Environmental, Social and Governance Issues: Fad or Future?

The phrase ‘Environmental, Social and Governance issues’ (ESG) is moving from buzzword to mainstream language. Against that backdrop directors and trustees must be mindful of how their respective duties are evolving and how their actions or inactions will be scrutinised.

What is ESG?

Whilst there is no single legal definition of ESG, examples of the issues that could fall within ESG include:

• Environmental: Considerations of climate change, emissions, energy efficiency, hazardous waste and resource depletion
• Social: Considerations of human rights, modern slavery, working conditions, both within the organisation itself and its supply chains, health and safety issues, employee relations and diversity
• Governance: Considerations surrounding executive pay, anti-bribery and corruption policies, board structure, independence and diversity, transparency

Directors’ duties and ESG

Directors will be familiar with the duty imposed upon them under the Companies (Jersey) Law 1991 to act in the best interests of a company. Satisfying this duty could include giving adequate consideration to relevant ESG issues to the company.

This is evidenced from the recent Supreme Court of England and Wales judgments in Vedanta Resources Plc v Lungowe and Okpabi v Royal Duct Shell plc (which are likely to be persuasive in Jersey), which emphasise that directors of parent companies should be increasingly concerned about their accountability and potential liability for the actions or inactions of their subsidiaries for ESG related issues. Whilst the decisions from these cases arose from environmental damage, the principles discussed may apply to other ESG related issues.

Accordingly, to minimise the risks of directors being involved in ESG related litigation they should:

• Seek advice at any early stage in relation to existing and developing ESG policies
• Stress test and conduct risk assessments to anticipate and mitigate potential risk areas
• Identify any existing ESG risks from subsidiaries and consider what checks and balances are in place in relation to those risks at subsidiary level
• Actively review and manage reputational risk arising from ESG issues
• Engage with shareholders to understand their particular ESG requirements
• Educate and train directors and employees on their legal and regulatory obligations around ESG issues and best practices
• Embrace change to maximise performance, reputation and operational efficiency

Trustee duties and ESG

Trustees are required to act with due diligence as would a prudent person to the best of the trustee’s ability and skill. In particular, trustees are obliged to so far as reasonable preserve and enhance the value of the trust property. In addition, a trustee is duty bound to act in the best interests of their beneficiaries.

The penalty for failure to adhere to these duties can be personal liability to make up the difference between the return achieved and what the beneficiaries could have reasonably expected. However, for most trusts, their investment horizon is 30 years or longer, which could well insulate a trustee against changes of fashion in financial markets. A trustee should not be liable for investment losses caused to a trust fund as a result of investing for ESG gains provided that:

• The loss was not caused by the trustee’s negligence
• The trustee complied with the terms of the trust instrument
• The trustee complied with its statutory and indeed their common law and fiduciary duties
• the trustee acted in the best interests of the beneficiaries when deciding to invest for ESG gains
• They have a suitable investment policy which is regularly reviewed
• They operate a professionally run portfolio which is regularly reviewed, along with the performance of the relevant investment manager.

Trustees exercising the power of investment to maximise ESG gains should:

• Review all trust investments more frequently than usual and consider whether they should be diversified or varied
• Keep written records of consideration of any advice obtained
• Actively reach out to beneficiaries to address the health of the portfolio and any action being taken to limit/reduce exposure
• Actively monitor performance of professional investment managements and consider if an intervention/change is required
• Revisit any contemplated investments to ensure that they are still appropriate

How we can help

Our Business Law team at BCR Law work with local businesses across all sectors, advising on any number of contentious and non-contentious issues from reviewing and updating your terms and conditions and policies and procedures, to guiding business owners and managers through the various legal and regulatory issues that come up when running a business.

This article does not constitute legal advice. For advice or further information, please contact us.