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Sustainable corporate governance in the United Kingdom: Environmental sustainability in directors' decision-making

Constantin Jung

No 25, Working Paper Series from Frankfurt University of Applied Sciences, Faculty of Business and Law

Abstract: Environmental sustainability is one of the greatest challenges of this century. It depends on both compliance with environmental protection laws and its integration into directors' decision-making beyond these laws. In this regard, the duty to promote the company's success stipulates in the Companies Act 2006 that directors, who are protected by Business Judgment Rule, shall consider their companies' environmental impacts. Since the stakeholders' interests are regarded as a means to increase shareholder value, directors may pursue their companies' environmental sustainability through a business case. The latest changes to the UK Corporate Governance Code 2018 further encourage directors to consider environmental sustainability in their business decisions. They may also link environmental sustainability to mandatory and voluntary disclosures through publishing their companies' achievements. As a result, directors have broad discretion to pursue environmental sustainability beyond environmental protection laws. However, evidence shows that directors frequently neglect this discretion, the environmental sustainability's resulting business case and that they even cause environmental damages to increase (the short-term) shareholder value. This is due to the social norm of shareholder primacy, which is now exacerbated by Brexit's and the Ukraine war's unclear economic impacts as well as the ongoing COVID-19 pandemic. In this regard, the current approach of the UK's company law in the predominant form of narrative reporting laws is insufficient because of the resulting greenwashing possibilities. This paper's main argument is thus that changes to the current legal framework for directors' decision-making are needed to achieve more environmental sustainability. Accordingly, a new principle for the UK Corporate Governance Code 2018 could lead to a greater consideration of environmental sustainability in directors' decision-making and increased shareholder value in times of rising societal awareness of climate change and a growing trend towards environmental activist shareholders.

Date: 2022
New Economics Papers: this item is included in nep-cis, nep-ene and nep-env
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DOI: 10.48718/1k89-pj62

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