If board members were in any doubt about their responsibilities for ensuring that their companies tackle sustainability challenges, the legal suit recently filed by environmental law charity ClientEarth, against the directors of oil major Shell, will have made things abundantly clear.
ClientEarth, in its capacity as a shareholder, is suing the 11 members of Shell’s board personally for allegedly mismanaging climate risk and breaching company law, by failing to implement an energy transition strategy aligned with the 2015 Paris Agreement on climate change. The claim has the backing of institutional investors with over 12 million shares in the company, including UK pension funds Nest Pensions and London CIV, Swedish national pension fund AP3, French asset manager Sanso IS, and Danske Bank Asset Management.
The claim is thought to be the first case in the world seeking to hold a board of directors liable for failure to properly prepare for the energy transition; the outcome could have significant implications for other companies and their boards.
Meanwhile, two of the UK’s largest pension schemes have said they will vote against the renewal of top directors at BP and Shell, unless the companies strengthen commitments to tackling carbon emissions. The Universities Superannuation Scheme and Border to Coast, which manages the pension assets of local authority workers, say the move is part of a drive to push oil companies and banks to make faster progress on climate-change pledges. Other asset managers are also increasingly targeting board members over a lack of progress on climate change.
Of course, pressure from investors is not the only reason why boards need to take decisive action on sustainability. They face mounting demands from customers and other stakeholders for engagement on ESG issues too.
New regulations are also imposing additional reporting requirements on companies. From 2024, large companies with operations in the European Union will be subject to mandatory sustainability reporting as a result of the EU Corporate Sustainability Reporting Directive. And the US Securities and Exchange Commission has proposed new rules that would require listed companies to disclose sustainability-related risks and the greenhouse-gas emissions of their whole value chain.
But sustainability is not only about external risks for companies – it also offers opportunities for growth, and the increasingly evident link between sustainable business transformation and long-term company performance is a powerful argument for action.
So there is a growing realization among board members of the importance of sustainability for their companies, and of the need for the board to take a leading role on this topic. Boards are charged with steering the direction of the company over the long term, and sustainability is clearly a long-term project.
And boards are upping their game. The Sustainability Board Report, an independent, non-profit project set up to measure the ESG preparedness of the boards of the world’s largest 100 publicly listed companies, found that 80% had a committee with a clearly stipulated sustainability role in 2022, up from 54% in 2019. Meanwhile, 25% of Fortune 500 board appointments in 2022 were of people with sustainability committee experience, up from 14% in 2021 and just 6% in 2020, according to executive search firm Heidrick & Struggles.