The ESG Conundrum: Aligning Corporate Law With Sustainability Goals

The author, Izabella Ferreira Pinto de Carvalho, is currently pursuing an Evening law degree (BCL) while working full-time. With a background in International Relations and Institutional Communication, she has previously interned at CIFAL - United Nations, focusing on projects aligned with the Sustainable Development Goals (SDGs). Her professional experience includes working as a Compliance Specialist at Apple, where she navigated regulatory challenges such as the Digital Services Act. In this blog, she critically examines the intersection of Environmental, Social, and Governance (ESG) factors with corporate law, exploring how businesses can reconcile sustainability commitments with traditional fiduciary duties under Irish and EU legal frameworks. The views expressed in this article are those of the author alone based on research materials from different authors. The author is grateful for the COLR faculty's work on reviewing this article.  

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A Introduction

Environmental, Social, and Governance (ESG) factors have become central to contemporary business discourse, influencing corporate strategies and operations globally. As stakeholders increasingly demand accountability and sustainability, businesses must adapt to regulatory frameworks, societal expectations, and environmental challenges. However, ESG's integration into corporate law raises critical questions about compatibility, particularly in Ireland, where fiduciary duties prioritize shareholder profits. This piece aims to critically examine ESG’s transformative impact on business operations and its potential for encouraging more sustainable and ethical practices. The tension created  by these factors will be anaylsed through the lense of existing legal frameworks employing Irish and EU law, case law, and corporate practices.

B         ESG’s Impact on Business Operations

ESG factors significantly influence how businesses operate and can create new opportunities for growth. The integration of ESG into corporate practices is increasingly recognized as essential for sustainable business development. The assertion that ESG factors not only shape the way businesses operate but also create new opportunities for growth can be exemplified in several ways: regulatory push, social license, financial stimulus and value creation.

I           Regulatory Push

The EU’s Corporate Sustainability Reporting Directive (CSRD)[1] and Corporate Sustainability Due Diligence Directive (CSDDD)[2] mandate firms to address double materiality, compelling businesses to address both how ESG issues affect them and how their activities impact society. This holistic approach integrates ESG into risk management, supply chain policies and operational strategies. For instance, Irish companies under the CSRD must annually disclose climate-related risks and social impacts, fostering transparency and stakeholder trust. The CSDDD obliges companies to conduct due diligence on human rights and environmental impacts, implement mitigation measures, and align with EU climate neutrality targets.

The European Sustainability Reporting Standards (ESRS) [3] proposes the implementation of general reporting requirements with a view to enhance transparency, stakeholder trust, and competitive advantage. These practices seek to attract investment, secure financing and improve procurement opportunities. Compliance with ESG directives positions companies to capitalize on emerging sustainability trends, aligning with EU climate goals and market expectations. [4] However, non-compliance risks include regulatory enforcement, negligence claims, and reputational damage.[5] For example, ClientEarth v Shell, 2023[6]underscored legal risks for directors neglecting climate-related issues, signalling growing stakeholder scrutiny. The Paris Agreement on Climate Change[7] may place further risk of climate-litigation on directors that do not act according to its objectives.

Similarly, the EU Taxonomy Regulation[8]  defines sustainable activities, guiding companies in aligning their operations with sustainability goals. It facilitates access to green financing by identifying sustainable economic activities, enabling businesses to attract environmentally conscious investors and consumers. This regulatory framework transforms ESG from a peripheral concern into a strategic priority, offering companies new growth avenues through improved market reputation and alignment with sustainability goals. This market reputation is what Pérez et al.,[9] call social license.

II         Social License

To Pérez et al.,[10] the relevance of ESG can be asserted because ESG enables companies to manage significant external impacts like climate change and labour market effects, aligning operations with societal expectations. Social license, or public acceptance, is imperative for the survival of companies: embedding purpose to the company is not only important to gain trust from stakeholders and mitigate risks, but it can also create financial value from their values. EU directives amplify this by requiring enhanced ESG disclosures, aligning corporate objectives with societal demands.[11]

Critics often argue that ESG metrics are inconsistent and that ESG distracts from profit-making. However, Pérez et al. contend that ESG can reconcile financial performance with societal impact, creating opportunities for companies to foster innovation, attract investment, and build resilience. Businesses that successfully integrate ESG enhance their societal standing, building long-term trust with stakeholders. [12]

C         Financial Stimulus

Giese et al. identify three financial mechanisms—cash flow, risk reduction, and valuation—that link ESG practices to superior financial performance.[13] Companies with strong ESG ratings enjoy higher profitability, reduced risks, and lower costs of capital. For instance, ESG-driven companies demonstrate innovation, resource efficiency and improved human capital development. These also lead to higher profitability and dividends, improving long-term financial performance. Companies proactively adopting sustainable practices typically have better risk management and compliance systems, reducing the likelihood of incidents such as fraud or litigation. ESG-driven companies have lower systematic risks, leading to a reduced cost of capital, and resulting in higher valuations. These advantages enhance profitability and attract long-term investors, underscoring ESG’s role as a growth driver. Companies with higher ESG ratings consistently showed lower risks, higher valuations, and improved financial performance over time.

Furthermore, ESG momentum—improvements in ESG scores—predicts future financial outperformance, demonstrating the economic value of sustainability. Giese et al. show that ESG ratings influence investor decisions and corporate valuations. ESG momentum findings suggest that businesses adopting or improving ESG practices can attract capital, enhance reputation and create long-term value. The economic value of ESG lies in its ability to balance profitability with resilience, as businesses that embrace ESG principles achieve competitive advantages.[14]

I           Value Creation

Henisz et al. article outlines the significant impact that a strong ESG proposition can have on a company's value creation. It argues that integrating ESG considerations into business strategies is not only an ethical necessity but also a financial advantage. Companies with strong ESG practices can unlock new market opportunities, gain regulatory trust and improve access to resources. Companies that demonstrate strong sustainability practices are more likely to gain trust from governing authorities, which can lead to improved access to resources. For instance, in public-private infrastructure projects, firms with proven sustainability records are often favoured. Additionally, implementing effective ESG strategies reduces operational costs through energy and waste savings, while enhancing reputation and stakeholder trust. [15]

Additionally, ESG fosters employee productivity and talent attraction by promoting social responsibility, aligning with the values of an increasingly conscientious workforce. Strong ESG frameworks also ensure regulatory compliance, minimizing risks and unlocking financial incentives. Furthermore, investing in sustainable practices mitigates the risk of stranded assets and positions companies for long-term success. Henisz et al. emphasize that these value drivers of growth, cost savings, regulatory compliance, employee engagement and investment returns are interconnected. It can be concluded that companies that embrace ESG principles gain a competitive edge, blending ethical commitments with financial performance.[16]

D         ESG and Company Law: Compatibility and Tensions

Companies are increasingly integrating ESG into operations, driven by stakeholder demands, regulatory requirements and the recognition of long-term financial benefits. However, some critiques remain. The main drawback is that ESG distracts companies from its core goal of maximizing profits, rather, it is  presented as a public relations move to broadcast the moral compass of a company. Furthermore, balancing the competing demands of ESG dimensions is challenging, often requiring trade-offs that lack clear mandates. Moreover, variability in ESG scoring methodologies across providers results in inconsistent and unreliable metrics. Finally, critics question the causal link between ESG performance  and financial outperformance, citing external factors like industry-specific tailwinds for the success of ESG-focused companies. It is also a consideration that the war in Ukraine and the pandemic have tested ESG’s applicability, with some arguing for a focus on immediate priorities like energy security over long-term sustainability goals. [17]

Traditional company law, which primarily prioritizes shareholder profit, may need to evolve to fully achieve ESG objectives. The courts of common law have shown reluctance in imposing ESG obligations beyond existing legal frameworks. For example, in Friends of the Irish Environment CLG v Government of Ireland,[18] the court refused to recognize a constitutional right to a healthy environment. The United Kingdom case ClientEarth v Shell highlights the limitations of existing laws in holding directors accountable for ESG-related risks. The courts have been reluctant to interfere and risk diverging from the company law embedded principle that companies’ goals are to maximize value for shareholders, as seen in Foss v Harbotle, 1843[19] and, approved in Ireland in Connolly v Seskin Properties Limited, 2012.[20]

In Ireland, directors' duties are codified under section 228 of the Companies Act 2014,[21] requiring directors to act in the company’s best interests, typically interpreted as maximizing shareholder returns. This shareholder primacy doctrine aligns with the judgment in Parke v Daily News [22] where the court ruled providing gratuitous benefits to dismissed employees was not in the company’s interest, prioritizing shareholder profit over societal benefit. This case underscores the doctrinal challenge of integrating ESG, which often emphasizes long-term societal goals over immediate financial returns.

ESG’s focus on sustainability and social equity challenges the short-term mindset inherent in traditional company law. Critics argue that ESG distracts from profit-making. Moreover, balancing ESG’s competing priorities of environmental sustainability, social welfare and governance is complex, requiring trade-offs that lack clear mandates within existing legal frameworks.[23]However, ESG aligns with shareholder interests by enhancing reputational capital and mitigating risks. For example, robust ESG frameworks mitigate reputational risks and regulatory penalties, ultimately benefiting financial performance. For instance, a robust ESG framework improves brand value, employee retention, and regulatory compliance, ultimately benefiting financial performance.[24] This duality highlights the need for a paradigm shift in corporate governance, balancing shareholder primacy with broader societal responsibilities.

E         Reconciling ESG with Company Law

To reconcile these two areas, some improvements might be necessary. By embedding ESG principles into the legal framework, companies would be compelled to adopt a more holistic approach that balances profit with societal and environmental responsibilities. Governmental incentives could also enhance the path for ESG, as well as adopting stakeholder capitalism.

I           Adapting Fiduciary Duties

While Parke v Daily News highlights the limitations of shareholder primacy, cases like ClientEarth v Shell demonstrate growing legal pressure to address ESG risks. These cases underscore the evolving expectations to balance financial and non-financial considerations. Legislative reforms that explicitly incorporate ESG into fiduciary duties would clarify these expectations and reduce conflicts, fully integrating ESG into corporate governance. Courts and lawmakers must adopt a more expansive interpretation of directors’ duties, encompassing long-term sustainability goals alongside financial objectives. Expanding directors’ duties to include societal and environmental considerations would ensure that ESG objectives are not secondary to shareholder profits.

Proposals such as the UK’s Better Business Act Campaign[25] suggest redefining corporate purpose to balance shareholder interests with broader stakeholder responsibilities. For instance, the UK’s section 172 of the Companies Act 2006 requires directors to consider the company’s impact on the community and environment. [26]Considering the reluctance of courts outlined previously,  similar reform in Irish law might be necessary to bridge the gap between ESG and traditional governance.

II         Incentivising ESG Compliance

Governments and regulators can promote ESG through further incentives such as tax breaks, subsidies, and preferential access to financing. These measures align profitability with sustainability, enabling businesses to pursue ESG objectives without undermining their financial goals. Standardized frameworks like the ESRS enhance accountability, ensuring comparability across industries, and mitigating the problem of requiring trade-offs and the lack of clear mandates.

Stakeholder capitalism offers a viable model for integrating ESG into corporate governance. It emphasizes balancing the interests of shareholders, employees, communities, and the environment, fostering long-term resilience and value creation. By broadening the definition of corporate success, this approach reconciles ESG’s societal focus with profit-driven goals of company law.

F          Conclusion

ESG factors undeniably shape business operations and create growth opportunities by driving innovation, enhancing transparency and fostering stakeholder trust. However, their integration into corporate governance challenges traditional company law frameworks that prioritize shareholder interests. Reconciling these tensions require legislative reforms, such as expanding fiduciary duties to include ESG considerations, uniformizing mandates and taxonomy and adopting stakeholder capitalism as a governance model. By aligning ESG with profitability, businesses can navigate regulatory complexities, address societal expectations, and achieve sustainable growth.

Standardizing scoring methodologies across providers like the ESRS would enhance clearer accountability. The interplay between ESG and company law exemplifies a transformative approach to corporate governance, fostering resilience and positioning companies to thrive in an increasingly interconnected and sustainability-focused world.

[1] Directive (EU) 2022/2464 on corporate sustainability reporting [2022] OJ L322/15.

[2] Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937 COM (2022) 71 final.

[3] European Financial Reporting Advisory Group (EFRAG), 'European Sustainability Reporting Standards (ESRS)' (2023).

[4] W Henisz, T Koller, and R Nuttall, ‘Five ways that ESG creates value’ (2019 McKinsey Quarterly,  <https://info.fiduciary-trust.com/hubfs/Fiduciary_Insights/McKinsey_Five_Ways_that_ESG_Creates_Value.pdf> accessed 4 January 2025.

[5]Dillon Eustace LLP, ‘ESG Corporate Reporting Obligations: Key Considerations for Company Directors and Officers’(2024)<https://www.dilloneustace.com/insights/esg-corporate-reporting-obligations-key-considerations-for-company-directors-and-officers/>  accessed 4 January 2025.

[6] ClientEarth v Shell [2023] EWHC 1137.

[7] Paris Agreement to the United Nations Framework Convention on Climate Change, December 12 2015, TIAS No. 16-1104. <https://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf > accessed 21 March 2025.

[8] Council Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 [2020] OJ L198/13.

[9] L Pérez, V Hunt, H Samandari, R Nuttall, and K Biniek, ‘Does ESG really matter— and why?’ (2022) McKinsey Quarterly <https://www.eticanews.it/wp-content/uploads/2022/09/does-esg-really-matter-and-why-vf.pdf> accessed 3 January 2025.

[10] ibid.

[11] ibid.

[12] ibid.

[13] G Giese, L Lee, D Melas, Z Nagy, and L Nishikawa. ‘Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance’ (2019) 45(5) Journal of Portfolio Management,  69-83, <https://www.proquest.com/docview/2249799015?fromopenview=true&pq-origsite=gscholar&sourcetype=Scholarly%20Journals> accessed  4 January 2025.

[14] Henisz (n 4).

[15] ibid.

[16]ibid.

[17] Pérez (n 9).

[18] Friends of the Irish Environment CLG V the Government of Ireland, Ireland and the Attorney General [2017] No. 793 JR.

[19] Foss v Harbottle [1843] 67 ER 189; (1843) 2 Hare 461.

[20] Connolly v Seskin Properties Limited [2012] IEHC 332.

[21] Companies Act 2014, s 228.

[22] Parke v The Daily News Ltd [1962] Ch 927.

[23] Pérez (n 9).

[24] Giese (n 13).

[25] Better Business Act , ‘The Pitch for Better Business’ <https://betterbusinessact.org/> accessed 21 Macrh 2025.

[26] Companies Act 2006, s 172.