Board directors and executive officers beware: personal ESG liability is here
Conor Chell, Laura Roberts and Maya Douglas from MLT Aikins say that directors – and now officers – could face personal liability over ESG issues.
In March 2022, ClientEarth – a group of environmental lawyers who are shareholders of energy giant Shell plc – threatened to take legal action against Shell’s directors, alleging they were personally liable for the company’s failure to set meaningful emissions targets.
ClientEarth has now made good on that threat. On February 9, 2023, ClientEarth announced it had filed a lawsuit against Shell’s 11 directors, marking the first time shareholder activists have sought to hold the directors of a company personally liable for an allegedly unrealistic net-zero plan. Notably, the group has the support of institutional investors holding more than 12 million shares in Shell.
ClientEarth says Shell’s directors breached their duties under the UK’s Companies Act by failing to create an energy transition strategy that aligns with the Paris Agreement. Specifically, ClientEarth alleges that Shell’s net-zero plan lacks short- and medium-term targets to reduce Scope 3 emissions, which account for more than 90% of Shell’s emissions. ClientEarth also claims Shell will cut its emissions by only 5% by the year 2030, despite being ordered to slash emissions by 45% by a Dutch court in 2021.
ClientEarth is asking the High Court of England and Wales to order Shell’s directors to implement a climate strategy that meets the requirements of the Companies Act and satisfies the Dutch court order.
It’s not just directors who run the risk of facing personal liability – corporate officers may also be held personally liable for ESG oversights following a recent landmark ruling in the US.
In January, the Delaware Court of Chancery ruled that shareholders of McDonald’s can sue former chief people officer David Fairhurst over allegations that he turned a blind eye to sexual misconduct by the company’s former CEO, thereby allowing sexual harassment to spread through the workplace.
According to Reuters, Fairhurst argued he couldn’t be sued because Delaware judges had always held that oversight obligations resided with directors, not officers. But the Court found it was “illogical” to assume that officers have no duty of oversight.
Institutional investors voting against re-electing boards
In conjunction with the trend toward personal ESG liability for directors and officers, many institutional investors are also taking action against boards that don’t address ESG issues. As an example, the world’s largest sovereign wealth fund voted against the re-election of 18 boards of directors last year – and plans to vote against dozens more to address mounting environmental concerns.
The Guardian recently reported that Norway’s Norges Bank Investment Management, which manages US$1.4trn in assets on behalf of Norwegians, plans to vote against the election of at least 80 boards of directors this year over their failure to set or achieve environmental and social targets.
Norges is a major shareholder of Apple, Nestlé, Microsoft and Samsung. The fund’s chief compliance officer told the Guardian that only 17% of the more than 9,000 companies Norges invests in have “clear science-based net-zero targets.” Voting against the re-election of board members is part of the fund’s plan to pressure the remaining 83% of companies to act now to address climate change.
The crackdown on greenwashing continues
The risk of personal liability for directors and officers likely won’t diminish anytime soon, especially in light of the global crackdown on greenwashing, which is set to expand exponentially. Last year drew to a close with the Canadian Securities Administrators warning companies against making “overly promotional” ESG disclosure.
In October, the Competition Bureau confirmed it was investigating a complaint about greenwashing at Canada’s largest bank. The following month, the Competition Bureau confirmed it was investigating the Canadian Gas Association over its claims that natural gas is clean.
Stateside, the House Congressional Committee on Oversight and Reform heard that major oil companies’ sustainability statements amounted to greenwashing. Big Oil’s climate pledges were based on “unproven technology, accounting gimmicks and misleading language to hide the reality,” according to an email a committee member sent to Bloomberg.
Of particular interest for Canadian energy companies, last October, the Australian Securities & Investments Commission (ASIC) levied its first-ever greenwashing fine against Tlou Energy Limited for allegedly making “false or misleading” sustainability claims to the Australian Securities Exchange.
Notably, Tlou claimed the electricity it produced would be carbon neutral as a result of carbon sequestration (which is closely related to carbon capture and storage). However, the ASIC ruled that this claim constituted greenwashing because Tlou had not undertaken any meaningful investigation into whether sequestration was a feasible option for neutralising emissions.
Significant pressure is also being applied by environmental groups. Greenpeace is now ranking Australian electricity providers based on their sustainability claims. Last February, Greenpeace released its Green Electricity Guide, a ranking of 48 electricity retailers that “cuts through the greenwash and spin” by downgrading companies if they use coal or natural gas.
As regulators and activists continue to target greenwashing, it’s become clear that ESG is not a promotional exercise, despite many companies treating it as such.
Most net-zero plans lack credibility: report
Increasing the risk of personal liability for directors and officers, on February 7, CDP – a non-profit that helps companies with climate disclosure – released a report that found only 0.4% of companies with climate transition plans have credible plans to transition to net zero.
CDP surveyed more than 18,600 companies around the world, just over 4,000 of which had released climate transition plans. However, only 81 of those companies had disclosed against all 21 key indicators found in credible plans, according to CDP.
The net-zero plans of Canada’s big banks and insurers are also under scrutiny. Federally regulated financial institutions will face mandatory ESG disclosure beginning next year, but the big banks and insurers already have net-zero plans – although those plans haven’t received stellar grades from Investors for Paris Compliance (I4PC).
In November, I4PC released a report card on the net-zero plans of Canada’s big banks, grading banks on their financed emissions reporting, interim financed emissions reduction targets and their support for net-zero strategies. Only one bank got higher than a C grade in the report card.
I4PC has also released a report that estimates Canada’s two largest insurers are financing the equivalent of three quarters of Canada’s total emissions, casting doubt on their net-zero strategies.
Carbon offsets called into question
Compounding the issue of potential liability, if your company is relying on carbon offsets to achieve your net-zero goals, a recent article published by the Guardian may not come as welcome news.
The British paper partnered with German daily Die Zeit and SourceMaterial, a non-profit organisation of investigative journalists, to analyse the carbon credits approved by the world’s largest and most widely used standard for carbon offset credits, Washington-based Verra, which has issued more than 1 billion carbon credits since its formation in 2009.
The investigation found that 94% of Verra’s rainforest offset credits had no climate-related benefits and should not have been approved. The investigation also found that Verra had, on average, overstated the threat to forests by 400%. It also uncovered human rights abuses at one carbon offset project.
Verra strongly disputes the findings of this investigation, which would call the credibility of any net-zero plan that relies on Verra-approved rainforest carbon offsets into question.
In a related development, responding to the mounting pressure and criticism that some companies rely too heavily on buying carbon credits instead of reducing their absolute emissions, the UN-convened Net-Zero Asset Owner Alliance (NZAOA), which represents a collective $11trn in assets, has updated its Target Setting Protocol. Going forward, the NZAOA will not allow companies to rely on carbon-removal schemes (such as purchasing carbon credits) to achieve intermediary emission targets.
Mandatory disclosure is coming soon
With mandatory ESG reporting fast approaching for public companies, banks and insurers, almost everyone will have to up their ESG disclosure game. By exaggerating your ESG credentials, your company may run the risk of regulatory action, litigation and reputational damage. Now that the prospect of personal liability has spread to directors and officers, the pressure to implement a sound ESG strategy is greater than ever.
Conor Chell is head of the ESG practice group, Laura Roberts is an ESG specialist and Maya Douglas is an ESG specialist, all from MLT Aikins. This article first appeared on MLT Aikins Insights.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.