Fiduciary Duty and Corporate Externalities: Rethinking Directors' Climate Obligations

This paper examines what I call the external dimension of directors’ duties— whether directors can and should consider the company’s impacts on climate change or address other negative externalities, even when doing so may not be connected to firm-specific shareholders' financial interests. This is in contrast to what I call the internal dimension of directors’ duties, which is concerned with the company’s interests, often equated with shareholder value.

The inquiry into the external dimension gains urgency from three developments: the rise of diversified investors and the universal ownership movement; EU regulations requiring corporate sustainability due diligence; and importantly, the prominence of state-owned enterprises (SOEs) as among the worst global greenhouse gas emitters.

I critically examine three arguments supporting the external dimension of directors’ duties. First, I argue that the incorporation of nature-related provisions into corporate constitutions by UK companies provides limited protection due to shareholder primacy constraints. Second, I show that catering to shareholders' preferences is unpersuasive, as empirical evidence shows most shareholder environmental activism in the US remains financially motivated. Finally, I advance the novel argument that in SOEs, such as those in China, the duties of directors of SOEs can align with those of the state as the controlling shareholder and as the asset owner. My analysis of Chinese SOEs holds at least three lessons for the US and comparative corporate governance discourse on climate change pertaining to government-owned utility companies, the double-edge sword of the universal ownership argument, and the conflict between the broader economic benefits generated by carbon-intensive SOEs and the externalities caused by them.