Why directors should eschew 'window-dressing' sustainability practices and public disclosures

ON Feb 9, 2023, 11 directors at Shell, the oil giant, were sued for allegedly breaching their legal duties under the United Kingdom Companies Act for failing to implement an energy transition strategy that aligns with the Paris Agreement.

This is a landmark case being the first known attempt to hold corporate directors personally liable for the company's failure to comply with international environmental protection convention. The lawsuit will be closely watched given the precedence it could potentially set for directors.

But while the jury is still out on the question whether directors have the social responsibility beyond maximising shareholder returns, lawyer Robson Lee says there are already a number of clear-cut areas of liability that directors should take heed of.

For one, the Board of a listed company would be in breach of its statutory duty of disclosure under securities rules and regulations if the company publishes a sustainability report that is not consistent with the group's actual business conduct and operations, he says.

That is because any deviation from what is published and disseminated to the market concerns a breach of the statutory and regulatory requirement that information disseminated to the market must be true, accurate and complete in all material respects, he points out.

Therefore, if there is no intention to abide by what the company publicly states concerning its environmental, social, and governance (ESG) policies and practices, the Board must be held accountable, states the partner at Kennedys Legal Solutions.

Any material deviation would arguably be an offence of misleading the market, which cannot be mitigated or excused by an increase in the company's top line and bottom line, adds Lee, who is also head of legal affairs at the Securities Investors Association (Singapore).

In spirit and truth

Simply put, a sustainability report cannot be a "window dressing publicity stunt", or a cosmetic corporate PR exercise, he says in an interview with The Business Times.

"You can't be saying one thing and doing another thing, because investors might be buying into your shares, or trading your shares with the anticipation that you will be complying with what you say", he adds.

"If you publish something and do a completely different thing, then obviously you are not being truthful to the market (and) there are sufficient laws and regulations to deal with such errant, egregious conduct concerning a completely falsified or misleading report."

For now, making glorified sustainability claims may appear non-consequential, but it might not stay this way, he notes. The market regulators are currently pivoting in the direction to define standards of corporate disclosures on the ESG policies and practices of public listed companies. It can be envisaged that the authorities will, at some point, consider upping the ante to impose regulatory accountability on directors to accurately disclose and properly implement their company's ESG policies and practices, as part of their fiduciary responsibility, he posits.

After all, there are greater objectives, such as the integrity of the Singapore market, he says. "There are more noble aims that we want to achieve as a market, as a country. It is not about the fact that you are making more money every year (so you can be excused)."

Lee goes on to address a real conflict - as companies transit from making public commitment to the actual implementation phase - that practical business considerations can take precedence over sustainability goals.

Observing a "clear disconnect" between what some companies say are their efforts to promote a sustainable world and what shareholders expect directors to do to raise profitability, he says trade-offs between corporate profitability and global corporate social responsibility are unavoidable.

"You cannot simply say, 'we have a huge project, and this will improve our bottom line by X-per cent'," he substantiates. "There will be some trade-off between foregoing a business opportunity that you traditionally go out and get more of, vis-a-vis what you are doing as an established institution as part of your social, community responsibility."

The issue is how do directors strike the proverbial balance?

Lead the way

A simplistic solution to make the job of directors easier is to set regulatory guardrails for the actual implementation and accurate public disclosures of a company's ESG policies and practices, and to hold directors accountable for the company's compliance.

A more holistic approach, he adds, duly considers the global benefits of ESG and striking a proper balance between corporate profitability that immediately impacts shareholder returns, and the interests of other stakeholders in a sustainable healthy global environment, be they employees, suppliers, or local communities, where the group has business operations.

Boards would anyway be better off leading sustainability efforts than waiting for compliance metrics to benchmark companies' ESG practices to be set in stone, or standards of assurance to properly audit these practices, Lee argues.

While government regulations and incentives can propel corporations to "shape up or shake-off the comfort-zone of inertia" to some extent, he believes the free market will ultimately become the "best motivational factor", influencing corporations to make concrete improvements to their ESG practices or face stakeholders' ostracism and market repudiation.

Stakeholders of the free market that can compel changes in business conduct and operations include customers, who may decide to buy only products that are environmentally friendly, he asserts.

They also include employees who may also choose to work only for socially-minded employers, as well as banks, financial institutions and investors that support only companies that adhere to ESG practices in form and in substance, he goes on to list.

In short, "everybody cannot just wait for the government to set the rules", he concludes. "One of the best ways for things to evolve substantively is when everybody is doing it because it is important to them and to the environment that they operate within."