In a time of rising political tensions and debate around the role of ESG factors, an important question arises for board members and directors: What exactly are their legal obligations when it comes to managing climate- and nature-related risks?
This article is the first in a three-part series summarizing key insights from a workshop held by the CGI Financial Sector team as part of the Chapter Zero France educational program during the ChangeNOW conference in Paris. The first workshop focused on disruptions in the political environment and the increasingly polarized public discourse on ESG, climate, and sustainability. In this part, we highlight legal duties, a concise yet highly relevant look at how climate and nature risk management is intertwined with the legal obligations of board directors, as presented by Sarah Hill-Smith, a climate lawyer at the Commonwealth Climate and Law Initiative (CCLI).
The Legal Opinion is Clear
Board directors are legally required to actively manage material climate- and nature-related risks. This duty exists independently of regulatory compliance or “anti-ESG” political agendas.
Lawyers around the world affirm a simple truth: climate- and nature-related risks are material financial risks to companies, and therefore must be actively managed by board members to fulfill their legal obligations. Failure to do so may constitute a breach of duty, exposing board members to legal liability as well as financial, operational, and reputational harm resulting from mismanagement of material risks.
Additionally, laws in many jurisdictions require boards to consider climate and nature risks, for instance, via sustainability disclosure regulations (such as CSRD) or human rights and environmental due diligence laws (such as the CSDDD). Ignoring these can lead to regulatory action, fines, reputational damage, and more. However, despite the significant overlap, compliance and corporate risk management are not the same thing. This means:
Even if sustainability regulations are delayed or rolled back, board members’ duties to manage foreseeable, financially material climate and nature risks still apply.
Managing climate- and nature-related risks, therefore, is not – and should not be – merely a compliance exercise or a way to limit liability. It is a fundamental precondition for long-term business resilience and success. It is central to the legal duties of directors and their strategic, operational, oversight, and governance roles.
Beyond managing risks, board members should actively seek opportunities related to climate and nature.
The main message of the workshop: Regulatory duties not only require boards to manage climate and nature risks, they also enable boards to go further – embedding these issues into the heart of strategy, operations, and opportunity-seeking, while reducing regulatory risk.
Understanding the Core Duties: Loyalty and Care
Two core duties – duty of loyalty and duty of care – require board members to act in good faith, with care, based on relevant information, and in the interest of the company’s long-term success.
The duty of loyalty means directors must act in good faith for the success of the company. While “success” is often interpreted financially, regulations make it clear that long-term impacts, the company’s environmental and social footprint, and its reputation must be considered. This encourages balanced decision-making between short-term profits and long-term risks, across all stakeholders. A director who overlooks a material risk may be judged by an objective legal standard.
The duty of care requires board members to act with appropriate diligence, knowledge, and oversight, delegating responsibly and staying informed of risks. It is about quality decision-making, even if outcomes are negative. Directors are unlikely to be held liable just for poor results, unless there is evidence of bad faith, misconduct, or breach of duty. Ignoring material climate or nature risks, however, could breach this protection.
A decision that seemed reasonable in the past may no longer meet today’s legal expectations, so board directors must stay up to date with legal, environmental, and social developments.
So what do these duties mean in the context of climate change and nature loss? Legal opinions from the UK, Japan, Australia, and elsewhere confirm the following trends:
Firstly, climate change and nature loss represent foreseeable and material financial risks to businesses and the broader economy.
Secondly, climate- and nature-related risks are not a new or separate category of risk. They must be managed in the same way as any other corporate or financial risks. This contrasts with the prevailing ESG narrative that often treats sustainability as a stand-alone category.
Thirdly, as a result, board directors are legally required to manage these risks just like they manage other business risks through diligence, oversight, and informed decision-making.
Fourthly, failure to manage these risks can expose directors to significant legal liability, including personal liability for breach of duty (even though the evidentiary threshold is high), regulatory penalties (such as fines, sanctions, or removal from office), and other civil or criminal consequences depending on the jurisdiction. Additionally, there are tangible business risks such as reputational damage, loss of shareholder trust, triggering bad leaver clauses, and financial or operational harm from poor risk governance.
Practical Steps for Boards
Board members can manage climate and nature risks by:
Identifying climate- and nature-related risks and opportunities, stemming from the company’s impacts and dependencies on nature, using expert input where necessary.
Assessing materiality, ideally using double materiality frameworks.
Managing and mitigating these risks structurally, e.g., by setting science-based targets, engaging with value chain partners and stakeholders, or investing in nature-positive solutions. How risks are managed falls within board directors’ business judgment and depends on the circumstances.
Disclosing risks and actions transparently, whether through mandatory regulations or voluntary frameworks. This helps boards communicate how risks are managed and reduces accusations of poor governance.
Documenting decision-making processes, protecting against liability. Meeting minutes and records of key decisions – especially the rationale behind them – can serve as critical evidence in case of legal scrutiny related to climate and nature risk governance.
Creating a Value Narrative
The five steps above represent a minimum standard, defining what board members must do under their legal duties. It’s critical to understand these are not duties owed to lawmakers – they are owed to the company. So even if sustainability rules are weakened or withdrawn, directors still have to take these steps to mitigate financially material climate and nature risks.
However, if businesses want to endure and thrive in the long term, boards must go further: invest in resilience and innovation. Nature and climate can no longer be treated as externalities or compliance burdens. They must be central to strategy and business planning.
Board members should view climate and nature as strategic priorities, directly connected to:
Ensuring supply chain resilience to physical shocks (e.g. droughts, floods, wildfires)
Accessing new markets through green innovation and first-mover advantage
Enhancing the company’s reputation with customers, partners, and talent
Driving operational efficiency through smarter use of energy, water, and land
Unlocking innovation – confronting nature loss and climate risk can lead to new business models and revenue streams
The economic case for investing in nature and climate is clear. The World Economic Forum (WEF) estimates that every $1 invested in ecosystem restoration could yield $7 to $30 in economic benefits. A systematic transition to a nature-positive economy could create $10.1 trillion in annual business value and 395 million new jobs by 2030 (WEF, The Future of Nature and Business).
Key Takeaways
If board members remember only two things:
In the future, the term “ESG” may fade, but the financial, operational, and governance reasons for investing in climate and nature opportunities will only grow.