Due managerial care – a new perspective?

The European Union is preparing a legal regulation aiming to put the finance sector at the forefront of efforts for a greener and cleaner economy. The new regulation will promote sustainable projects that may be loss-making over long periods with their social value only becoming apparent after several years. Will this also necessitate a change in the concept of fiduciary duty/due managerial care requiring managers to generate profit for shareholders?

The EU regulation now being prepared establishes a framework to promote sustainable investments and follows from the Paris Agreement on Climate Change and the UN 2030 Agenda for Sustainable Development. In these documents, the European Union as well as the governments of most countries undertook to fulfil objectives aimed at a more sustainable economy and society. The European Commission understands that without engaging the private sector it will not have sufficient capital to fulfil these objectives. It is thus logical to engage the financial sector, in particular banks, which by their nature generate most of the private money in circulation and allocate it through loans.

The new legislation aims to redirect private capital to green projects. The regulations now being prepared should motivate investors to be more aware of the environmental impact of their business activities and prioritise ‘clean’ investments over ‘dirty’ ones. For this purpose, the regulation, among other things, introduces a classification of individual investments by their sustainability, so that investors may also assess their environmental impact.

Beyond any doubt, one issue with green projects is that they tend to be riskier and may not generate profit in the short-term, although their sustainability and social value should show in the long run. However, by including loss-making green projects in their portfolios, managers would be in breach of their fiduciary duty/duty of due managerial care under which they have to generate profit for their clients and recipients.

In this respect, the regulation now being prepared may not be the last one. In fact, green investment aspects have never been discussed on such a scale before. It is thus to be expected that this trend will continue at the highest political level. And regulations involving other private entities, not just financial institutions, are bound to follow.

But is it possible within just years to shift the limits of due managerial care so far away from investors’ and shareholders’ interests and towards environmental protection and sustainability that assessing projects’ profitability would become secondary to assessing their sustainability?

The present concept of due managerial care obliges the statutory body of a corporation to act with due care, necessary knowledge and loyalty. The European Commission has already proposed also including environmental, social and administrative criteria in the mandate of European supervisory bodies. Furthermore, the newly appointed European Commission headed by von der Leyen aims to make the EU a worldwide leader in environmental protection. It is thus likely that each new legislative proposal of the European Commission will reflect these criteria, which will then also have to be taken into consideration by the statutory bodies of private companies when making their investment decisions. An informed and ‘right’ decision should thus not be driven solely by the desire to make as much money as possible year on year, but rather by the effort to invest in projects that are sufficiently green and sustainable. The question remains when we will see a change in the concept of “acting in the justifiable interest of the corporation” as we know it from the present wording of the Corporations Act.

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