Reimagining corporate governance: Where fiduciary duties meet ESG considerations

Writer: Sujannya Rathinam

Editor: Salayla Elmasry

In a time where ESG considerations are becoming increasingly prominent in the business world, the question of how fiduciary duties intersect with ESG goals has become the subject of extensive debate. Fiduciary duties refer to the legal obligation of directors to act in the best interests of shareholders, which was historically understood as maximising profit. As ESG initiatives such as cutting carbon emissions or investing in fair labour practices may reduce short-term profits, there is concern that this compromises fiduciary duties.. While there remains doubt on whether fiduciary duties and ESG goals can co-exist, recent developments suggest they can be aligned to support long-term business value.

This tension came to the forefront in ClientEarth v Shell (2023). ClientEarth argued that Shell’s directors had breached their duty of exercising “reasonable care, skill and diligence” under Section 174 of the Companies Act (CA) 2006 due to a failure to adopt environmentally friendly policies. The Court of Appeal dismissed the claim, emphasising that directors have wide discretion to decide what “success” looks like suggesting courts are still reluctant to impose ESG obligations on directors.

While courts remain cautious, regulation and governance codes are shifting towards integrating  sustainability into corporate decision-making. The CA 2006 was an important step in this direction. Section 172 requires directors to act in ways that promote company success with regard to “the likely consequences of any decision in the long term” and “the impact of the company's operations on the community and the environment”. By explicitly including these considerations, the law signals that ESG factors are no longer peripheral, but instead built into what responsible leadership looks like.

Building on this foundation, the UK Stewardship Code 2020 marked a significant shift. Stewardship in corporate governance refers to the responsible management of a company's resources and interests. For the first time, the code explicitly integrated ESG into its stewardship definition: "the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.” This redefined good stewardship as creating sustainable value not just for shareholders, but for the wider economy, environment, and society. This signalled that directors can pursue ESG goals without compromising their fiduciary obligations.

Regulatory guidance further reinforces this view. The FCA Policy Statement PS21/24 requires firms to disclose how they factor climate risks into their management and investment decisions. These requirements strengthen transparency, encouraging firms to integrate environmental factors into their risk assessments.

However, the upcoming 2026 Stewardship Code revisions have raised eyebrows for 2 key reasons. Firstly, the new definition of stewardship removed explicit ESG references, defining stewardship as “the responsible allocation, management and oversight of capital to create long-term sustainable value for clients and beneficiaries.” Secondly, it reduces reporting requirements by 20–30%, replacing detailed disclosures with a more flexible framework.

Critics worry that this signals weakened accountability and a retreat from the progress made. From July 2023 to June 2024, BlackRock supported only 4% of ESG proposals put forward by shareholders at annual meetings, reflecting a wider trend of ESG backlash. However, the reality may be more nuanced. The Financial Reporting Council (FRC) stresses that the goal is not to deprioritise ESG, but to embed it more deeply within fiduciary judgement.

The 2026 changes may therefore reflect not a retreat, but a shift towards integrating ESG into metrics of long-term company success. While ESG and fiduciary duties may appear at odds, the trajectory is clear: responsible action for the planet and society is now central to creating long-term business value.