Dominic Wall, an assistant manager in ESG Advisory and Assurance at a professional services firm, and Eve Aycock, trainee advocate at M&P Legal (both recent winners of 30 Under 30 in the Isle of Man) explain how environmental, social and governance issues will inevitably grow in influence locally and likely be incorporated into Manx law.

ESG – environmental, social and governance – is a framework used to assess a business’s sustainability efforts.

The framework is not restricted to environmental issues, rather it encompasses the three Ps: people, planet and profit.

The Isle of Man presently does not have specific ESG, or business sustainability, law.

Premium-listed, standard-listed companies and regulated business in the UK are currently required to report in line with Task Force on Climate-related Financial Disclosures (TCFD) disclosures and statements of compliance.

Other UK companies and LLPs are required to report according to Department of Business, Energy and Industrial Strategy (BEIS) climate-related financial disclosures (CRFD) guidance if they are in scope such as:

•UK Public Interest Entities and AIM-listed companies with more than employees

•Other UK companies including private and LLPs with more than 500 employees and more than £500 million turnover.

•CRFD recognises the recommendations of the TCFD as one of the most effective frameworks for companies to analyse, understand and ultimately disclose climate-related financial information and are therefore aligned to TCFD.

The Isle of Man’s ESG legal landscape is composed of fragments of domestic, EU-derived and international legislation which broadly relate to the principles underpinning business sustainability. Primary laws, regulations and codes of conduct relating to business sustainability include:

•Directors’ duties under common law (unlike the UK, directors’ duties are not codified in the Companies Acts but exist under Manx and UK case law);

•Corporate Governance Principles and Code of Conduct 2005;

•The Bribery Act 2013;

•The Equality Act 2017;

•The Climate Change Act 2021.

The Climate Change Act 2021 forms the linchpin of the island’s current business sustainability regime. The Act, which among other things provides for the development of regulations combating fossil fuels, single-use plastics and waste, is underpinned by the just transition and climate justice principles which advocate for socio-economic equity in context of climate change.

While the island typically shadows the UK’s legal development, it is yet to enact an equivalent to the UK’s 2021 Environment Act, which was created to provide a new legal framework for environmental protection post-Brexit.

The island also has not yet adopted various business sustainability-related codes and regulations such as the UK Stewardship Code 2020; Disclosure Guidance and Transparency Rules; and Companies (Strategic Report) Climate-related Financial Disclosure) Regulations 2022.

On the supranational level, in January 2023 the EU’s Corporate Sustainability Reporting Directive (CSRD) entered into force.

The CSRD is designed to broaden the scope of companies required to report on sustainability.

While it does not directly apply to the Isle of Man, the CSRD will directly affect UK companies if they have securities listed on EU regulated markets or if they generate more than 150 million euros net turnover in the EU (for each of the last two financial years) and have at least one EU subsidiary (large or listed on an EU regulated market) or EU branch (more than 40 million euro net turnover in the preceding financial year).

It will also apply directly to EU subsidiaries of UK companies. This may be as soon as periods on or after January 1, 2024, for UK companies with securities listed on an EU-regulated market and that have more than 500 employees.

At present, most business sustainability codes and regulations are voluntary and non-binding. However, this is liable to change.

In Australia, a recent legal opinion on directors’ duties by the Commonwealth Climate Law Initiative concluded that directors’ duties encompass a legal requirement to consider nature-related risks.

The opinion propounded that directors failing to do so could be held liable for breaching their duty of care and diligence. If nature-related risks are perceived as material, the opinion stated that they should be disclosed pursuant to directors’ continuous disclosure and periodic reporting duties.

With the release of the final Taskforce on Nature-related Financial Disclosures (TNFD) v1.0 risk management and disclosure framework, organisations now have access to guidance and tools to report and act on nature-related risks and opportunities.

With this in mind, ESG claims against directors are likely to increase.

In February 2023, a world-first claim was brought at the High Court of Justice in London seeking to hold corporate directors personally liable for inadequate climate risk management.

Client Earth (a non-profit environmental law organisation) brought an action in its capacity as minority shareholders against the directors of Shell plc for alleged breaches of duties under the UK Companies Act 2006. The claim was grounded in the Shell directors’ alleged failure to put in place an energy transition strategy consistent with the Paris Agreement.

While the High Court dismissed the application in May 2023, and rejected the application for permission to appeal in November 2023, similar cases will undoubtedly be tried in future. The Isle of Man courts may in time become a venue for such claims.

Another significant business sustainability litigation trend is the rise of lawsuits alleging greenwashing. ‘Greenwashing’ refers to behaviour or activities that make people believe that a company is doing more to protect the environment than it really is.

The pernicious practice is frequently deployed (deliberately or otherwise) by marketing campaigns across various sectors including travel, fashion and finance.

In June 2023, a Dutch court permitted a case to be brought by environmentalists against Dutch airline KLM for alleged greenwashing associated with its ‘Fly Responsibly’ marketing campaign. The claim was initiated under a new Dutch class action law which enables a broader scope of claims and underlying claimants comparative to other jurisdictions.

In tandem with legislation, entities such as NGOs (non-governmental organisations), non-profits and social enterprises occupy an important role in encouraging business sustainability compliance. In the Isle of Man, a social enterprise called Earthscope launched in November 2023 with the aim of helping to facilitate the Isle of Man’s transformation to a ‘nature-first’ nation.

The organisation offers training and workshops to communities and businesses to encourage nature-focused practices. It is likely that similar civil society groups will grow as ESG laws and regulations become mandatory.

Businesses must be careful to strike a delicate balance between promoting business sustainability values whilst not straying into the territory of greenwashing.

Directors in particular must be careful as their duties under common law may encompass the requirement to consider the environment. While the island’s ESG regime is currently fragmented and largely non-binding, business sustainability laws and regulations will snowball in the coming years, becoming increasingly mandatory in nature with legal repercussions for non-compliance.

•This article is a broad summary and does not constitute legal advice. Consult specialist advisors as to each specific set of facts.