Dr Gerry Bean has published an article in the Law Institute Journal assessing directors’ duty to management of environmental, social and governance (ESG) risk. He looks at the open ended duties of directors, at law, and the welter of spectacular reputational collapses, of recent, to argue that is is vital that they do manage ESG risk. My take on this – with apologies to the: ‘a hard earned thirst, deserves a big cold beer’ Victoria Bitter ads (which some of you will remember) – would go something like this: “You can get it as a bank, having investment advisers, charging ‘fees for no service’ or paying $1b for Austrac offences – the worst kind of action needs an inquisition, and the best one round here, is the Banking Royal Commission.” I’m posting this article, as ‘directors duties’, will never be far away from the life of a tax practitioner – if for no other reason than managing tax governance risk.

See below for the article

[Tax Month – June 2021]

 


 

Directors’ duties: At your peril

Law Institute Journal article by Dr Bean (1.7.21)

 

2020 taught all of us, including lawyers, several important lessons. One is the increasing importance of management of environmental, social and governance (ESG) risk by directors and management. Recent APRA and ASIC reports and the Hayne Royal Commission have increased focus on corporate governance and risk management. Despite this, 2020 saw several spectacular ESG failures by Australian companies with damaging fallout, including AMP with the promotion of a senior executive despite sexual harassment claims and Rio Tinto with the destruction of the Juukan Gorge caves. While these failures are problematic for the messages they send about attitudes to women, sexual harassment and Indigenous peoples, viewed more broadly, these failures led to reputational damage, embarrassing director resignations and reduced market value.

A recent trend in corporate governance has been the focus on directors recognising and overseeing so-called “non-financial risks” such as reputational risk. Poor ESG performance often results in reputational damage. But these risks are also financial risks because reputational damage can lead to consumers, investors and lenders turning away from dealing with the business. Directors are increasingly seeking to embed ESG as part of their corporate culture, and management of ESG risk is increasingly an issue in corporate finance, project finance and M&A due diligence.

The definition and development of ESG and its relevance to directors’ duties are considered in this article, and recent examples illustrate the importance of directors addressing ESG in order to comply with their directors’ duties.

What is ESG?

The concept of “corporate social responsibility” – corporations doing good in society – preceded the rise of ESG, which is a more specific set of issues within corporate social responsibility. The acronym, ESG, is often considered as being first used in the 2005 “Who Cares Wins” Report, but it is only in more recent times that ESG has become a real focus in Australia. The initiative was originally designed to find ways to integrate ESG into capital markets on the basis that this “makes good business sense and leads to more sustainable markets and better outcomes for societies”. ESG provides a response to changing social attitudes in the face of high-profile reports into corporate failures, with the consequence that directors and managers must consider issues and interests that they may previously have disregarded.

The “Who Cares Wins” Report outlined several areas within ESG as issues of concern:

Environmental issues
  • Climate change and related risks
  • The need to reduce toxic releases and waste
  • New regulation expanding the boundaries of environmental liability with regard to products and services
  • Increasing pressure by civil society to improve performance, transparency and accountability, leading to reputational risks if not managed properly
  • Emerging markets for environmental services and environment-friendly products.
Social issues
  • Workplace health and safety
  • Community relations
  • Human rights issues at company/suppliers’/contractors’ premises
  • Government and community relations in the context of operations in developing countries
  • Increasing pressure by civil society to improve performance, transparency and accountability, leading to reputational risks if not managed properly.
Corporate governance
  • Board structure and accountability
  • Accounting and disclosure practices
  • Audit committee structure and independence of auditors
  • Executive compensation
  • Management of corruption and bribery issues.

This was a prescient list of issues given events in recent times. The report recognised that sound corporate governance and risk management systems were crucial pre-requisites to addressing ESG issues.

Directors’ duties

Company law and the Corporations Act 2001 (Cth) (Corporations Act) do not explicitly address the question of the role of corporations and the role of directors in society and to how to take ESG into account. The Corporations Act does not take a prescriptive approach to any issues directors should focus on when fulfilling their director’s duties. We can compare this approach with the wide-ranging list of factors that UK directors must consider under s172(1) of their Companies Act 2006, which includes factors that fall within the ESG remit.

See the rest of the article, here ……………..

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