Introduction
Environmental and climate-related risks are no longer matters confined to corporate social responsibility initiatives. They have become mainstream business risks capable of affecting a company’s financial performance, regulatory compliance, and long-term viability. As regulatory frameworks and disclosure obligations continue to evolve, directors should be expected to consider environmental and climate-related issues as part of their core governance responsibilities.
While Malaysian law has not created a separate or standalone “climate fiduciary duty”, directors should not assume that climate and sustainability considerations fall outside the scope of their existing legal obligations. Rather, environmental and climate risks are increasingly relevant to how traditional directors’ duties are assessed under Malaysian company law.
This article examines the evolving landscape of directors’ duties in Malaysia and highlights the practical steps boards should take to mitigate environmental and climate-related risks.
The Existing Duties of Directors Under Malaysian Law
The starting point remains section 213 of the Companies Act 2016 (“CA 2016”), which requires directors to:
- exercise their powers for a proper purpose and in good faith in the best interests of the company; and
- exercise reasonable care, skill and diligence.[1]
These duties are not new. However, the context in which they are applied is changing. The key question is no longer whether climate change is relevant to directors’ decision-making, but whether climate-related risks are material to the particular company and, if so, whether the board has adequately considered them.
In practice, a breach of Section 213 is not merely a civil wrong giving rise to potential shareholder derivative actions; it also carries direct serious penalties including imprisonment and substantial fines.
Why Climate Risk Has Become a Boardroom Issue
Historically viewed as external policy concerns, climate risks are now categorised as conventional corporate risks. These generally fall into four categories:[2]
1. Physical Risks
Physical risks arise from climate-related events such as floods, extreme weather conditions, rising temperatures, droughts, and disruptions to supply chains or business operations. These risks may affect manufacturing facilities, logistics networks, infrastructure, and workforce productivity.
2. Transition Risks
As governments, regulators, and markets move towards a lower-carbon economy, businesses may face regulatory changes, technological disruption, shifting consumer preferences, and increased compliance costs. Companies that fail to adapt may experience reduced competitiveness or stranded assets.
3. Financial Risks
Environmental risks can directly impact financing arrangements, insurance costs, asset valuations, impairment assessments, and access to investment capital. Climate-related considerations are increasingly incorporated into lending and investment decisions.[3]
4. Liability Risks
Companies may face litigation, regulatory investigations, or enforcement actions arising from environmental harms, inaccurate sustainability disclosures, or alleged failures to manage climate-related risks.
The Accountability Gap
Although environmental laws may impose liability on directors in certain circumstances, enforcement actions are generally directed at the company rather than individual directors. As a result, environmental harm caused by corporate activities often does not translate into personal accountability for those responsible for overseeing corporate decision-making.[4]
This has given rise to what is often described as an accountability gap, where the environmental consequences are borne by communities, future generations and the environment itself, while directors are seldom personally penalised. Consequently, recent developments such as enhanced sustainability reporting, climate-related disclosures and verification requirements may be viewed as efforts to increase transparency and strengthen board-level accountability for environmental risks.
Sustainability Reporting and the National Sustainability Reporting Framework
A significant recent development is Malaysia’s adoption of the National Sustainability Reporting Framework (“NSRF”), which establishes the IFRS Sustainability Disclosure Standards, namely IFRS S1 and IFRS S2, as the baseline sustainability disclosure standards for applicable entities.[5]
The NSRF aims to improve the consistency, comparability, and reliability of sustainability-related disclosures in Malaysia through a phased implementation approach. As climate-related information becomes measurable, reportable, and verifiable, boards will be expected to demonstrate that they have exercised appropriate oversight over the company’s sustainability reporting processes.
The Importance of the Business Judgment Rule
Importantly, directors are not expected to predict every environmental event or guarantee perfect outcomes. Section 214 of the Companies Act 2016 provides protection through the business judgment rule. A director who makes a business judgment is deemed to meet the duty of care and diligence if they:[6]
- act in good faith;
- act for a proper purpose;
- do not have a material personal interest in the subject matter;
- appropriately inform themselves; and
- reasonably believe their decision is in the best interests of the company.
The greater risk arises where directors fail to consider a material environmental risk altogether. Courts and regulators are generally more concerned with the quality of the decision-making process than with second-guessing commercially reasonable decisions.
Lessons from ClientEarth v Shell Plc
The landmark decision of the English High Court in ClientEarth v Shell Plc offers critical insights for corporate boards regarding shareholder derivative claims.[7]
- Background: ClientEarth sought permission to bring a derivative action against the directors of Shell Plc. ClientEarth alleged they breached statutory duties under the UK Companies Act 2006 by failing to adopt and implement an adequate climate strategy aligned with the Paris Agreement. The English High Court dismissed the claim at the permission stage.
- Rejection of “Incidental Duties”: The court rejected ClientEarth’s attempt to impose specific absolute “incidental duties” on directors (such as a duty to formulate climate strategies based on scientific consensus or specific interim targets). The court reaffirmed that statutory duties require directors to weigh multiple competing commercial considerations, rather than elevating climate risk above all other business factors.
- Judicial Restraint in Management Decisions: Courts will not interfere with commercial decisions made by boards acting in good faith. So long as a board’s response falls within the range of decisions reasonably open to directors, the court will not substitute its own judgment.
- Good Faith and Ulterior Motives: The court noted that bringing a derivative claim with a de minimis shareholding to advance an activist policy agenda rather than to benefit the company as a whole signals a collateral purpose and a lack of legal good faith.
ClientEarth v Shell Plc demonstrates that directors must consider environmental impacts and climate risks, but the Court will intervene only where decisions fall outside the range of reasonable responses available to a properly informed board. Protection exists only because the Shell board had actively evaluated climate risks, formulated strategy, and set targets. It does not protect boards that fail to evaluate material climate risks altogether.
Practical Steps for Directors & Key Takeaways
The law relating to directors’ duties has not fundamentally changed. What has changed is the environment in which those duties are exercised. In light of these developments, directors should consider adopting a practical framework of:
1. Know
Understand the environmental and climate-related risks relevant to the company’s industry, operations, and business model.
2. Assess
Evaluate the potential financial, operational, regulatory, and reputational impacts of those risks.
3. Decide
Consider available strategic responses and make informed decisions in the best interests of the company.
4. Document
Ensure board discussions, deliberations, and reasons for decisions are properly recorded. Robust documentation may become critical evidence if a board’s conduct is later questioned.
As environmental and climate-related risks become increasingly foreseeable and financially significant, directors are expected to give proper consideration to such risks as part of ordinary corporate governance. The emerging expectation is not that directors become environmental experts, but that they understand material environmental risks, assess their implications, and make informed decisions.
For further information, please contact:
Dato’ Azmi Mohd Ali, Partner, Azmi & Associates
- Section 213 of the Companies Act 2016 (Act 777).
- Sri, Tan, and Zarinah Anwar. n.d. “Legal Opinion on Directors’ Duties and Disclosure Obligations under Malaysian Law in the Context of Climate Change Risks and Considerations.” Accessed October 1, 2026. https://commonwealthclimatelaw.org/wp-content/uploads/2022/07/CCLI-Legal-Opinion-on-Directors-Duties-and-Disclosure-Obligations-under-Malaysian-Law-in-the-context-of-Climate-Risks-22-July-2022-w-signatures.pdf.
- Sri, Tan, and Zarinah Anwar. n.d. “Legal Opinion on Directors’ Duties and Disclosure Obligations under Malaysian Law in the Context of Climate Change Risks and Considerations.” Accessed October 1, 2026. https://commonwealthclimatelaw.org/wp-content/uploads/2022/07/CCLI-Legal-Opinion-on-Directors-Duties-and-Disclosure-Obligations-under-Malaysian-Law-in-the-context-of-Climate-Risks-22-July-2022-w-signatures.pdf.
- Sri, Tan, and Zarinah Anwar. n.d. “Legal Opinion on Directors’ Duties and Disclosure Obligations under Malaysian Law in the Context of Climate Change Risks and Considerations.” Accessed October 1, 2026. https://commonwealthclimatelaw.org/wp-content/uploads/2022/07/CCLI-Legal-Opinion-on-Directors-Duties-and-Disclosure-Obligations-under-Malaysian-Law-in-the-context-of-Climate-Risks-22-July-2022-w-signatures.pdf.
- Securities Commission Malaysia, “National Sustainability Reporting Framework.” n.d. Accessed October 1, 2026. https://www.investmalaysia.gov.my/media/swqntak1/national-sustainability-reporting-framework.pdf.
- Section 214 of the Companies Act 2016 (Act 777).
- ClientEarth v Shell Plc and Others [2023] EWHC 1897 (Ch).
