In early February, a first-of-its-kind lawsuit was filed against the Board of Directors at Shell. ClientEarth, an environmental law firm, sued eleven of Shell’s directors in the high court of England and Wales for allegedly “mismanaging climate risk” and, in turn, breaching United Kingdom business law by failing to implement an energy transition strategy that aligns with the Paris Agreement.
What is the most surprising aspect of this suit? It has the support of institutional investors holding more than twelve million shares in Shell. Or perhaps, is it more surprising that it has taken this long for a suit of this nature to arise?
While recent studies have shown that many consumers are willing to pay more for sustainable products, 78% of those surveyed have also indicated that they don’t know how to identify environmentally friendly companies. Further, there has been a crackdown on “greenwashing,” or exaggerating how environmentally friendly a corporation is to consumers. For instance, Canadian Securities Administrators warned companies against making “overly promotional” ESG disclosures and reports.
Taking this one step further, U.S. regulatory agencies are pushing for mandatory ESG disclosures from companies to facilitate true ESG investing. The U.S. Securities and Exchange Commission (SEC) previously revealed a rule to “enhance and standardize climate-related disclosures for investors.” This move was made as part of a general response to public concern about ESG issues within public companies. Under the new SEC disclosure rules, listed companies would be required to disclose additional information outside of the traditional business risks, such as information about a company’s greenhouse gas emissions and indirect emissions from purchased electricity or other forms of energy.
Another U.S. regulatory agency, the U.S. Department of Labor (DOL) established a final rule on ESG factors that have recently gone into effect. The rule recognizes that “ESG factors may be relevant to the risk-return analysis of potential investments.” In essence, the final rule allows plan [JD1] fiduciaries to consider climate change and other ESG factors when they select retirement investments and exercise shareholder rights, like proxy voting.
The rules proposed by the SEC are focused on transparency and ensuring that there is adequate ESG disclosure for consumers and investors. However, many companies are complaining that such disclosure is overwhelming and requires new measurements and data that they do not traditionally track. Further, much ESG data is unstandardized and can be hard to interpret or understand; leaving companies with little guidance on their obligations for releasing such information. Some forward-thinking companies are looking to incorporate ESG data as a “larger strategy” in which they look at how to utilize the technology in their corporate practice.
Moreover, in 2022, there was a stream of stockholder complaints about ESG issues that made their way to court, and the Delaware Court of Chancery, along with the Supreme Court, signaled a new understanding of In re Caremark in which there would be the potential for director liability for failures of oversight. The recent In re McDonald’s Corporation Stockholder Derivative Litigation also reveals a trend of increased director liability, as the Delaware Court held that the corporate officers and directors owed a duty of oversight and violated that duty by allowing a “corporate culture that condoned sexual harassment and misconduct.” Although the Judge in McDonald’s held that the liability under a duty of oversight was a context-driven inquiry, such a holding open the door for director personal liability for other claims, such as ESG claims. Further, if the action against Shell and new rules are any indication of future litigation, it stands to reason that many directors may find themselves accountable for poor climate obligations and environmental impact.
In sum, new lawsuits, emerging agency rules, and recent corporate actions signal a significant focus on ESG-related issues and, potentially, increased director personal liability for climate-related impacts of corporate actions. Topics such as these are growing in importance and are a component of the Environmental Panel of the JBIPL Spring Symposium. If you would like to attend this year’s Symposium, please RSVP here.
Noelle Henry is in her third-year at Wake Forest University School of Law, and she serves as the JBIPL Symposium Editor. Noelle holds a Bachelor of Arts in English with a minor in Business from the University of Texas at Austin. During her time at Wake Forest Law, Noelle has worked for the Financial Industry Regulatory Authority (FINRA), the U.S. Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCAOB). Upon graduation, Noelle intends to work in financial regulation and securities litigation.