A new chill could soon descend on the country’s boardrooms.
With environmental, social and governance (ESG) issues increasingly part of the job of corporate directors, concern is growing that they could face legal action personally should their companies fail to meet goals in those areas or if the targets they set are just too weak.
Legal experts are watching a high-profile case in Britain to see if corporate structures will shield directors from being held liable in ESG-related actions. If they don’t, it could lead to a new spate of lawsuits.
Last month, ClientEarth, an environmental activist group, filed suit against the 11 directors of Shell PLC SHEL-N, arguing the oil major is not shedding fossil fuel assets and shifting to alternative energy quickly enough. The group said the company’s board is failing to manage climate-related risks, which could affect Shell’s future success to the detriment of investors, including pension funds.
“We believe this puts Shell’s board in breach of its legal duties under the UK Companies Act to manage the climate risk facing the company. So we’re going to court,” ClientEarth said in a statement. Its suit has the backing of institutional investors that collectively control 12 million shares of Shell, according to the group.
The company has already suffered a legal loss on a climate issue. In 2021, a Dutch court ordered Shell to cut emissions by more than double its own target, ruling it has a duty of care and that its plans are not concrete enough. Shell has filed an appeal.
Shell has rejected ClientEarth’s allegations, asserting its directors have complied with their legal obligations and have acted in the company’s best interest. It said it believes its emissions targets are aligned with the Paris Agreement goal of limiting global temperature gains to 1.5 degrees C above preindustrial levels.
The ruling will be precedent-setting in Britain and could influence future cases in countries that follow common law, including Canada, said Conor Chell, a lawyer who heads up MLT Aikins’s ESG practice group in Calgary. It could have implications for directors and also senior officers of companies.
In a recent article, Mr. Chell and colleagues Laura Roberts and Maya Douglas referred to a case before the Delaware Court of Chancery, which ruled in January that shareholders of McDonald’s Corp. could sue the fast-food giant’s former chief people officer. He is accused of looking the other way while a culture of sexual misconduct spread through the organization.
“You need a body of case law before you could confirm or actually give a client advice to say that the corporate shield can be pierced. The way I would categorize this is these are preliminary indicators that we’re headed in that direction,” Mr. Chell said in an interview.
Paramount for corporate directors is fiduciary duty – acting first in the best interest of their companies and shareholders. As ESG issues have blasted to the fore, debate has crescendoed over board responsibilities and whether those factors run counter to, or are part and parcel of, overseeing corporate financial well-being.
Helle Bank Jorgensen, the chief executive and founder of Competent Boards, a firm that provides ESG advisory services and professional development courses to a global list of clients, has said directors must now be aware that ESG issues can boost a company’s value as well as destroy it. Investors expect them to know what the company’s energy transition plan looks like, who is accountable, what it costs – and what the implications of inaction are.
The definition of fiduciary duty will expand, especially as ESG disclosure becomes mandatory, Mr. Chell said. “Then there is a legislative duty to report on those factors. It’s mostly climate-related right now, but I suspect over the years there will be an expansion into some of the social and governance factors, as we’re seeing in the European Union.”
Directors have always had to answer to investors for their performance in annual proxy votes or activist investor campaigns over issues such as corporate strategy, acquisitions and executive pay. Recent contests at Exxon Mobil Corp. and Suncor Energy Inc. show they are vulnerable to shareholder unrest over ESG issues as well.
In 2021, the fund Engine No. 1 made headlines when it succeeded in getting three nominees onto the board of Exxon Mobil after complaining that the company had refused to take sufficient action to deal with climate-related risks. Some of world’s largest institutional investors sided with the activist fund.
Last year, Suncor Energy agreed with Elliott Investment Management LP to install three new directors, heading off a proxy fight partly over trouble in the social category – the company had a horrendous safety record at its oil sands operations. Under that agreement, Elliott could add a fourth director.
Mr. Chell said the question for directors now is whether the courts will become the next arena in the fight against greenwashing, with regulators such as the Competition Bureau in Canada and U.S. Securities and Exchange Commission launching investigations and getting tough on companies that try to pass off marketing fluff as serious sustainability strategy.
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at [email protected].
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