· 7 min read
While sustainability leaders debate carbon credits and social impact metrics, a quieter revolution is reshaping corporate power: a transformation in how boards govern. The companies that will define the next decade won't be those with the boldest net-zero pledges, but those with boards that embed structured, accountable ESG governance into their core decision-making.
The new reality: Stakeholders now hold the cards
Boards that cling to shareholder primacy are navigating with an outdated map. Today's corporate landscape is being redrawn by three powerful, converging forces:
Rising legal accountability is personal. The EU Corporate Sustainability Due Diligence Directive makes boards personally responsible for environmental and human rights oversight. California's climate disclosure laws and the UK's expanded Modern Slavery Act echo this global trend. ESG delegation is no longer defensible.
Courts are dismantling old defences. ClientEarth v Shell and Milieudefensie v Shell shattered the myth that climate pledges are non-binding. In Bridges v South Wales Police [2020], facial recognition deployment was struck down under proportionality review. And in May 2024, the International Tribunal for the Law of the Sea (ITLOS) declared that member states of the UN Convention of the Law of the Sea must exercise "stringent" due diligence to prevent climate-related marine pollution—a ruling already influencing corporate legal exposure.
Investors are asserting power. ESG assets under management reached $30 trillion in 2022, with Bloomberg projecting $40 trillion by 2030. Yet boards often overlook a critical shift: investors now scrutinize not only risks companies face, but also the risks they create. The 2023 UN Financing for Sustainable Development Report confirmed energy transition spending has surpassed fossil fuel investments for the first time.
The governance gap: When countries sign but companies pollute
Here lies the core contradiction: international climate treaties bind states, yet the biggest polluters are corporations—many of them state-owned.
According to the Carbon Majors Database, just 100 companies account for 71% of global emissions since 1988. In 2023, state-owned enterprises (SOEs) produced 52% of global emissions, with 16 of the top 20 historical emitters being state-owned entities. These firms straddle two accountability spheres: sovereign public obligations and private corporate governance.
The OECD acknowledges the challenge: SOEs dominate emissions-heavy sectors like energy and transport but operate under governance frameworks designed for different accountability structures. When Saudi Aramco generates more emissions than many countries, traditional shareholder primacy governance simply cannot address the scale and complexity of the climate challenge.
Structured proportionality: Bridging the accountability gap
The solution isn't cosmetic ESG upgrades. It's the adoption of structured proportionality: a constitutional law framework that offers a clear, auditable method for weighing complex trade-offs between competing interests.
Already tested in Bridges v South Wales Police [2020], and reinforced by ITLOS's 2024 advisory establishing "stringent" due diligence standards, structured proportionality is migrating from public law into ESG litigation and corporate governance. This framework enables boards to demonstrate that their decisions are:
Legitimate → Aligned with company purpose and broader societal needs Evidence-based → Grounded in data rather than assumptions
Necessary → Avoiding excessive harm where viable alternatives exist Proportionate → Balancing benefits against foreseeable impacts
This transforms ESG from rhetoric into a rigorous governance discipline—one that protects directors while meeting evolving legal standards.
From theory to strategic advantage
This isn't theoretical. Structured proportionality creates measurable competitive advantage.
Consider a technology company deploying AI systems. A conventional board might focus primarily on ROI and basic compliance. A structured board would systematically evaluate algorithmic bias, engage affected communities, and implement measurable safeguards. As litigation over greenwashing and digital ethics accelerates, it's the structured board that manages risk effectively, attracts top talent, and secures sustainable finance.
The evidence supports this approach:
• Access to capital: Over 1,593 institutions managing $40.5 trillion in assets have committed to fossil fuel divestment as of 2023, while the EU Taxonomy Regulation now mandates disclosure of sustainable economic activities
• Talent acquisition: High-performing professionals increasingly choose employers with transparent governance over those with ad hoc decision-making
• Market resilience: Structured ESG governance builds stakeholder trust, enhancing brand equity and customer loyalty
Good structure protects, poor governance exposes
Directors are legally safest when they can demonstrate documented, systematic ESG deliberation. Courts now demand rigorous process, not mere platitudes.
ClientEarth v Shell and Milieudefensie v Shell show that vague climate commitments won't withstand judicial scrutiny. The ITLOS standard of "stringent" due diligence is already influencing interpretations of fiduciary duty, including under §.172 of the UK Companies Act 2006.
The evolving reality: fiduciary responsibility increasingly encompasses foreseeable environmental and social impacts—regardless of ownership structure. This is particularly complex for state-owned enterprises operating under dual accountability to both sovereign owners and international climate obligations.
Sector-specific governance: One size fails all
Generic ESG playbooks create unnecessary risk. Each sector demands tailored governance approaches:
Energy boards must understand stranded asset risk and transition pathways as the IEA reports $1.7 trillion in clean energy investment for 2023, with solar investment overshadowing oil production for the first time.
Technology boards face data ethics and algorithmic accountability while missing opportunities in renewable energy optimization systems.
Consumer goods boards need robust supply chain traceability as the EU Taxonomy requires disclosure of sustainable economic activities.
High-performing boards embed sustainability expertise into all committees—from audit reviewing climate-related financial risks to strategy integrating planetary boundary analysis.
ESG as strategic intelligence
ESG is not a compliance burden—it's competitive intelligence that provides early warning of market shifts.
Leading boards use structured frameworks to:
• Anticipate regulation and position advantageously with frameworks like the EU Taxonomy
• Pre-empt litigation risk while demonstrating systematic sustainability governance
• Access sustainable finance from investors managing $30 trillion in ESG-focused assets globally
For mid-market companies, this represents significant opportunity. While established players adapt legacy governance structures, agile firms can build scalable ESG frameworks that demonstrate regulatory compliance and attract sustainability-focused capital.
From compliance to market leadership
This transformation requires fundamentally upgrading board judgment to match modern business complexity. As Professor Sir Andrew Likierman of the London Business School demonstrates, effective judgment depends on how options are framed, trade-offs are understood, and independence is protected from coercion. In the ESG era, these capabilities must be systematically enhanced.
Directors must ask themselves:
• Are our decisions working within planetary boundaries or contributing to their breach? (Because regulatory frameworks like the EU Taxonomy are built around these limits)
• What evidence underpins our ESG assumptions? (Because courts demand proof, not promises)
• Can we defend our reasoning to diverse stakeholders? (Because stakeholder capitalism is becoming stakeholder law)
• Are we creating measurable societal value—or managing reputational risk? (Because investors managing $30 trillion in ESG assets distinguish between genuine impact and governance theatre)
Boards that build systematic capacity to answer these questions aren't just reducing risk—they're constructing the foundation for leadership in a sustainable economy.
Conclusion: Governance is strategy
In the era of ClientEarth v Shell, Milieudefensie v Shell, and ITLOS's "stringent" due diligence standard, governance is no longer background infrastructure. It is the strategy.
The fundamental paradox is clear: countries sign climate treaties, but companies—many state-owned—generate the emissions. Bridging that accountability gap requires structured ESG governance sophisticated enough to handle both sovereign obligations and corporate responsibilities.
The companies that solve this governance challenge won't just thrive in tomorrow's markets—they'll define the operating standards for a sustainable global economy. The window for strategic choice is narrowing. The companies that act now will set the terms for everyone else.
illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.
