Fiduciary Duties among Anti-ESG Sentiments: ESG as a Means to Value Creation and Sustainability

The regulatory landscape for environmental, social, and governance (“ESG”) in the US has shifted significantly towards uncertainty. The new administration has strategically pivoted away from emission reduction and clean energy. The Securities and Exchange Commission has since followed suit, gradually receding from its previously pro-ESG stance. In contrast to consistent deregulatory efforts at the federal level, ESG regulations at state-level has been highly polarized. Despite strong momentum towards decarbonization from some states led by California, 21 other states have enacted more than 40 anti-ESG bills. 

As some argue, ESG still plays a key role in creating more sustainable corporations. Yet since directors are bound by their fiduciary duties to prioritize the interests of stockholders instead of stakeholders, how can corporations defend ESG as a legitimate strategy? This essay argues that certain ESG initiatives can be justified under Delaware corporate law, provided it serves as a means to the end of maximizing stockholders’ interests. However, ESG alone cannot rebalance corporate governance toward stakeholders; meaningful change requires regulatory reform.

A. Fiduciary Duties in a Changing Regulatory Development — ESG as a Means to the Ends of Profit Maximization

(i) Duty of Care

Under Delaware law, directors must inform themselves of all material information reasonably available to them when making business decisions. The courts apply the business judgment rule, which presumes that directors acted on an informed basis, in good faith, and honestly believed that the action taken was in the best interests of the company. The courts’ scrutiny mainly focuses on the process leading to the decision, rather than the outcome. 

An ESG initiative that increases short-term transaction costs or fails to generate anticipated returns does not, in itself, constitute a breach. This remains true as long as the directors relied on material information and expert advice that led them to believe the initiative would benefit the company, even if the benefit is aimed at the long term. Liability arises only where directors fail to inform themselves adequately, causing the company to incur expenses akin to waste. However, the standard for proving waste is extremely high, met only in rare situations where the board makes an ESG-related decision that no reasonable businessperson would have made.

(ii) Duty of Loyalty

In Delaware, the duty of loyalty doctrine requires directors to act solely in stockholders’ interests, imposing restrictions on when directors may take ESG considerations into account. As illustrated in eBay v. Newmark, directors breached this duty if they subordinate stockholders’ interests to the well-being of the community. 

ESG considerations can still be justified if framed instrumentally. As indicated in Unocal and clarified in Revlon, directors of a not-for-sale company generally may consider the interests of stakeholders. They may do so only when their interests are “rationally related” to the benefits accruing to stockholders. Stakeholders are means, not ends. So far, the case law has not provided a clear definition of ESG, nor has there been any precedent on fiduciary duties in this context.

B. Real Empowerment Through Regulatory Reform

What about ESG considerations that do not necessarily relate to a company’s profitability? According to the former Chief Justice of the Delaware Court, Leo Strine, companies should still strive to consider ESG, as it rebalances governance towards stakeholders. The current stockholder-oriented corporate governance system concentrates power in stockholders and undermines stakeholders, leading to inequality, stagnant wages, financial instability, and environmental externalities. With a balanced governance system, economic gains can be distributed more fairly, and companies can benefit from aligning their interests with long-term social and ecological sustainability.

However, in Strine’s words, “power dictates purpose” in corporate governance. It is unfit for directors to warrant protection of stakeholder interests through ESG initiatives that are not closely linked to shareholders’ interests. The Delaware Corporate Law grants voting rights, approval rights for fundamental transactions, and enforcement rights exclusively to stockholders. No other constituency is given comparable legal power. As a result, directors are accountable only to stockholders and “owe their continued employment as managers and directors” to that constituency alone. 

As these initiatives fall outside the scope of fiduciary duties, it is unreasonable to assume that directors will voluntarily prioritize stakeholder interests. Meaningful stakeholder protection therefore requires structural reform, ranging from stronger external regulations (such as labor, environmental, and consumer laws) to specific enforcement mechanisms to incentivizing long-term stewardship by institutional investors. 

C. Practical Tips for Boards to Incorporate ESG into Business Decisions

To comply with fiduciary duties in an uncertain ESG regulatory landscape, the primary step for the boards is to integrate ESG into their business strategy. Given shifting stakeholder sentiment and potential reputational risks associated with taking stances on certain issues, boards should consider when and how their companies should engage on certain topics. They should also work with management to set a tone at the top and foster a corporate culture that prioritizes ethics, professionalism, and integrity. 

Regarding executive compensation, compensation committees should periodically reassess any ESG-related metrics that promote long-term stockholder value, considering political developments and performance outcomes. This is key to ensuring alignment with long-term stockholder value.

To build credibility among stakeholders, Boards should also encourage management to ensure that any ESG-related policies can be demonstrably linked to performance and value creation and therefore withstand criticism. Boards should also engage more with stakeholders to understand their expectations and values, enabling boards to assess both the immediate and long-term consequences of strategic decisions.

Despite growing anti-ESG sentiment, directors may incorporate ESG considerations without breaching fiduciary duties, provided that those considerations are rationally connected to stockholder value. However, ESG, without more, cannot restore a more balanced governance system with fairer economic distribution to customers, employees, and the community. Absent structural reform, corporations will continue to prioritize stockholders, limiting ESG’s potential in realizing stakeholders’ interests. While a prudent board should embed ESG into the company’s business strategy to create long-term value that satisfies both legal obligations and evolving market expectations, genuine stakeholder empowerment ultimately depends on regulatory reform beyond the boardroom.

Eva Ye is a current LL.M. candidate at NYU School of Law, where she serves as a Graduate Editor for the Journal of Law and Business. Prior to commencing her LL.M., she interned at international law firms in Hong Kong, focusing on transactional areas (general banking, M&A, and capital markets), as well as dispute resolution. She graduated with a combined BBA/LL.B. degree from the University of Hong Kong, with a major in Law and Finance and a minor in Accounting.