ESG and directors' liability

Whether it is for a small corporation or an international large corporation like Shell, ESG has become a very vital aspect of corporate policy. This development is the result of society’s pressure upon companies their ESG activities: society now requires companies to publish detailed ESG reports and wants them to also follow them up flawlessly. Throughout ESG controversies, it has become clear that if companies do not abide with these ESG reports, they may risk great financial and reputational damage that could affect their entire business.

ESG claims brought by litigants against companies will in most cases be based upon liability for wrongful conduct. Such liability is normally sought from the company as a whole, since it is a legal entity, which can be held liable for wrongful conduct. However, as a result of current ESG-related developments, this liability can also shift to or at least threaten directors of a company. Since the directors are the key decision makers for a company’s operations, they not only have a duty of care towards the company, but also towards society. They are expected to act in the interests of the company's employees, society and (in)directly the environment. This means, among other things, that directors are expected to take into account most of the risks that will arise for the company as well as for society, even if these would be future risks. Future risks may include the threat that climate change may pose to society and the company itself. Thus, in the present time, it is no longer sufficient for a business to act only from economic considerations. As mentioned above, there is also the risk of the extensive ESG reports that companies are now required to publish, which may pose a liability risk for directors in particular.

The Royal Dutch Shell v Milieudefensie-case

From the Royal Dutch Shell v Milieudefensie­-case follows that it is of importance for directors to start assessing their vulnerability in these ESG controversies and start taking measures to comply with ESG standards. This case raised new legal questions with regard to the liability of directions of a company such as RDS.

Royal Dutch Shell (RDS) is one of the largest Co2 emitters in the Netherlands and with the whole Shell-group, one of the largest emitters in the world. To comply with the new ESG-ideology, RDS declared in its ESG reports that it would be climate neutral by 2050. Nevertheless, RDS continued to invest more than 80% of its capital in oil and gas. This drove the Vereniging Milieudefensie (Milieudefensie) to file a claim against RDS.[1] Milieudefensie based its claim on Article 6:162 of the Dutch Civil Code (unlawful act).[2] The Dutch court ruled that RDS has a duty of care to ensure reduction of Co2 emissions. The outcome shows that RDS as a whole was held liable, but Milieudefensie also threatened the directors to hold them liable for their share of the tort.

Under Dutch law, special circumstances can open the door to personal liability of directors.[3] In the event a director can be personally blamed for a detriment (“persoonlijk een ernstig verwijt”) – given his obligation to perform his duties properly as referred to in Article 2:9 of the Dutch Civil Code – the director might be held liable. However, a valid liability claim also requires a clear causal link between the wrongful acts and the damages suffered. For both the causal connection as well as for the damages, it is very difficult to prove a definite and justifiable causal link. Environmental damages on their own are already very difficult to establish, let alone pinpointing a causal link between a specific tort and the climate damage suffered.

ESG is constantly evolving and growing with each lawsuit that is filed. These cases, among others, will help companies and directors prepare for possible future lawsuits against them or others. The unwritten standard duty of care adopted in the Royal Dutch Shell v Milieudefensie-case will in many cases not be sufficiently clear to attribute an unlawful conduct to a director, since liability requires a director to be personally blamed for a detriment. Therefore, at this moment in time, there may not be much risk with respect to directors' liability, but this may change soon.