Environmental, Social and Governance (ESG) - Principles and Practice · Board's Accountability on ESG

Board's Role and Duties on ESG under Section 166

Updated 11 October 2026 · Fact-checked

Section 166 of the Companies Act, 2013 requires every director to act in good faith, with due care, skill and diligence, and in the interests of the company, its employees, shareholders, the community and the environment. The board therefore must oversee ESG strategy, risks, disclosures and compliance. In answers, state the duty, apply it to the facts, then conclude.

Understand Board's Role and Duties on ESG

A company's board is the body that directs and controls the company. Its powers come with duties. Section 166 of the Companies Act, 2013 lists the main duties of a director. These are fiduciary duties: a director holds a position of trust and must put the company's interests ahead of personal gain.

The key ESG link is in Section 166(2). A director must act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and the protection of the environment. So the section requires directors to have regard to employees, the community and the environment, not only shareholders. This supports ESG oversight by the board. The section does not prescribe any specific ESG structure or committee. How the board organises its oversight is for the board to decide.

The other duties also carry ESG meaning. Under Section 166(3), a director must exercise duties with due and reasonable care, skill and diligence and independent judgment. A board that ignores a known climate, safety or data risk may fail this standard. Section 166(1) requires a director to act in accordance with the articles. Section 166(4) prohibits conflict of interest. Section 166(5) prohibits undue gain or advantage, and a director who makes it must pay an amount equal to it to the company. Section 166(6) says a director must not assign the office to another person, and any assignment is void. It deals only with assigning the office. It does not deal with delegating tasks to a committee.

In practice, the board oversees ESG in four ways. It sets strategy and policies. It identifies and reviews ESG risks and opportunities. It approves disclosures such as the Board's report and the BRSR for listed companies. It builds structure, often by delegating work to a committee such as the Risk Management or Sustainability Committee, while keeping final accountability. Delegation does not remove responsibility, because each director's duty of care under Section 166(3) and the board's collective responsibility continue.

A contravention of Section 166 attracts a fine under Section 166(7) of not less than ₹1,00,000, which may extend to ₹5,00,000. This is separate from the Section 166(5) requirement to pay the company an amount equal to any undue gain. Claims for any loss the company suffers are general remedies and do not come from Section 166(7).

Key rules to remember

Section 166(1): Act in accordance with the articles of the company; Subject to the Act, the director must follow the articles.
Section 166(2): Good faith + promote objects + benefit of members as a whole + best interests of company, employees, shareholders, community and protection of environment; The main ESG hook. Quote the environment and community limbs.
Section 166(3): Due and reasonable care, skill, diligence + independent judgment; Use this for failure to oversee known ESG risks.
Section 166(4): No situation of direct or indirect conflict of interest with the company; Applies to conflicts in ESG related-party contracts or vendor choice.
Section 166(5): No undue gain or advantage; if made, pay equal amount to the company; Gain for self, relatives, partners or associates. This payment is separate from the fine under Section 166(7).
Section 166(6): A director must not assign the office; any assignment is void; Bars assigning the office to another person. It does not govern committee delegation.
Section 166(7) penalty: Fine of not less than ₹1,00,000, may extend to ₹5,00,000; Penalty for contravention of the section. It does not provide for recovery of losses.

How to solve Board's Role and Duties on ESG questions

Use a provision, analysis, conclusion structure for any question on the board's ESG duties.

1Read the facts and identify the director's act or omission, such as ignoring an emission breach or approving a misleading disclosure.
2State the relevant duty in plain words, citing Section 166 and the exact sub-section.
3Link the duty to ESG. Quote the employees, community and environment limb of Section 166(2) where relevant.
4Apply the duty to the facts. Ask: did the board know of the risk, did it act with care, was there a conflict or gain?
5Check delegation. If a committee or management was involved, note that the board keeps overall accountability.
6Add related provisions only if the facts need them, such as Board's report disclosure or the BRSR for listed companies.
7Conclude clearly: duty breached or not, and the consequence, including the Section 166(7) penalty.
8Add one practical point, such as a board resolution, ESG policy or minuted review.

Quickest way: Duty-Fact-Result in three lines

When to use it: Use when you have little time or the question carries few marks.

Write the duty: Section 166(2) or 166(3), in one line.
Write the fact that breaks or meets it, in one or two lines.
Write the result and consequence, including the fine range of ₹1,00,000 to ₹5,00,000 if breach is found.
Close with one practical step the board should take.

Common mistakes in Board's Role and Duties on ESG

Saying directors owe duties only to shareholders.
Older company law focused on members.
Fix: Quote Section 166(2): the duty runs to the company, employees, shareholders, the community and the environment.
Citing the wrong sub-section for care and diligence.
Students memorise Section 166 as one block.
Fix: Link 166(2) to good faith and stakeholders, 166(3) to care, skill and diligence, and 166(4) and (5) to conflict and undue gain.
Claiming that delegating ESG to a committee ends the board's liability.
Confusing delegation of work with delegation of accountability.
Fix: State that the board may delegate tasks but remains accountable and must review the committee's reports.
Writing generic ESG theory with no application to the facts.
Case-based answers feel like essay questions.
Fix: Follow provision, analysis, conclusion. Spend half the answer on the facts.
Stating the wrong penalty or inventing section numbers for other duties.
Memory slips under time pressure.
Fix: Remember only what you are sure of: Section 166(7) fine is ₹1,00,000 to ₹5,00,000. Otherwise describe the rule in words.

Worked examples

Example 1

The board of Sundaram Chemicals Ltd. received two internal reports warning that its effluent discharge exceeded permitted limits. The directors took no action to avoid a plant shutdown and noted the reports only as 'received'. Advise whether the directors have breached Section 166.

Show the solution

Provision: Section 166(3) requires a director to act with due and reasonable care, skill and diligence and independent judgment. Section 166(2) requires acting in the best interests of the company, its employees, the community and the protection of the environment.
Analysis: The board had clear notice of a legal and environmental risk through two reports. Merely noting them is not diligence. A prudent director would ask for corrective action, timelines and compliance status.
Analysis: The aim of avoiding a shutdown put short-term convenience ahead of the community and environment limb of Section 166(2).
Conclusion: The directors have likely breached Sections 166(2) and 166(3).
Consequence: Section 166(7) provides a fine of not less than ₹1,00,000, extending to ₹5,00,000. The company may also face action under environmental laws.
Practical point: The board should direct a remediation plan, assign a committee to monitor it, and minute the follow-up.

Answer: Yes. By ignoring known effluent breaches the directors failed the care and diligence duty in Section 166(3) and the environment and community duty in Section 166(2). Penalty under Section 166(7) is ₹1,00,000 to ₹5,00,000, and the board should adopt a monitored remediation plan.

Example 2

Meera Textiles Ltd. has set up a Sustainability Committee and the board argues that, as a result, individual directors have no further ESG duty. Examine the argument.

Show the solution

Provision: Section 166(3) imposes a personal duty of due care, skill and diligence on every director. The board also carries collective responsibility for the company's affairs.
Analysis: A committee is a board tool for detailed work. It gives focus and expertise but does not transfer the board's collective responsibility or remove each director's duty of care.
Analysis: Directors must still review committee reports, question management and ensure that ESG risks reach board level.
Analysis: Section 166(2) duties to the community and environment apply to each director regardless of committees.
Conclusion: The argument is incorrect. The committee supports oversight but does not remove accountability.
Practical point: The board should schedule periodic committee reports, record discussions in minutes and review the ESG policy at least yearly.

Answer: The argument fails. Directors keep personal duties under Section 166(3) and Section 166(2), and the board stays collectively responsible. The committee assists, but the board remains accountable for ESG oversight.

Exam tips

Quote the exact limb of Section 166(2) on employees, community and environment. Examiners reward this link.
Use the provision, analysis, conclusion layout in every case answer, and name the sub-section in each step.
Show that you know delegation to committees does not remove board accountability.
Add a practical drafting or compliance step, such as a board resolution, policy approval or minuted review.
Do not cite section numbers or penalties you are unsure of. Explain the rule in words instead.

Practice questions from Board's Accountability on ESG

Board's Role and Duties on ESG: frequently asked questions

Which section of the Companies Act, 2013 lists directors' duties?

Section 166 lists the duties of directors. It covers acting under the articles, good faith, due care and diligence, avoiding conflict of interest, avoiding undue gain and not assigning the office.

How does Section 166 connect to ESG?

Section 166(2) requires directors to act in the best interests of the company, employees, shareholders, the community and the protection of the environment. This makes environmental and social concerns part of the director's duty and supports ESG oversight by the board. Section 166(3) on care and diligence applies to ESG risk oversight.

What is the penalty for breach of Section 166?

A director who contravenes Section 166 is liable to a fine of not less than ₹1,00,000, which may extend to ₹5,00,000 under Section 166(7). Separately, under Section 166(5) a director who achieves undue gain must pay an equal amount to the company. Any claim for losses is a general remedy and is not part of Section 166(7).

Can the board hand over ESG oversight to a committee?

The board can delegate detailed work to a committee, such as a Risk Management or Sustainability Committee. But it stays accountable and must review the committee's reports and act on them.