The corporate law discourse on climate change has largely focused on the “internal dimension” of directors’ duties – whether boards must consider climate-related risks and opportunities that affect firm-specific financial performance. While this question has gained significant traction, a more provocative challenge remains less explored: Should directors address their company’s negative impacts on climate, the economy, and society, even if doing so is unconnected with or may even conflict with firm-specific shareholder returns (at least in the short-term)?

In a new paper, I tackle this “external dimension” of directors’ duties. Three developments are driving this issue: the rise of universal ownership, new EU sustainability regulations, and the stark reality that state-owned enterprises (SOEs) are among the world’s worst greenhouse gas emitters.

The Universal Ownership Argument

The Delaware Court of Chancery’s recent decision in McRitchie v Zuckerberg provides a fascinating entry point into these tensions. The case saw Meta’s minority shareholders arguing that directors breached their duties by maximizing the company’s financial interests without considering the broader economic harm caused by misinformation on Meta’s platforms – harm that ultimately damages the portfolios of diversified investors who hold shares across the economy.

While Vice Chancellor Laster rejected the claim that directors owe duties to diversified investors, his decision included an important qualification: Directors must consider risks to the broader economy when their decisions would “consistently or profoundly harm the broader economy” and thus undermine long-term shareholder value. This opens intriguing possibilities for climate-related corporate decision-making, given mounting evidence that climate change could cause economic losses equivalent to experiencing “the 1929 Great Depression, forever.”

Corporate Constitutions and the Nature Guardian Experiment

One of the more creative developments I examine is the incorporation of “nature-related provisions” into UK company constitutions. Companies like Faith in Nature and House of Hackney have amended their articles of association to appoint “Nature Guardians” to their boards and explicitly require consideration of environmental impacts, even when disconnected from financial returns.

While innovative, there are fundamental limitations in these arrangements. The provisions operate within an entrenched shareholder primacy framework, creating ambiguity about how to resolve conflicts between shareholder interests and environmental protection. More concerning, only company members can enforce these constitutional provisions, and majority shareholders can remove Nature Guardians or eliminate the environmental clauses entirely through special resolution.

These experiments highlight a broader challenge: Meaningful corporate environmental accountability may require more than voluntary constitutional amendments within existing legal frameworks.

EU Regulations

The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) and Corporate Sustainability Reporting Directive (CSRD) represent more rigorous approaches. These regulations require companies to address adverse impacts on human rights and the environment and to report on both how sustainability issues affect their financial performance (financial materiality) and how their activities affect sustainability matters (impact materiality).

Notably, the final CSDDD removed provisions that would have explicitly required directors to consider sustainability consequences as part of their duties – a move driven by concerns about interfering with national corporate laws and potential director liability. Yet this removal doesn’t eliminate directors’ obligations. Companies subject to these regulations must still comply, and this creates a new compass for corporate decision-making that inevitably influences how directors discharge their duties.

The SOE Solution: A Triple Alignment of Duties

To begin with, SOEs control staggeringly large portions of the global carbon-intensive economy: over 70 percent of oil and gas assets, 60 percent of coal mines and plants, and more than 60 percent of world electricity capacity. Among the world’s top 20 highest carbon-emitting entities, 16 are SOEs, accounting for over 40 percent of global fossil fuel emissions. Yet paradoxically, SOEs are also responsible for more than 50 percent of planned renewable energy investments globally.

SOEs offer a unique path for legitimizing the external dimension of directors’ duties. The key insight lies in recognizing that SOEs create a rare alignment of three distinct fiduciary relationships that normally point in different directions.

First, directors of SOEs owe duties to act in the company’s best interests – but crucially, those interests encompass multiple objectives beyond profit generation, including environmental protection, social development, and strategic economic goals.

Second, the state as controlling shareholder also owes fiduciary duties to the SOE and, as a public entity, must balance broader societal considerations alongside financial returns.

Third and finally, the state as asset owner (managing diversified portfolios that include both SOEs and private companies) owes duties to the beneficiaries that require considering systemic risks like climate change that affect overall portfolio performance.

This triple alignment means that directors, controlling shareholders, and asset owners can all legitimately prioritize climate considerations even when doing so conflicts with short-term, firm-specific profits.  Unlike private companies, whose directors face potential liability for sacrificing shareholder returns, SOE directors operate within a framework where broader considerations are not just permitted but often required.

However, the same logic that permits SOE directors and controllers to account for external considerations such as renewable energy investments – even if at the expense of SOE-specific shareholder returns – can paradoxically justify continued coal plant construction when the broader economic benefits outweigh climate costs. The Chinese coal-fired power plant SOE-case study demonstrates that even when directors have clear legal authority to address negative externalities, the actual exercise of that authority depends on complex political and economic calculations that may not align with climate goals.

For example, China continues building coal plants despite net-zero commitments because the SOE directors and controllers are likely to have conducted the cost-benefit analysis at the country level rather than the firm level. Using social discount rates rather than private cost of capital, and considering consumer willingness to pay across the entire value chain rather than just plant-level profits, directors and controllers of SOEs are likely to have concluded that taking into account broader economic considerations justify continued coal-fired power plant operations.

The Chinese SOEs case study suggests that the universal-ownership logic that climate advocates often invoke can work in reverse: Wwhen carbon-intensive activities generate broader economic benefits that outweigh their costs within a diversified national portfolio, state asset owners may rationally delay decarbonization.

Implications for Corporate Governance

My paper suggests three lessons for corporate law’s engagement with climate change. First, the external dimension of directors’ duties is particularly relevant for government-owned utilities, which account for significant portions of electricity capacity globally. Second, the universal ownership argument cuts both ways – it can justify either climate action or continued fossil fuel activities, depending on the economic calculus undertaken by the asset owner. Finally, SOEs highlight how corporate governance mechanisms can help mitigate or exacerbate the inherent tension between the broader economic benefits generated by carbon-intensive activities and their environmental externalities.

This post comes to us from Professor Ernest Lim at National University of Singapore, Faculty of Law. It is based on his recent article, “Fiduciary Duty and Corporate Externalities: Rethinking Directors’ Climate Obligations,” available here.