Abstract
This article will discuss the fiduciary duties of directors under Indian laws to consider climate risk and work toward adaptation and mitigation. The second part of this article will briefly examine the effects of climate change on the Indian corporate landscape. Following this, the third part will analyze the Indian legal framework that governs director duties in the context of climate change. The fourth section of this article will explore the challenges that hinder the enforcement of the directors’ duties to act in the interests of stakeholders, including the environment. Subsequently, the fifth section will offer policy recommendations and legal reform suggestions on managing the issues raised in the preceding section. Lastly, the article will concludes, emphasizing the need to have a robust system for nudging directors to take into account the interests of an array of stakeholders, while undertaking and managing commercial ventures.
Introduction
At the global stocktake of COP28, the Indian Prime Minister, Mr. Narendra Modi noted that India's strategy of balancing development and climate protection was succeeding, and the country was only among a few to be on course to achieving its Nationally Determined Contribution of limiting global warming to 1.5 °C. 1 Yet, despite this progress, the global outlook remains dark. A 2023 report found that temperatures have been above average across seasons and this extreme heat has been coupled with significantly lower rainfall. 2 Further, in 2023, 8 attribution studies in India argued that climate change made extreme weather-related events notably more severe and probable. These included a quintupling of droughts, increasing intensity of cyclones on India's western coast and an increase in the duration of heatwaves in India by 2.5 days. 3
The Indian government and sectoral regulators have accordingly sought to hasten progress on the climate front. These concerted efforts have resulted in India's performance on climate action for 2020 being rated “high” in climate policy, greenhouse gases (“GHG”) emission and energy issues categories, and “medium” in renewable energy. 4 Over the last few years, India has been placed in the top 10 destinations for climate tech investments, as venture capital funding exceeded USD 1 billion. 5 As per the Climate Change Performance Index, India is on track to meet its 2030 emissions target to a below 2 °C scenario. 6 The Government has also said that the country is on track for net-zero emissions by 2070. 7 The Government intends on achieving these goals by reinforcing and promoting regulatory policies and legislation, including those on mandatory sustainability disclosures and establishing standards of corporate accountability.
The industrial operations of corporations have contributed majorly to the present climate crisis and by extension, directors are also responsible for running their businesses in a manner that has been severely detrimental to the environment. At the same time, companies are uniquely well-positioned to aid in the process of limiting the adverse effects of climate change by providing the resources required to counter these problems. Modern-day companies wield tremendous amounts of power in the form of capital and can affect ground-level changes. This power can be tapped into and directed toward mitigating and adapting to climate change. Due to this, the fiduciary duties of directors are increasingly being implicated in climate change litigation. To this effect, climate change related court cases have more than doubled globally since 2017 and are consistently growing. 8 The corporate law of some jurisdictions emphasizes a shareholder wealth maximization goal, whereas for jurisdictions with a stakeholder orientation, the risk of directors being held accountable for breaches of fiduciary duties for failing to consider, or inadequately considering climate risks to their businesses is higher. India's Companies Act, 2013 (“Companies Act”), tends to lean toward the latter system as it requires directors to consider both the interests of shareholders and stakeholders in exercise of their fiduciary duties. While cases implicating fiduciary duties in climate contexts are yet to be seen in India, their popularity in the US indicates that it is only a matter of time before we see India's first case on the subject.
Through this article, we will discuss the fiduciary duties of directors under Indian laws to consider climate risk and work toward adaptation and mitigation. The second part of this article will briefly examine the effects of climate change on the Indian corporate landscape. Following this, the third part will analyze the Indian legal framework that governs director duties in the context of climate change. The fourth section of this article will explore the challenges that hinder the enforcement of the directors’ duties to act in the interests of stakeholders, including the environment. Subsequently, the fifth section will offer policy recommendations and legal reform suggestions on managing the issues raised in the preceding section. Lastly, the article will conclude with emphasizing the need to have a robust system for nudging directors to take into account the interests of an array of stakeholders, while undertaking and managing commercial ventures.
Indian corporations and the climate change challenge
Climate change remains a significant challenge for emerging economies like India, threatening to magnify risks already existing on account of high social vulnerability and climate variance. 9 Globally, India is particularly vulnerable to the effects of climate change, with a ranking of 7/181 in Germanwatch's Global Climate Risk Index, 2021. 10 75% of Indian districts are especially vulnerable to extreme climate events and disasters, and McKinsey estimates that should India fail to act efficiently, climate change could even reduce India's GDP by 2.5–4.5% annually. 11 Similarly, the Cross Dependency Initiative, in their physical climate risk analysis found that 9 Indian states rank among the top 50 most climate-vulnerable regions of the world, and 80% of these top 50 regions are either in the US, China or India. 12 Since 1990, the Indian states of Assam, Bihar and Uttar Pradesh have reported 331%, 141% and 96% increases in climate-related damage to physical infrastructure. 13
Average temperature in India is projected to increase by 2.4 °C, to 4.4 °C by 2100, with heatwaves tripling or quadrupling. 14 Extreme weather events, including droughts, floods, and heatwaves are expected to increase in frequency and intensity. Summer monsoon rain in India has declined over the last couple of decades, and since the mid-20th century, droughts have become more frequent, covering larger areas in India. 15 Some of India's largest cities have seen continued water scarcities, heatwaves and floods, resulting in the death of hundreds and displacement of thousands. 16 Yet, the expected costs of India's pledges to mitigate the impact of climate change are revealing—while $2.3 trillion will be required annually till 2030 to mitigate climate risks, current annual investment stands at $44 billion only. 17
With a population now greater than China, 18 India must resolve conflicting challenges- providing affordable energy to the population, while simultaneously addressing climate change risks and building resilience among communities. India is poised to play a critical role in the global quest for net-zero emission goals, and has pledged to reduce total projected carbon emissions by 1 billion tons by 2030 and achieve net-zero by 2070. 19 Consistent with its Paris Agreement commitment of reducing emissions intensity of GDP by 35% by 2030 from 2005 levels, India has set in motion a host of policy, regulatory and legal measures to achieve its goals under the Agreement. 20 Progress has been positive, and India ranked 8th on the Climate Change Performance Index, 2023, which monitors the climate protection performance of 59 countries and the EU, and was the highest among the G20 nations. 21
While there has been much discussion of climate change in the context of macroeconomic, health or welfare related issues, its impact on companies remains under-discussed. Climate risk is today a material financial risk for companies across the world, as increased levels of CO2 and other greenhouse gases drive temperatures across the world. Climate policy and technological innovation will determine the levels of future GHG emissions—Climate Action Tracker estimates 22 that a “high-carbon emissions path” will result in increasing weather events like rising sea levels, storms and wildfires, resulting in disruptions of business operations, destruction of property and devaluation of corporate assets. In comparison to this business-as-usual approach, a “low carbon emissions path,” on account of reducing dependencies on fossil fuel and increasing use of renewable energy, can reduce global warming and probabilities of extreme weather events, by half. 23
Financial risks to companies are typically categorized into (a) physical risks and (b) transition (to a low carbon economy) risks. Physical risk “reflects the uncertain economic costs and financial losses from tangible climate-related adverse trends and more severe extreme events.” 24 Per the Task Force on Climate-Related Financial Disclosures (“TCFD”), physical risk could either be acute (event driven - floods, cyclones etc.) or chronic (long term—prolonged high temperatures) and have significant direct and indirect financial consequences for companies, on account of damage to assets or disruptions to supply chains. Similarly, financial performance may also be adversely impacted by water scarcity, emissions, food security, and temperature changes affecting employee safety and availability of physical premises and operations. 25 For example, a 2021 report found that the Indian economy loses $95 billion annually (roughly 3% of GDP) solely on account of air pollution. 26
On the other hand, transition risk “stems from the uncertain pace and scope of the economic transformation required to produce fewer carbon emissions.” 27 The transition to a low carbon economy necessitates significant legal, technological and market changes to facilitate mitigation and adaptation. The nature and speed of these changes influence the level of legal, financial and reputational risk to companies. Shifting to energy-efficient, sustainable and green-tech will impact the competitiveness of certain companies and therefore the demand for their products and services. For instance, India is one of cheapest producers of solar energy across the world and is implementing the largest program to expand renewable energy. 28 This has led to the thermal energy companies coping with billions of dollars in stranded assets, which is likely to only increase given the continued push toward renewable energy. Effects of this transition risk also reverberate to the insurance and banking sector and cannot be ignored by boards. 29
Moreover, the policy and regulatory changes also contribute to an increased risk of climate litigation. A failure by companies to mitigate their GHG emissions or adapt to climate change more broadly, and inadequately disclose climate risks has prompted an increase in climate-litigation claims from shareholders, public interest bodies, insurers and the State. 30 As financial values of climate-related loss continue to grow, the Network for Greening the Financial System expects a parallel growth in climate litigation. 31 Climate litigation strategies have evolved from claims against governments, to rights-based approaches under public law, 32 and now to claims under corporate and securities law against directors on account of a failure to consider climate risk in corporate decision making. For the purposes of this article, we will limit the discussion of climate litigation to duties of directors under corporate and securities laws.
Notably, customer perceptions of a company's climate mitigation or adaptation or decarbonization efforts is becoming a driver of market reputation, which again, impacts demand for their products, and increasingly, investor funding. 33 Recognizing the increasing relevance of climate risk to financial performance, Indian companies have responded. An S&P Environmental, Social and Governance (“ESG”) study found that 24% of Indian companies (out of the 187 companies studied, representing 85% of market capitalization) have issued climate adaptation plans to mitigate physical risks, compared to an average of 21% across the world. 34 Companies in the real estate and utilities sectors were the leaders in issuing adaptation plans, arguably because of their reliance on physical infrastructure which is at severe risk of damage, from climate-related events and hazards, apart from the problems of unplanned urbanization and unregulated construction in India. Encouragingly, 33% of Indian companies regarded climate risk and opportunity strategy as among their top 3 material issues (compared to 25% of companies globally). 35
Indian law on fiduciary duties in the climate context: directors beware
India has demonstrated great proactiveness in developing a legal framework that mandates corporations and their directors as agents of the companies to account for the impact of their actions on the environment. This commitment to preservation of the environment is best reflected in the Companies Act and certain regulations that have been issued by the Securities and Exchange Board of India (“SEBI”). We now turn to examine these legislations.
Company law
The relevant text of Section 166 of the Companies Act, 2013, which contains the statutory provisions on directors’ duties of trust, loyalty, care, and competence, is reproduced below: “Section 166 (Duties of Directors) Section 166(2): A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
36
Section 166(3): A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.”
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Section 166(2) and (3) of the Companies Act codifies the position of directors in India as fiduciaries who are obligated to act consistently with their fiduciary duties of care, loyalty and disclosure toward not just shareholders but also various stakeholders. The Companies Act has been referred to as India's radical experiment with corporate purpose, on account of its strong pro-stakeholder orientation in Section 166(2). 38 Under Section 166(2), directors are required to equally consider the interests of shareholders and stakeholders such as employees, the larger community and the environment without any pre-ordained order of priority. Therefore, the directors owe a fiduciary duty to a wide array of stakeholders and are required to act for the benefit of these stakeholders. This marks a considerable departure from the English approach, where directors are required to consider stakeholder interests only if they enhance shareholder value. 39 While scholarly opinion on the applicability of common law in interpreting fiduciary duties is divided, with some suggesting the exercise of codifying directors’ duties in the Companies Act, 2013 was exhaustive, with a conscious decision to exclude common law, 40 other scholars and the judiciary in Rajeev Saumitra v. Neetu Singh 41 argue that Section 166 (dealing with fiduciary duties) “is akin to the common law right,” 42 and that common law remedies remain available even if not mentioned in the statute.
The Supreme Court of India in Tata Consultancy Services v. Cyrus Investments 43 also pointed out that corporate law has moved to a regime of social accountability and responsibility, from the earlier conceptions of familial and contractual regimes. This provision was for the first time substantively tested only in 2021 in MK Ranjitsinh v. Union of India, 44 where the Supreme Court of India confirmed that directors should account for shareholder and stakeholder interests, on a non-hierarchical basis, and borrowed the wide definition of “environment” from the Environment (Protection) Act, 1986 (“inter relationship which exists among and between water, air and land, and human beings, other living creatures, plants, micro-organisms and property” 45 ). The acceptance of this definition of environment even for company law matters is liberal and can certainly include climate risks faced by companies. This can result in situations where actions of directors to maximize shareholder profits may run afoul of their responsibilities to stakeholders under Section 166(2) of the Companies Act. However, while a plain reading of the text of Section 166(2) indicates that the beneficiaries of these fiduciary duties include shareholders, employees, the community and the environment, as we note later, only shareholders retain the right to enforce a breach of the duty owed to them.
Further, Section 166(2) of the Companies Act is unanimous in that directors must consider long-term interests of the company, and Indian law nowhere requires directors to serve short-term interests. 46 In the face of increasing physical and transition risks resulting from climate change, directors are therefore required to prepare strategies to deal with its long-term effects. Due to the nature of climate change, the impact of which can only be understood over long-term horizons, the typical temporal horizon considered by directors under Section 166(2) must be increased. These could include assessing the scale of emission reductions, and the levers required, and calculating costs of transition to energy and water efficient mechanisms.
It must also be noted that balancing often competing interests of shareholders and stakeholders can be complex, 47 and directors must carefully apply themselves in deciding the course of action, when, for example, a particular investment may benefit shareholders but detract from the company's climate pledges. At the same time, the interests of shareholders and stakeholders may be aligned in certain circumstances such as the adoption of cleaner sources of energy which not only create profits but are also better for the environment. However, the pluralist approach of Section 166(2) to consider shareholder and stakeholder risk without any hierarchy yields a wider conception of fiduciary duties where directors are obligated to consider the impact of climate risk, without pegging it to financial performance. Indian company law therefore regards climate preservation as an end in itself, and not just as a means toward securing improved financial performance or limited financial risk.
In other words, it is textually possible to argue that the stakeholder approach of 166(2) obliges directors to take reasonable efforts to mitigate the adverse climate footprint of their companies even when their business activities do not lead to financial losses for shareholders. This is a central difference between India and other Western jurisdictions, where for instance, in Pacific Gas & Electric and Exxon, the climate litigation against the companies was brought by shareholders, purely on account of the financial harms caused to them by the companies’ actions. Arguably, litigants in India have a broader range of grounds to invoke under Indian company law, that is, both financial and non-financial grounds, even where shareholders may not have suffered financial harm.
The pressure for directors to take into account long-term interests of the company vis-à-vis climate change is coming not only from law but also from the market, with funds like BlackRock requiring their portfolio companies to disclose plans on making their business models consistent with net-zero goals and how these plans are compatible with the company's long-term interests. 48 Therefore, directors in exercise of their duties under Section 166(2) are also required to consider climate risk on both touchstones: that of the interests of the company as well as the interests of other stakeholders.
On the other hand, Section 166(3) states that directors shall discharge their duties “with due and reasonable care, skill and diligence and shall exercise independent judgment” 49 and is a codification of the duty of competence. In interpreting this duty, courts in India earlier followed the rule in In re City Equitable Fire Insurance Co., 50 holding that directors are required to exercise the standard of skill, care and diligence as an ordinary person would do, having considered their specific circumstances. 51 The Expert Committee on the Companies Act had noted that directors must not act negligently in managing the affairs of the company, in the same manner as a reasonable man would look after his own affairs. 52 However, it is argued that since under Indian law directors are trustees of the company, the more appropriate standard to analyze the duty of care would be the higher standard of a careful and prudent businessman in comparable circumstances. 53
This higher standard resonates with the Supreme Court's observation in Official Liquidator v. PA Tendolkar, where the Court held that several years had passed after In re City Equitable Fire Insurance Co, and “nowadays the courts take a stricter view of the duties of a director.” 54 While there has not yet been any judgment on whether the standard to adjudge the duty of competence under Section 166(3) is objective or subjective, scholars consider that in light of the Supreme Court's holding in Official Liquidator, and the Companies Act's instructions to independent directors to “regularly update and refresh their skills, knowledge and familiarity with the company,” and “take and follow appropriate professional advice and opinion of outside experts,” the standard is an objective one.
Further, the fiduciary duty of care may be sub-divided into exercising the “requisite degree of care in the process of decision making” and to “act on an informed basis.” 55 Directors are therefore required to keep themselves informed of all the risks faced by the company and other relevant, material and reasonable available facts before making decisions. At the same time, Section 166(3) also requires directors to monitor and exercise oversight of the management of the company and allows them to engage experts to assist. Directors therefore must update themselves with latest trends in climate science, be cognizant of the changing physical environment and the impact of climate change on the company's assets and business, as well as with regulatory responses to climate change.
Section 134 of the Companies Act requires directors to annually issue, among other things, “a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company.” 56 Independent directors are in turn required to evaluate this using their independent judgment and ensure (to their satisfaction) that “the systems of risk management are robust and defensible.” 57 There is, however, no guidance on how directors are exactly expected to address risk, including those stemming from climate change.
The Caremark decision 58 also speaks to the duty of oversight, where the Court acknowledged that directors are required to implement reporting systems to monitor the company's “business performance” - which was expanded in Stone v. Ritter 59 where a director would be held to be in breach if he a) “utterly failed to implement any reporting or information system,” or (b) “consciously failed to monitor and oversee such system.” 60 Some scholars argue that Caremark duties are not applicable to climate change, since there are no legal mandates in the US to ensure companies are Paris Agreement compliant. And so, the argument goes that boards are not required to integrate climate risk monitoring in their systems since these risks are business risks, and not legal risks. 61 However, while proving liability for breach of Caremark duties in a climate context would be a steep task, the penumbra of the decision will nonetheless encourage compliance by directors. 62
The duty of loyalty is also implicated if the director's statements are not honest or where their opinions are not honestly held. 63 If climate-related risks to the company's business are known by the directors and would undermine any opinion they give to shareholders, they could attract personal liability. For instance, in Ramirez, 64 the US District Court for the Northern District of Texas held that in light of the directors’ familiarity with the proxy cost of carbon, they should have factored that into their opinions, and their failure to do so was materially misleading. 65 Decisions like Ramirez could arguably find their way into Indian jurisprudence sooner rather than later, as Indian courts increasingly look to US/UK law for guidance on evolving issues that have already been litigated there. In particular, with the increase in cross-border investment into India, the courts may be inclined toward creating jurisprudence similar to the West, in order to create a familiar investment atmosphere for foreign capital.
Securities laws, disclosures and their interface with the duty of competence
The securities laws of the country also contribute significantly toward imposing duties on directors for the preservation of the environment. In addition to the legal framework prescribed by the Companies Act, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (“Listing Regulations”) sharpen the duty under Section 166(3) by allowing directors to efficiently discharge their duties and by also allowing courts to impose liability for breaches of fiduciary duties more effectively. 66 This is all the more critical in the climate context, since extreme climate events, environmental damage caused by humans and climate action failure have been regarded as among the top 3 risks to companies. The Listing Regulations require the boards of listed entities to frame and implement risk management policies and review and ensure that risk management systems are in place. 67 The top 1000 companies by market capitalization are also required to establish a risk management committee. 68 Under the Indian law therefore, while Section 166(3) and relevant jurisprudence addresses the duty of care or competence conventionally, the risk management framework under company and securities law helps in operationalizing that duty.
The director's duty of competence in India, in a climate context, could apply either when directors fail to consider climate risk at all, while making business decisions, or consider climate risk, but inadequately. In the first situation, directors could be held to be in breach if they fail to establish climate risk management systems, including failing to make appropriate disclosures and representing these risks in their financial statements. The degree of risk will of course vary across companies, with sectors like energy and agriculture facing heightened risk. In Official Liquidator, the Supreme Court also noted that a director “cannot shut his eyes to what must be obvious to everyone.” Accordingly, with climate risk to companies becoming ubiquitous, directors cannot plead ignorance of this fact in a defense to a suit for breach. Unlike the good faith qualifier in Section 166(2), the duty of competence in 166(3) is objective and therefore directors must keep themselves informed of the risks their companies face from climate change, including on specific transactions.
In the second situation, directors may be held to have inadequately considered climate risk under Section 166(3). This may happen where some material information has been brought to a director's notice, and the director's duty of care would require him to examine the information further. Upon such examination if a “red flag” arises (such as shareholder dissent on climate-related issues or inaccuracies in a climate report or findings of a scenario modeling), then the director would be required to make further investigations. The duty may also be invoked where directors are not “climate competent” and therefore have to engage expert advice to guide the board on climate issues, while at the same time also synthesizing the information as applicable to the company. These experts should also be appointed after adequate diligence. Even if the monitoring of climate risks is delegated to management by directors, Indian law requires directors to exercise reasonable supervision, and therefore directors should ensure management is discharging its delegated function efficiently.
The disclosure framework under Indian law is also set out in the Companies Act, the SEBI Listing Regulations and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”). Relevant for purposes of disclosure of climate risk are the ICDR's disclosure requirements in the Risk Factors and Management's Discussion and Analysis (“MD&A”) sections. The ICDR requires issuers to describe their business strategies, including the systems in place to address environmental issues, which would arguably include climate change. Similarly, if the issuer company is subject to environmental litigation arising out of climate change, and this litigation has a materially adverse effect on the issuer's position that too warrants disclosure. Further, in the MD&A, issuers must analyze and disclose the impact of climate change and climate-related risk on their financial performance. Management's views on transition and physical risk would need disclosure here. Issuer companies are required to determine risk factors in order of their materiality, noting that “some risks may not be material at present but may have a material impact in the future.” 69 Therefore, even though the ICDR is silent on climate change disclosures, issuer companies are obligated to disclose all information that may be material to investors, a broad term, which in many contexts includes climate risks. 70
While authorities in India have noted that a determination of “materiality” must be made based on the specific facts of each case, at a minimum Indian law's conception of materiality includes information which “if concealed, would have a devastating effect on the decision-making process of the investors, and without which the investors could not have formed a rational and fair business decision of investment.” 71 The Reserve Bank of India has also argued that in light of the systemic risk that climate change poses to the financial system and economy, climate change risk ought to be material information warranting disclosure for purposes of securities law. 72 Regulation 30 of the Listing Regulations offers some guidance to companies in making their determinations of materiality for purposes of continual disclosure to the stock exchanges—where omission of an event/information is “likely to result in discontinuity or alteration of event or information already available publicly” or is “likely to result in significant market reaction if the said omission came to light at a later date.” 73 Some of the events which are mandatorily required to be considered as material and disclosed include, disruptions in business operations due to weather-related events, impact of changes in the applicable regulatory framework and significant litigation. 74 Interestingly, this requirement covers the physical, transition and litigation risk flowing from climate change, as highlighted above.
In a more recent judgment, indicating the necessity of increased transparency, the Securities Appellate Tribunal held that “the letter and spirit of the disclosure requirement is the need for disclosing all material events in clear terms with very little discretion for judging the degree of materiality. The emphasis is on disclosure; not otherwise, which means disclose even when the issuer doubts whether there is any materiality. In other words, it would imply that only facts/events which the issuer is undoubtedly sure of having no relevance to the issuer or to the issue can be excluded from disclosure.” 75 In the case cited above, a failure to disclose rejection of an environmental clearance in an issuer company's offer documents had been held to be a failure to disclose material facts, resulting in a penalty on the issuer and merchant banks. Directors could potentially be implicated in these regulatory actions as well—section 24 of the Securities Contracts (Regulation) Act, 1956 provides that “where an offence has been committed by a company, every person who, at the time when the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence, and shall be liable to be proceeded against and punished accordingly.” 76 From a director's perspective, it is extremely relevant to consider the impact of climate change on a company's business along with the risks it faces, since an omission to disclose, or disclosure of misleading statements in an offer document exposes them to civil and criminal liability under Section 34 and 36 of the Companies Act.
More specific to climate-related disclosures today is the SEBI's Business Responsibility and Sustainability Report (“BRSR”). The BRSR is the outcome of a decade-long regulatory push beginning with the Ministry of Corporate Affairs’ Corporate Social Responsibility (“CSR”) guidelines of 2010 and the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business and the National Guidelines for Responsible Business Conduct (“NGRBC”). The BRSR which was earlier called the Business Responsibility Report was issued in 2012 and was applicable to the top 100 listed companies, which today applies to the top 1000 listed companies. 77 Consistent with the magnitude of the environmental risk to the country, 87% of the disclosure provisions in the BRSR deal with environmental issues, including waste, emissions/pollution, water, energy and resources. 78 The BRSR also requires that companies disclose risks arising from climate change, which could include “impact on operations, worker health, demand for products or services etc. Climate change opportunities can include cost savings through resource efficiency, development of new products and services, access to new markets etc.” 79
Relevantly, the SEBI's BRSR differs from the CSR guidelines and the NGRBC in one key aspect—its prescriptive nature. The aforesaid policies were a failure on account of their voluntary nature—the history of Indian corporate and securities law has been one where only mandatory law has succeeded. 80 In making sustainability reporting mainstream and mandatory, the regulator has learnt from the experience with voluntary sustainability measures. The BRSR is also consistent with the global push toward sustainability reporting, and 50% of India's top 100 listed companies have adopted the Global Reporting Initiative's framework, 40% of companies the Sustainable Development Goals, 20% the framework of the International Integrated Reporting Council and 5%, the TCFD. 81 To conclude the duty of disclosure, directors should keep in mind that the climate-related disclosures the company makes, whether in offer documents or on a periodic basis to regulators/exchanges should be accurate, failing which liability may be foisted on them.
Challenges in enforcement of director duties
The actual enforcement of director's duties by stakeholders is difficult for a number of reasons. Firstly, directors are required to act in good faith with reasonable care, based on their knowledge, experience and commercial judgment. Nevertheless, “good faith” remains a subjective standard, in essence implying that directors should opine that their decisions are to protect the interests of shareholders or stakeholders, as applicable. 82 In order to establish liability on directors for breach of their fiduciary duties, whether flowing from statutory law or common, plaintiffs would have to prove that (a) the duty was in fact breached by the director (b) the loss suffered was foreseeable and (c) the loss was caused by the breach of the duty. 83 The question of whether the risk/loss was foreseeable is dependent on the available information at the time of the breach. 84
The competing interests of shareholders and stakeholders can lead to situations where directors are called upon to prioritize one of them over the other. In such a situation, directors can rely on the business judgment rule, which though not explicitly recognized in the statute, has been referenced in a few decisions, where the court held that they were only concerned with good faith and fairness in the exercise of fiduciary duties. 85
In such cases, the courts typically refrain from analyzing a director's bona fides, if the action was prima facie in the best interests of the company or shareholders or stakeholders, as applicable, since the board-decision making is a complex process. As long as the director's decision is in good faith and based on sufficient information, the outcome of the decision is cast aside. However, the business judgment rule does not offer protection from “unconsidered inaction” and a decision must be made by the board before they claim protection under this rule. 86 For example, if a property and health insurance company failed to undertake climate modelling exercises to ascertain how climate was influencing their risk profile, from weather-related damage to property or increased illness/death, their directors could be held to be in violation of the duty of care. Companies in Delaware are also allowed to limit liability for their directors for breaches of the duty of care through exculpatory clauses in their incorporation documents. However, their duty of loyalty or requirement to act legally and in good faith cannot be exculpated.
However, plaintiffs could stumble at establishing causation in a climate claim against directors “due to the disparate nature of GHG emissions” since the law here has “fallen behind scientific progress in the context of corporate climate emissions and, therefore, corporate accountability.” While a “but for” standard would be hard to meet, we await decisions of Indian courts on this specific climate claim.
Secondly, if directors are motivated by executive pay policies which tie remuneration to short-term performance, which is often the case, they could seek to prioritize short-term profitability, and possibly reduce investment on climate efficient technologies to address climate risk. This could potentially be violative of Section 166(2), if mala fides could be proved. Similarly, if directors are personally skeptical of the risks of climate change, the subjective element of good faith in the section could save them. However, with courts becoming increasingly conscious of holding corporations liable for environmental obligations, it would not be unreasonable to expect Indian courts to apply the reasonable person test. 87
Thirdly, any attempt to mandate climate-responsible actions must tackle the problem of greenwashing. The phenomenon of greenwashing undermines the entire movement toward adopting better and responsible practices by delaying credible action. This rampant problem has drawn much attention and has witnessed multiple legal claims. Recently, in KlimaAllianz v. FIFA, 88 a claim was filed against the use of statements that presented the 2022 FIFA World Cup in Qatar as climate or carbon neutral. This challenge was upheld, and FIFA was advised to refrain from making unsubstantiated claims in the future. Following this, there have been several claims against misleading advertisements. However, at the same time, the problem of greenwashing stems from a lack of clear, identifiable targets and the circulation of misinformation. Therefore, any attempt to curb greenwashing must focus on better corporate governance practices that lead to enhanced transparency and accountability. Moreover, the increased emphasis on accounting for stakeholder interests in addition to the interests of shareholders may lead to directors becoming more insulated from shareholders, reducing their accountability and hurting economic performance. 89
Fourth, under the Indian Companies Act, 2013, only shareholders can bring a class action or a derivative action against directors for breach of fiduciary duties. Class actions under Section 245 remain limited to members and depositors and the common law jurisprudence on derivative actions does not yet contemplate stakeholders bringing a suit of this nature either. There is no remedy available to stakeholders (including the stakeholder beneficiaries mentioned in Section 166(2) to sue for a breach of fiduciary duties owed to them, except for a situation where the Government itself brings an action under Section 241(2) if it is of the opinion that the company is being run in a manner contrary to public interest, in this case, worsening the climate crisis. Moreover, globally, climate-related cases brought by stakeholders against corporations that allegedly hurt their interests have often not been successful. For instance, the claim brought by ClientEarth against Shell was dismissed with the England and Wales High Court holding that it would not generally interfere with the decisions directors take to properly balance the competing interests of shareholders and stakeholders. 90 Similarly, a claim brought by the beneficiaries of the Universities Superannuation Scheme arguing that their pension fund had violated its duties by investing in fossil fuels was also dismissed recently, on account of a lack of cogent and compelling evidence of losses suffered, and since the pension fund's trustees had taken a reasoned commercial decision based on expert advice. 91 Nonetheless, the risk of litigation remains for companies where climate-conscious shareholders, investors, members or stakeholders in society may seek to sue companies/their boards on climate-related grounds, and directors therefore need to be cognizant of ESG- and climate-related risk issues.
Policy reforms and legal recommendations
The problems and challenges associated with the enforcement of director duties in respect of their obligations to preservation of the environment are largely implementation related. However, the treatment of these issues under Delaware law may aid us in tackling these challenges in India. The emerging trends across the world, especially in the US are bound to influence India's evolving approach to corporate governance. For this reason, we will draw upon emerging jurisprudence from other nations to put forth recommendations which may be well-suited to the Indian context.
Firstly, the defense of acting in “good faith” may not remain viable in the present day social and political context. Considering the increasing levels of scientific evidence and information on the adverse impacts of climate change, the regulatory push toward sustainability and the efforts of international organizations, directors would probably not be able to argue that risks posed by climate change to their companies were not foreseeable.
For instance, in the context of Delaware law, it has been noted that fiduciary duties in the context of acting in the best interests of the company requires directors at a baseline level to inform themselves of the risks of climate change to the business, and to, for example, adopt long-term perspectives on the risks and opportunities from energy transitions. 92 Further, in Delaware, directors’ fiduciary duties are divided into the duties of care, loyalty and disclosure. The duty of care mandates directors to make lawful business decisions having considered “all material information reasonably available to them.” 93 The plaintiffs must meet the standard of breaching their duty of care as established in Smith v. van Gorkom 94 through acting with gross negligence in the decision-making process. Applying this standard to the question of climate risk, directors will be in breach of the duty of care if they completely fail to inform themselves about the climate risk applicable to their company, which is foreseeable and financially material. They may also be held liable if they do not consider relevant information and trends on climate risk but display gross negligence in the process of evaluation of that information. 95
Secondly, the physical, transition and liability risks posed by climate change to businesses demand that directors accord it significant importance in their risk management frameworks. As Milieudefensie and Ors. v. Royal Dutch Shell plc 96 demonstrates, 97 although in a global context, tort law claims may be brought against directors of companies who fail to manage climate risk and suffer related financial losses. As such, directors ought to be wary of this risk and appropriately factor it into risk management policies. As climate change increases the risk to companies, directors could potentially be held liable for a breach of their duty of oversight and monitoring if they fail to oversee the functioning of the company's climate-related litigation risk control, fail to monitor climate-related material business risk and fail to monitor regulatory compliance. 98 As a result, we see the emergence of “climate competent directors”—directors with expertise and experience of climate-related business threats and opportunities including climate science, low carbon transition across the value chain and public policy. 99 And at a minimum, all directors “now need to add a base level of climate competency to their governance skill set, as is necessary to guide their companies through the physical impacts of climate change and the transition to the net-zero emissions economy.” 100 With the increasing risk of incurring personal liability, coupled with the push toward building climate competence, directors will be predisposed to account for the impact on the climate while making commercial decisions.
Further, transition risks also include technological risk, market risk and reputational risks. Shifting to energy-efficient, sustainable and green-tech will impact the competitiveness of certain companies and therefore the demand for their products/services, and “as new technology displaces old systems and disrupts some parts of the existing economic system, winners and losers will emerge from this creative destruction process.” 101
Thirdly, it is imperative for effective incorporation of climate change mitigation and adaptation strategies into corporate governance principles in India. There are several ways in which this may be achieved. Primarily, climate targets should be clearly identified, and executives should be incentivized to meet these targets. For instance, a company may set a target to reduce its GHG emissions by 25% and incentivize its directors to achieve this target by linking their annual compensation to the achievement of this target. Secondarily, there should be increased emphasis on disclosures by companies regarding their sustainability and adaptation initiatives. The legal framework of India already requires companies to publicly disclose several details about such actions. However, with the modern-day consumer being increasingly aware and interested in companies that adopt sustainable and ecologically progressive strategies, the companies will be driven to compete against each other to demonstrate better practices. In addition to this, it is also imperative that corporate training programs be actively implemented to train and upskill directors regarding the incorporation of sustainable practices in their decision making.
Conclusion
Advances in climate science have today made it possible to link a company's failure to address climate risk to financial harm suffered by plaintiffs. That apart, in stakeholder-oriented jurisdictions like India, directors are required to not only maximize shareholder value but also maximize stakeholder welfare. While jurisprudence in India on fiduciary duties is generally limited, and yet to take off in the context of climate-related duties, increasing trends of climate-related litigation in the US and Europe which implicate directors’ fiduciary duties should serve as warning to directors of Indian companies as well. As things stand, directors in India are already required to consider climate change as part of their duties of care, loyalty and disclosure.
Given the growing interest in how the operations of companies tend to impact the environment, it is highly likely that stronger regulations and laws will be introduced in due course to govern the conduct of corporations. Moreover, it is in the interest of companies to align themselves with better and sustainable practices which will not only win them goodwill with their consumers but will also allow them to engage in commerce while contributing toward safeguarding the climate.
Footnotes
Author’s note
Rudresh Mandal is also affiliated with Senior Associate (Capital Markets & Corporate) at Fox & Mandal, New Delhi and Kolkata, India. Shuchi Agrawalis is also affiliated with Research Fellow at Vidhi Centre for Legal Policy, New Delhi, India.
Declaration of conflicting interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The authors received no financial support for the research, authorship, and/or publication of this article.
