Published On: August 29th 2025
Authored By: Ekene Evans Ahmed
Ambrose Alli University
Abstract
The increasing integration of Environmental, Social, and Governance (ESG) factors into corporate strategy and disclosure is fundamentally reshaping the landscape of fiduciary duty, leading to an anticipated wave of derivative lawsuits. For their alleged failures in overseeing ESG risks; for making misleading ESG disclosures, or not aligning corporate purpose with broader stakeholder interests, these legal actions are expected to challenge directors and officers, thereby redefining corporate governance worldwide.
Keywords: ESG; Monitoring; Environment; Social; Governance; Fiduciary; Directors; Duties; Investment; Performance
Introduction: An Examination of the Developing Aspect of Fiduciary Duty in an ESG Era
The Broadening Scope of Fiduciary Obligations to Cover ESG Factors
Particularly within corporate governance, the normal understanding of fiduciary duty has generally been centred on the principle of shareholder primacy. That is where a directors primary obligation is to maximize shareholder value. But the increasing global focus on Environmental, Social, and Governance (ESG) factors is prompting a significant re-evaluation and expansion of these duties.
Legal frameworks and judicial interpretations are starting to recognize that a company’s long-term sustainability and success are very much linked to its impact on a broader range of stakeholders. This is including the environment, employees, customers, and communities.
Take, for instance, the UK Companies Act 2006, specifically Section 172, which creates a mandate that directors must act in a way they consider, in good faith, would be most likely to promote the success of the company. And in doing this, there must be regard to a non-exhaustive list of factors including the interests of employees, the impact of the company’s operations on the community and the environment, and the desirability of maintaining a
The Intersection of ESG Disclosure and Fiduciary Responsibility
Noting the increasing demand for transparency, regarding corporate ESG performance, it has brought the issue of ESG disclosure to the forefront of fiduciary responsibility. Investors, regulators, and also the public are demanding more detailed, accurate, and comparable information about how companies are managing ESG risks and opportunities. This heightened scrutiny shows that the quality and veracity of ESG disclosures are no longer just a matter of public relations, or even voluntary reporting. Rather, they are constantly being viewed through the lens of legal obligations and fiduciary duty.
The duty of Directors and officers is to ensure their company’s ESG disclosures do not mislead. That these disclosures accurately show the company’s practices and its performance. The failure to do so can lead to allegations of breach of fiduciary duty, particularly if misleading disclosures result in harm to the company or its shareholders.
The Marsh article on the mitigation of ESG-related securities enforcement and litigation risks explicitly provides that “Even more generalized statements about environmental stewardship can potentially be viewed by courts as material if senior management is aware of specific, undisclosed facts that paint a substantially different picture from the public disclosures”[1]. What this implies is that directors have a duty to be informed about the company’s ESG profile, and to ensure that public statements clearly align with reality. Thus, if a company publicly commits to certain ESG goals or standards, directors have a fiduciary obligation to oversee the implementation of strategies to meet those commitments, and to disclose material shortcomings or failures.[2]
It must be noted that derivative suits can target directors and officers, personally, for failing in their oversight duties concerning ESG disclosures. This trend is becoming more rampant by the increasing sophistication of plaintiffs in using pre-suit “books and records”, inspections to obtain internal corporate documents, such as board minutes, which can reveal whether directors were aware of, and consciously ignored, “red flags” related to ESG disclosure or compliance.
The Global Trend: Redefining Corporate Purpose Beyond Shareholder Primacy
The doctrine of shareholder primacy is increasingly being challenged and redefined in light of ESG considerations. It provides that the sole purpose of a corporation is to maximize shareholder value. There is a growing global recognition that corporations have broader responsibilities to society and the environment, and that a singular focus on shareholder returns can be very detrimental in the long run.
The increasing focus on ESG in fiduciary duties and the rise of ESG-related litigation are further compelling companies to integrate broader societal considerations into their core strategies and operations, effectively redefining corporate purpose for the 21st century. As noted by the Harvard Law School Forum on Corporate Governance, the objective of creating sustainable, long-term value recognizes that the purpose of for-profit corporations includes value creation for investors, but also acknowledges that the interests of other constituents are “inextricably linked to that very creation of long-term value”.[3]
Entering the Expected Wave of Derivative Lawsuits Associated with ESG
Get to Know the Factors Influencing the Rise in Derivative Litigation: Investor Activism and Regulatory Scrutiny
There are many factors contributing to the expected increase in ESG-related derivative lawsuits, but two main ones are increased investor activism and regulatory scrutiny. An environment considered more litigious is being created by new disclosure requirements, as well as enforcement actions brought about by increased attention of regulatory bodies to ESG issues worldwide. The U.S. Securities and Exchange Commission (SEC), for instance, has made clear its intention to pursue claims against publicly traded companies for making false or noncompliant environmental and ESG disclosures by establishing a Climate and ESG Task Force within its Division of Enforcement. This has to do with the establishment of rigorous internal controls and verification processes for ES
ESG Derivative Suit Allegations: Failure of Oversight and Fiduciary Duty Violation
Typically, ESG derivative lawsuits tend to focus on claims that a company’s officers and directors violated their fiduciary duties—mostly the duty of care, the duty of loyalty, and the duty of good faith—by either making false ESG disclosures or failing to sufficiently monitor and manage significant ESG risks. Plaintiffs may contend that the board disregarded “red flags” pertaining to discriminatory practices, hazardous working conditions, or environmental non-compliance, for example. And that by acting in bad faith, this deliberate disregard amounted to a violation of the duty of loyalty. The duty of loyalty was mentioned in the Spence v. American Airlines[4] case, which was an ERISA case. The court determined that fiduciaries had violated this duty by permitting ESG factors to affect investment choices
Personal Liability of Directors and Officers for ESG Failures
Even though derivative lawsuits are filed on the company’s behalf, the company usually receives any damages that are awarded. However, the litigation itself may result in significant legal expenses, harm to the company’s reputation, and most importantly, the potential for directors and officers to be held personally liable if it is determined that they violated their fiduciary duties.
A breach of the duty of loyalty and bad faith could result in personal liability if, for instance, board minutes or other company records show that the directors knew about serious environmental non-compliance or human rights violations in the supply chain but did nothing about it. The TEPCO case in Japan serves as an excellent illustration. In this case, four former directors were ordered to pay the company about $85 billion in damages for breaching their duty of care by failing to take appropriate preventive measures against a foreseeable tsunami, which resulted in the Fukushima nuclear disaster.[5]
The Important Legal Developments, and Case Studies in ESG Fiduciary Duty
About the ClientEarth v. Shell Plc[6] Derivative Action
The derivative action filed by ClientEarth against the Board of Directors of Shell plc is landmark development in the intersection of climate risk, fiduciary duty, and corporate governance.
This case is so vital for several reason; firstly, it is one of the first instances where shareholders have used a derivative action to challenge a board’s management of climate risk on behalf of the company, seeking to hold directors personally liable for alleged failures in their oversight duties. Secondly, the matter directly tests the extent to which directors’ fiduciary duties under UK company law encompasses the management of climate-related financial risks. The UK Companies Act 2006 requires directors to act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members. In doing so, regard must be had (amongst other matters) to the likely consequences of any long term decision, the interests of the company’s employees, the need to foster the company’s business relationships with suppliers, customers and others, the impact of the company’s operations on the community and the environment, and the desirability of the company maintaining a reputation for high standards of business conduct.
ClientEarth’s claim is hinged on the argument that a proper management of climate risk is quite necessary in fulfilling these statutory duties. The case also follows the landmark 2021 Dutch decision in Milieudefensie et al. v. Royal Dutch Shell plc[7], where the Hague District Court ordered Shell to reduce its emissions by 45% by 2030, finding that Shell had an obligation under Dutch tort law to prevent dangerous climate change. However, in July 2023, Justice Trower refused permission for ClientEarth to continue the derivative claim, a decision that was subsequently reaffirmed after a reconsideration hearing . The court found that ClientEarth had not established a prima facie case for the directors’ breach of duties, emphasizing the court’s reluctance to interfere with the business judgment of directors on complex commercial issues.[8]
ERISA Litigation: Fiduciary Duty in the Context of ESG Investing
The Employee Retirement Income Security Act of 1974[9] (ERISA) governs private-sector employee benefit plans in the United States, imposing strict fiduciary duties on those who manage plan assets. A significant area of ESG-related litigation has emerged concerning whether ERISA fiduciaries can, or should, consider ESG factors when making investment decisions for retirement plans. The U.S. Department of Labor (DOL) has issued various rules and guidance on this topic, with positions shifting across administrations.
The Biden administration’s DOL issued a rule in 2022 (effective January 2023) clarifying that ERISA fiduciaries may consider climate change and other ESG factors as relevant to an investment’s risk-return analysis, and when choosing between otherwise indistinguishable investments, may use such factors as tie-breakers . This rule was challenged in court, with plaintiffs arguing it subverted ERISA’s requirement that plan assets be managed for the “exclusive purpose” of providing financial benefits to participants. However, a Texas district court upheld the rule, finding it consistent with ERISA as it did not permit fiduciaries to sacrifice investment returns or take on additional risk for non-pecuniary objectives.[10]
Implications for Corporate Governance and Strategy
The Necessity of Board Oversight of ESG Risks and Opportunities
It is necessary to note that the broader aspect of ESG and fiduciary duty necessitates a major enhancement in board oversight of ESG risks and opportunities. Directors are no longer able to afford treating ESG issues as minimal concerns or simple matters of corporate social responsibility. Rather, ESG factors must be infused into core strategic discussions and risk management processes at the board level. This requires boards to make sure that robust systems are in place for identifying, assessing, monitoring, and managing the material ESG risks across the organization.
Noting the Importance of Comprehensive ESG Disclosure and the Avoidance of “Greenwashing”
It is submitted that companies and their boards should prioritize the integrity of their ESG communications. This shall ensure that disclosures are transparent, complete, and definitely not misleading. G data. “Greenwashing”, or making unsubstantiated or exaggerated claims about ESG performance, is a significant risk. Not only does this have the power to do immense damage to a company’s reputation and erode stakeholder trust, but it could also lead to regulatory enforcement actions and derivative lawsuits which allege the breach of fiduciary duty.
Integrating ESG into Long-Term Corporate Strategy and Value Creation
The imperative for companies to deeply integrate ESG considerations into their long-term corporate strategy and value creation models is emphasized by the redefinition of corporate purpose and the expansion of fiduciary duties to encompass ESG factors. It goes beyond just compliance or risk mitigation. It involves recognising ESG issues as the fundamental drivers of business, innovation, and sustainable growth. The companies that are able to successfully integrate ESG into their core strategy are in better positions to identify new market opportunities.
Conclusion
We’re navigating the new era of ESG-driven fiduciary duty.
We usher in a new era where ESG considerations, inclusive of the understanding and application of fiduciary duty, is being fundamentally reshaped by the convergence of heightened stakeholder expectations, evolving legal interpretations, and increasing regulatory scrutiny. The wave of ESG-related derivative lawsuits which we anticipate, driven by investor activism and regulatory enforcement, will quite likely serve as a major catalyst for redefining corporate purpose and accountability globally. In order to successfully navigate this new era, corporate leaders should proactively enhance board oversight of ESG issues, ensure robust and truthful ESG disclosure practices, and strategically integrate ESG into the core of their business models for long-term value creation. Not only does the failure to adapt to these changing expectations expose companies and their leadership to legal, as well as financial risks, and including personal liability, but it also jeopardizes their long-term sustainability and social license to operate. The acceptance of ESG as an integral component of fiduciary duty is an imperative for responsible corporate governance in the 21st century.
References
[1] Marsh and Norton Rose, ‘How to Mitigate ESG-Related Securities Enforcement and Litigation Risks’ (Marsh, 6 January 2023) <https://www.marsh.com/en/services/financial-professional-liability/insights/how-to-mitigate-ESG-related-securities-enforcement-and-litigation-risks.html> accessed 18 July 2025.
[2] Maria Antonia Tigre and Cynthia Hanawalt, ‘The Fiduciary Duty of Directors to Manage Climate Risk: An Expansion of Corporate Liability through Litigation?’ (Columbia Law School Climate Law Blog, 15 February 2023) <https://blogs.law.columbia.edu/climatechange/2023/02/15/the-fiduciary-duty-of-directors-to-manage-climate-risk-an-expansion-of-corporate-liability-through-litigation/> accessed 18 July 2025.
[3] Mike Delikat, Stacy Kray and Carolyn Frantz, ‘Trends in ESG Litigation and Enforcement’ (Harvard Law School Forum on Corporate Governance, 10 August 2023) https://corpgov.law.harvard.edu/2023/08/10/trends-in-esg-litigation-and-enforcement/ accessed 18 July 2025.
[4] 4:23-cv-00552-O
[5] Gen Goto, ‘ESG, Externalities, and the Limits of the Business Judgment Rule – TEPCO Derivative Suit on Fukushima Nuclear Accident and the Expansion of Caremark’ (ECGI, 1 October 2024) <https://www.ecgi.global/publications/blog/esg-externalities-and-the-limits-of-the-business-judgment-rule-tepco-derivative> accessed 18 July 2025.
[6] [2023] EWHC 1897 (Ch)
[7] HADC 19-379-26052021
[8] Dr Joy Debski, ‘ClientEarth v Shell Plc & Ors.: has an opportunity been missed to reassess directors’ duties vis a vis Climate Change risks?’ (School of Law & Social Sciences Blog, Robert Gordon University, 26 April 2024) <https://rgu-slss.blog/2024/04/26/clientearth-v-shell-plc-ors-has-an-opportunity-been-missed-to-reassess-directors-duties-vis-a-vis-climate-change-risks/> accessed 18 July 2025.
[9] 29 U.S.C. 1001 Et Seq.
[10] Cathy Botticelli, Rick S Horvath and Mark D Perlow, ‘An Update on ESG Litigation Risks in the United States’ (Harvard Law School Forum on Corporate Governance, 13 March 2025) <https://corpgov.law.harvard.edu/2025/03/13/an-update-on-esg-litigation-risks-in-the-united-states/> accessed 18 July 2025.
