The Environmental Dimension of Section 166 – VIPS LAW BLOG
-Ria Mahajan*
Floods, heatwaves and water scarcity are no longer marginal to business. They disrupt supply chains, damage assets, drive up insurance costs and reduce labor productivity. Regulatory, technological and customer expectation changes can also challenge the maintenance of carbon-intensive business models. Climate change is not only an environmental issue. It’s a governance issue.
That raises a question for Indian company law: should a director’s fiduciary duties extend to environmental responsibility and if so, what should that mean? The argument is Companies Act, 2013 itself provides us the foundation. What is missing is clarity about what the duty means in practice and how it is enforced.
What Section 166 Actually Says
Section 166 of the Companies Act lists the duties of directors. Under 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, its shareholders, the community and “for the protection of environment”.
That last phrase is crucial. Environmental issues are included within the statutory scope of a director’s duties, not in a voluntary CSR policy. The provision, read with section 166(3), which requires due and reasonable care, skill and diligence and independent judgement, suggests that a board cannot simply disregard a material environmental risk because its consequences lie in the future. Where operations create foreseeable risks, reasonable governance may require board level monitoring, compliance systems, reliable information and a documented response.
What Section 166 Does Not Do
Section 166(2) does not prescribe any climate-risk methodology. A director violating the provisions of the section shall be punishable under section 166(7) with fine of one lakh rupees to five lakh rupees. That is not automatic liability for every wrong a company commits. Whether a director is personally liable depends on the relevant provision, the facts, the conduct of the director and the route of enforcement.
So the defensible claim is that the directors are not guarantors of environmental damage. It is that environmental protection is already part of their statutory duties and that guidance and adjudication should give it practical content.
Courts Have Already Set the Tone
Indian environmental jurisprudence supplies the wider context. In Vellore Citizens’ Welfare Forum v. Union of India, the Supreme Court recognised the precautionary principle and the polluter-pays principle as features of Indian environmental law. The first supports preventive action where serious risks are foreseeable. The second places the cost of pollution on those responsible.
In M.C. Mehta v. Kamal Nath, the Court applied the public trust doctrine, holding that certain natural resources are held in trust for public use. In State of Himachal Pradesh v. Ganesh Wood Products, the Court dealt with the ecological consequences of industrial demand on forest resources.
These cases do not create a separate company-law cause of action against directors. They do show that environmental protection carries real weight whenever corporate decisions affect natural resources.
Disclosure Is Not the Same as Responsibility
India has also moved on disclosure. The Securities and Exchange Board of India (SEBI) requires specified listed entities to file Business Responsibility and Sustainability Reports covering environmental and other sustainability matters.
Reporting helps investors assess performance and risk, but it is no substitute for responsible conduct. A company can publish extensive information and still fail to prevent harm. Good governance connects accurate reporting with board oversight and actual risk management.
Why This Belongs in Fiduciary Governance
Financial materiality : Physical damage, water stress, changing energy costs, new standards and litigation can all affect assets and business continuity. A board that does not obtain or consider relevant information is deciding blind. Environmental oversight is an extension of competent risk management.
Long-term value : Savings from neglecting pollution controls can turn into penalties, clean-up costs, project delays and lost public trust. The point is not that every environmentally beneficial decision raises immediate profit. It is that directors should weigh environmental consequences as part of the company’s long-term interests.
Greenwashing : When companies announce net-zero targets or claim strong environmental performance, those claims should rest on evidence and credible plans. Directors should ensure that material sustainability statements are not knowingly false or misleading. The Companies Act separately punishes fraud under section 447 where its elements are proved.
Affected communities : People harmed by pollution rarely have a voice in the boardroom. Environmental duties help ensure their interests are not ignored. Regulators set the legal standards, while directors make sure the company’s own decisions and systems take those standards seriously.
A Look Abroad
The United Kingdom offers a useful comparison. Section 172 of the Companies Act 2006 requires directors to promote the success of the company for its members as a whole, while having regard to long-term consequences, employees, business relationships, the community and the environment. This “enlightened shareholder value” model integrates environmental factors while keeping the company’s success as the central goal.
The European Union has gone further towards structured obligations. The Corporate Sustainability Reporting Directive expanded sustainability disclosure, and the Corporate Sustainability Due Diligence Directive addresses certain adverse environmental and human-rights impacts. Both have been subject to change since adoption, so any Indian reform should rest on the operative text and current implementation status.
India need not copy either model. Section 166(2) already mentions the environment. The task is to clarify how it works, drawing on comparative experience in risk assessment, due diligence, disclosure and accountability.
Three Objections, Three Responses
“This creates uncertainty.” Directors already face extensive obligations, and a further duty could lead to defensive decision-making or hindsight litigation. The answer is not to ignore environmental risk but to offer proportionate guidance focused on materiality, reasonable care, good faith and legal compliance.
“Environmental regulation belongs to public authorities.” Public regulation is indispensable, but regulators cannot supervise every operational decision in real time. Boards allocate resources, build compliance systems and respond to risks. Fiduciary governance should complement environmental statutes, not displace them.
“Courts will second-guess business judgment.” Judicial review should stay restrained. The question is whether directors acted honestly, considered material information, complied with the law and responded reasonably to identified risks. It is not whether a judge would have chosen a different commercial strategy.
What Reform Should Look Like
Rather than imposing strict liability, India can give existing duties practical content:
- Guidance : The Ministry of Corporate Affairs and relevant regulators should explain how section 166(2), read with section 166(3), applies to material environmental risks, without forcing a single climate strategy on every company.
- Board oversight : Companies with significant environmental exposure should fold these risks into board agendas, internal controls and enterprise risk management, for example through an existing committee and specialist advice.
- Disclosure integrity : Sustainability disclosures should be accurate, consistent and verifiable, and regulators should prioritise misleading statements and serious compliance failures, proportionately.
- Director education ; Training on environmental compliance, climate-related financial risk and sustainability reporting helps directors ask better questions.
- Calibrated enforcement : The law should distinguish a reasonable decision that turns out badly from a decision made in bad faith, without due care or in knowing disregard of material risks.
Conclusion
Environmental responsibility is increasingly inseparable from sound corporate governance. Section 166(2) already recognises this by listing protection of the environment among the interests that shape a director’s good-faith duty.
The reform India needs is not to make directors liable for every environmental harm. It is to give existing duties clear content through guidance, credible disclosure, board-level risk oversight and proportionate enforcement. That would protect legitimate business judgment while making it harder for directors to ignore foreseeable environmental consequences. Leadership in a climate crisis should be judged not only by immediate financial results, but by whether they are achieved lawfully and sustainably.
*(The author is a B.A. LL.B. (Hons.) student at the Vivekananda Institute of Professional Studies – Technical Campus, Guru Gobind Singh Indraprastha University, New Delhi. Her work spans legal research and drafting, international law and human rights, and gender and technology law. She can be found on LinkedIn.)
