, view from the Board and a series of commitments are available on the Rio Tinto website[4] in relation to these events.

These high-status resignations outlined above demonstrate the power and increased assertiveness of stakeholders, who are holding boards and executives accountable for failing to meet ESG responsibilities.

The aforementioned events also highlight the level of deliberation now demanded of boards and senior executives in relation to such concerns. As a result, risk experts and business leaders are beginning to understand the diversity and gravity of ESG risks.

These mega-trends are geopolitical in nature, and are related to:

  • climate change;
  • pandemics;
  • high energy prices;
  • supply-chain disruptions; and
  • increased cultural inclusiveness and sensitivity.

Although the above list is not exhaustive, these are some of the key issues that are causing board agendas and executive remits to become broader.

Directors’ duties

Directors’ duties differ across jurisdictions. They are expressed in statute, regulatory instruments and in case law. While not all are fiduciary duties in the strict legal sense, corporate governance laws generally reflect core fiduciary principles and expectations relating to conduct, trust, loyalty and discretion.

Where there are failures to act with care, skill and diligence, litigation frequently ensues. Recent litigation focuses on governments, corporations and individuals for torts or for a failure to meet a duty of care. Regarding climate change, we are seeing action alleging a failure to:

  • mitigate emissions (which seeks to establish liability for emissions and[5] the associated climate change impacts);
  • to adapt (which alleges a failure to adequately manage the physical or economic transition risks associated with climate change, or from inaccurate disclosure of related exposures); and
  • to implement transition-specific regulatory compliance (which arises from laws and standards introduced to implement the economic transition).

The United Nations (UN) Guiding Principles on Business and Human Rights (UNGPs), endorsed by the UN Human Rights Council in June 2011, are internationally accepted standards of corporate behaviour. Their formalised expectations for corporate responsibility, however, are guidelines, not law. Having said this, these expectations can assume greater significance when they are incorporated in customer contracts, or in principles adopted by a company at the behest of shareholders or other stakeholders.

These expectations can include ‘supply chain liability’, whereby companies are deemed liable for ESG impacts within their supply chains. This is becoming more common in procurement or supply contracts. Supply chains present challenging issues for companies operating internationally, and boards must be aware of the risks that supply chains present. Owing a contractual duty of care to assure that one’s own direct or indirect supplier provides a healthy and safe working environment creates diligence responsibilities. These supply chain risks are mitigated by human rights due diligence, for which a growing corps of consultants are prepared to assist. Adopting reviewable standards for whether, or when, this duty of care is applicable will facilitate the work of boards and executives.

The need for ESG awareness by boards and executives

Regardless of current uncertainties regarding ESG requirements, boards and senior executives must be aware of ESG issues and trends, and they must discuss macro themes when they affect corporate strategy. While there are no prescriptive expectations about where in the boardroom sustainability and other ESG concerns ought to reside (whether in the audit committee, a governance committee, a separate risk committee, or elsewhere), boards must ensure that they enable a risk and opportunity balance. Accordingly, the CEO must ensure that some senior executive function covers these concerns on a daily basis; this may be the Chief Financial Officer (CFO), the Chief Risk Officer (CRO), the Chief Operating Officer (COO) or a special ESG function. To achieve this (without becoming operational in nature in the process), boards and their committees will need to identify long-term ESG issues; discuss ESG strategy; and engage in a dialogue with stakeholders on ESG concerns, costs and benefits.

Furthermore, boards and CEOs must also be aware of the agendas of activist shareholders. Though less active in Europe than in the United States, activists can focus on near-term financial underperformance, as well as ESG issues.

With activists and non-governmental organisations (NGOs) now joining forces, corporate leadership and boards need to respond by informing long-term corporate strategy and incentivisation to tackle both financial and ESG underperformance.

In the case of ExxonMobil, a small hedge fund investor succeeded in securing multiple new members on the board and exposed the vulnerability of the existing board to ESG concerns, despite the company reporting its biggest quarterly earnings in more than two years. After a shareholder vote, ExxonMobil placed additional emphasis on carbon capture projects.

Even in the context of takeover-bid consideration, board members and senior executives are now also facing questions about whether they can, and how they should, balance ESG and financial interests.

For instance, recently, board members of the United Kingdom-listed Vectura Group plc (specialising in inhaled therapeutic medicines, some of which treat ailments caused by tobacco products), had to evaluate competing bids for the company. The Vectura Board unanimously recommended to shareholders of the pharma company the offer from tobacco company Philip Morris International (PMI) as the best and highest bid, which provided a 60 per cent premium to Vectura’s undisturbed trading price.

The board members soon found themselves under intense pressure from health groups, charities, public health experts and academics. These groups alleged societal concerns regarding a tobacco group being allowed to own a company that treats the respiratory illnesses caused by smoking cigarettes.[6]

Jacek Olczak, Chief Executive Officer of Philip Morris International, wrote to Vectura staff once the offer to Vectura had been made. In this letter he noted that PMI had invested over $8bn behind programmes to improve the lives of adult smokers through innovative technologies, ‘with the aim of disrupting our traditional business – the manufacturing and sale of cigarettes – and accelerating the end of smoking.’[7] In March meanwhile PMI announced its intention for smoke-free products to account for more than 50 per cent of its total net revenue by 2025.[8]

Ultimately, Ventura’s board agreed that PMI’s offer was compelling in the context of competing bids.

This case demonstrates that, despite the rising prominence of ESG concerns, board members remain bound by traditional duties under corporate law, which favour analysis driven by financial returns[9]. Additionally, boards rely on opinions from advisors, who tend to frame their advice primarily through a financial lens, as their duties also flow from traditional legal norms.

As boards seek to navigate laws, investor and consumer trends and evolving regulation, legal imperatives and societal expectations can be seen to exert antagonistic pressures. Yet, should the existence of corporations as societal constructs serve to align corporate actions to societal expectations? Given the current legal constraints imposed upon boards, especially in the mergers and acquisitions (M&A) context, boards will not take societal expectations into account until their fiduciary duties are changed, obliging them to permit such considerations.

ESG integration is also a part of the active investment process and the oversight of the investment management business. Certain managers have a consistent framework for ESG integration, which also permits a diversity of approaches across different investment teams and strategies. These can vary according to client objectives, investment style, sector and market trends.[10]

How then, under current conditions, should boards (and management) react to competing stakeholder challenges? Will an incoherent strategy, with conflicting goals, ultimately harm shareholders and society more than a lack of an ESG strategy would? Should Royal Dutch Shell divert cash flow from legacy carbon products to grow more sustainable energy projects? Activist hedge funds have suggested that large conglomerates, such as Shell, should match their business strategies with specific shareholder constituencies, and contemplate break-ups to allow different units a more focused appeal to specific investor groups.

Perhaps it would be most efficient for investors to determine how they value ESG integration into corporate strategy However, what is clear, is that until legal tools provide more certainty, boards of directors must consider how they can most effectively integrate ESG into their deliberations.


[1] Natalia Nicolaidis is the founder and CEO of Dynamic Counsel, a governance and risk consultancy, and a member of the board of directors of Aegean Airlines SA and Mytilineos SA. Ms Nicolaidis was formerly the general counsel of Credit Suisse Group AG’s Investment Banking and Capital Markets division. Amelie Dueckelmann-Dublany is a candidate for a Master of Law, from the University of Konstanz, specialising in intellectual property, and for an LLB from Warwick University.

[2] Rio Tinto, ‘Rio Tinto publishes board review of cultural heritage management’, 24 August 2020, www.riotinto.com/en/news/releases/2020/Rio-Tinto-publishes-board-review-of-cultural-heritage-management, accessed 19 November 2021.

[3] International Bar Association, ‘Juukan Gorge incident and Covid-19 pandemic highlight focus on ESG’, Rachael Johnson, 2 December 2020, https://www.ibanet.org/article/0B0F4134-F037-4C73-9456-DBF89429CEE2, accessed 19 November 2021.

[4] Rio Tinto state: ‘We apologise unreservedly to the Puutu Kunti Kurrama and Pinikura (PKKP) people, and to people across Australia and beyond, for the destruction of the Juukan Gorge rock shelters. In allowing the destruction of the Juukan Gorge rock shelters to occur, we fell far short of our values as a company and breached the trust placed in us by the Traditional Owners of the lands on which we operate. It is our collective responsibility to ensure that the destruction of a site of such exceptional cultural significance never happens again, to earn back the trust that has been lost, and to re-establish our leadership in communities and social performance.’ Rio Tinto, ‘Juukan Gorge’, https://www.riotinto.com/en/news/inquiry-into-juukan-gorge, accessed 19 November 2021.

[5] World Economic Forum (in collaboration with PricewaterhouseCoopers [PWC]), How to Set Up Effective Climate Governance on Corporate Boards, January 2019.

[6] Asthma UK and the British Lung Foundation wrote letters, co-signed by 35 charities, public health experts and clinicians, expressing concerns about the deal.

[7] https://www.vectura.com/wp-content/uploads/2021/07/Project-Vela_JAO-Letter-to-Vela-Employees.pdf

[8] https://www.pmi.com/our-transformation/pmi-aims-to-become-a-majority-smoke-free-business-by-2025

[9] In August, having accepted PMI’s offer, the Vectura board stated that: ‘Wider stakeholders could benefit from PMI’s significant financial resources and its intentions to increase research and development investment and to operate Vectura as an autonomous business unit that will form the backbone of its inhaled therapeutics business.’

[10] BlackRock ESG Integration Statement, effective date: 27 July 2018, revised: 19 May 2021.