In April 2022, UN Secretary-General António Guterres urged major emitters to take more decisive action in meeting climate pledges, warning of dire consequences without global energy policy revisions. While governments lead in environmental regulation, large corporations hold significant sway in reducing reliance on carbon fuels. This dynamic places scrutiny on boards of directors, particularly in sectors like energy, minerals, and mining. ClientEarth, an environmental law charity, filed a lawsuit against Shell Plc’s board in February 2023, alleging a breach of duty in shaping the company’s climate change risk management strategy. The contention wasn’t a lack of effort to reduce fossil fuel dependency, but rather the perceived slow progress in setting short to medium-term emission reduction targets. The High Court in London dismissed ClientEarth’s case in May 2023, a decision upheld in July. This case prompts critical questions about directors’ environmental responsibilities and liabilities, especially in the Indian context. It brings to light the potential challenges to commercial decisions that may have adverse environmental impacts, and whether directors have legal recourse under the ‘business judgment rule’ in such circumstances.
Legal Framework in Indian Scenario
In India, the inclusion of environmental preservation as a legislative obligation for directors constitutes a fundamental paradigm change in corporate governance. It represents a greater public realisation of environmental sustainability’s crucial relevance. This legislative framework not only emphasises the need for corporations to be accountable for their environmental footprint, but it also allows stakeholders, notably shareholders, to hold directors accountable for choices that may have far-reaching environmental implications.
The case of “Tata Consultancy Services Ltd. vs. Cyrus Investments (P) Ltd.” confirms this shift in the corporate atmosphere. It demonstrates how corporate duties have evolved from a profit-driven focus to a broader framework of social accountability and environmental stewardship. This move is consistent with worldwide trends in which businesses are increasingly required to operate in an ecologically friendly manner. Furthermore, the case of “M.K. Ranjitsinh vs. Union of India” gives vital clarification on the legal term ‘environment’. The court maintains a uniform interpretation by referring to the Environment (Protection) Act, 1986, emphasising the interconnectivity of water, air, land, and living beings. Section 166(7) of the Companies Act, 2013 mandates fines up to INR 5,00,000 (approximately USD 6000) for non-compliance with duties, including environmental safeguarding under Section 166(2). Shareholders can also turn to Section 241 of the Companies Act, allowing them to approach the National Company Law Tribunal (NCLT) if they perceive directors prioritizing profits over environmental conservation. The NCLT holds significant authority, including the power to temporarily suspend a company’s board of directors during proceedings.
The reliance on the ‘business judgment rule’ as a potential safeguard for directors facing challenges related to environmental decisions indicates the delicate balancing act that directors must now perform. They are tasked with not only ensuring profitability and shareholder value but also managing environmental risks and impacts. This underscores the need for directors to be astute and forward-thinking in their decision-making, taking into account long-term environmental sustainability alongside short-term financial gains. Additionally, the linkage between the Companies Act and the Environment (Protection) Act provides a clear legal framework for interpreting and enforcing environmental responsibilities. It establishes a robust foundation for environmental protection within the corporate sector, aligning India’s legal landscape with international best practices for sustainable corporate governance.
In essence, these legal developments signal a growing recognition that businesses play a pivotal role in environmental conservation. Directors are now entrusted with a dual mandate: to act in the best interests of the company and its stakeholders, while also ensuring the protection and preservation of the environment. This evolution in corporate governance not only aligns with global efforts to combat climate change but also reinforces the idea that businesses must be at the forefront of sustainable practices for the well-being of society and the planet.
Evolving Perspectives from Corporate Social Responsibility to Corporate Legal Responsibility
During a panel session on “Corporate Legal Responsibility and Climate Change” at the Commonwealth Magistrates’ and Judges’ Association (CMJA) Annual Conference 2023 in Cardiff, Justice BR Gavai emphasized a pivotal shift in the role of businesses in tackling climate change. This transition signifies that businesses are not only morally bound but also legally obligated to actively engage in climate action, aligning with both international and national mandates. Justice Gavai’s call underscores the pressing need for collective action and a robust legal framework to effectively combat the far-reaching impacts of climate change. This mirrors the evolving landscape of corporate engagement in environmental conservation, recognizing that voluntary Corporate Social Responsibility (CSR) efforts may fall short in cases of conflicts or significant harm to the environment, wildlife, or communities.
Furthermore, Justice Gavai’s citation of established judicial principles such as “polluter pays”, “precautionary principle” and “sustainable development” underscores the judiciary’s pivotal role in holding corporations accountable for their environmental footprint. These principles provide a guiding framework that places the onus on corporations to protect the environment and contribute to its restoration in the face of damage caused by their operations. The emphasis on collaborative initiatives, sharing best practices, and setting ambitious climate targets for corporations underscores their potential to play a pivotal role in the global fight against climate change. This perspective aligns with the broader recognition of the corporate sector as a significant stakeholder in achieving environmental sustainability.
Hence, Justice BR Gavai’s advocacy for corporate legal responsibility marks a profound evolution in the role and expectations of businesses in confronting climate change. It signifies a departure from voluntary CSR efforts towards a legally binding commitment to environmental protection. This shift not only aligns with global imperatives but also recognizes the influential role that businesses can play in mitigating the impacts of climate change.
Business Judgment Rule and its Role in Climate Protection
The business judgment rule stands as a crucial safeguard for directors when their commercial decisions are scrutinized in a court of law. It asserts that, in making such decisions, the board must have acted in good faith, based on sound information, and with the genuine belief that it serves the company’s best interests. This principle, reinforced in landmark cases like “Aronson vs. Lewis”, establishes that courts typically refrain from overruling a board’s decision, provided there is no evidence of misconduct. Originating in the UK Courts as early as the 18th Century, this rule has evolved over time and found strong precedent in Delaware, USA. Recent rulings, like the “City of Coral Springs Police Officers’ Pension Plan vs. Jack Dorsey, Block, Inc.”, underscore that a board, primarily composed of impartial and independent directors, can make a suboptimal business decision without incurring significant liability, as long as the decision is made in good faith.
In the context of environmental litigation, such as ClientEarth’s case against Shell’s directors, the High Court referred to the business judgment rule while dismissing the application. The court affirmed that it is the directors’ prerogative, acting in good faith, to determine the best course for the company’s success. While the business judgment rule has been invoked in a limited number of cases in the Indian context, it remains a recognized defence. The question arises: can it effectively shield directors against allegations of breaching statutory duties, especially in matters related to climate action? Although Indian cases like Fidaali do not provide a definitive answer, the High Court’s acceptance of the rule in the ClientEarth action, which revolved around alleged breaches of statutory duties in the context of climate concerns, suggests its potential applicability. Foreign courts, particularly in common law jurisdictions, have firmly supported the application of the business judgment rule. In the Indian context, where environmental activism has played a significant role in legal proceedings, it will be intriguing to observe how Indian courts balance such activism with established principles of directorial liability, particularly in matters pertaining to climate action. This dynamic highlights the evolving landscape of corporate responsibility in the face of pressing environmental challenges.
Conclusion
In an evolving global landscape, the urgency for heightened corporate responsibility in the face of climate change is evident. From UN Secretary-General António Guterres’ plea to major emitters to legal battles challenging corporate environmental practices, the call for swift action is clear. The transformation of corporate duties in India, underscored by cases like Tata Consultancy Services Ltd. and M.K. Ranjitsinh, reflects a broader shift towards a more holistic view of corporate success, one that embraces environmental stewardship. Justice BR Gavai’s plea for ‘Corporate Legal Responsibility’ adds a significant dimension, emphasizing the pivotal role businesses play in shaping a sustainable future. The business judgment rule emerges as a critical safeguard, providing directors with a necessary buffer as they navigate this new terrain. In this dynamic landscape, the delicate balance between profitability and environmental conservation takes centre stage, prompting a critical question: are businesses moving swiftly enough to address climate concerns while safeguarding their financial interests? The legal battles, as exemplified by ClientEarth’s action against Shell, serve as poignant reminders that the choices made by corporations today hold the key to the future of our planet.
This article is written by Mr Aayush Akar & Mr Dhruv Kalia, students of the National Law University Odisha & National Law University of Advanced Legal Studies respectively.
References:
https://www.ft.com/content/e7dfc39f-90af-4819-8675-ec84bb650c4.
https://caselaw.nationalarchives.gov.uk/ewhc/ch/2023/1137.
https://www.esgtoday.com/uk-court-rejects-attempt-to-revive-climate-lawsuit-against-shell-directors/.
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