Climate change and sustainability disputes: Liability for Directors and Officers
Things are heating up
Global | Publication | July 2021
Climate change and the risks that it poses to, among other things, property and physical infrastructure, human health and economic interests are now well established. Impacts on corporations have also come under scrutiny and include physical damage to assets, supply chain interruption, reputational risks arising from poor sustainability practices, compliance costs associated with more stringent regulatory requirements, the economic impact of “stranded assets”, and finally, litigation by governments, regulators, shareholders and others.1
Corporate disputes risks
According to a recent publication by the C.D. Howe Institute, over 1,600 cases related to climate change are currently pending globally. While to date climate change disputes have tended to be dominated by claims against governments for their failure to implement adequate climate change policies and protections,2 corporations are increasingly coming under fire.
Corporations are the subject of litigation relating to climate change in a number of jurisdictions. In Peru, for example, a homeowner whose property was threatened by glacial melting brought an action for damages for the cost of flood prevention measures against a corporation that owned companies that were alleged to have discharged greenhouse gases. In Australia, a pension fund was sued for having allegedly failed to disclose information on climate business risks and its strategies to address them, and a bank was sued for allegedly having failed to disclose climate-change related risks of its investments. In the U.S., lawsuits have been brought by various cities and states against fossil fuel companies seeking damages based upon the companies’ alleged climate change impacts or alleged concealment of information about their products’ contribution to climate change. At least one securities class action has been commenced claiming that misrepresentations were made by the company concerning climate change related risks.3 In Canada, while no corporation has yet been sued in connection with climate change, in 2017 the Alberta Securities Commission agreed to review a complaint submitted by Greenpeace against a publicly traded company based upon allegations that the company had misled investors and failed to provide full, true and plain disclosure of all material facts in a preliminary prospectus and annual report by failing to fully disclose climate change risks.4
According to a 2019 publication of WillisTowersWatson, litigation theories in climate change related litigation currently being tested in the courts include failure to mitigate greenhouse gas emissions, failure of the corporation to adapt to physical impacts of climate change, failure to adapt the corporations’ investment strategies to mitigate the impacts of climate change, failure to disclose climate related risks, and failure to comply with environmental regulatory obligations.5
As data pertaining to greenhouse gas emissions expands and technology for tracking businesses’ contributions to global warming advances, the incidence of tort claims against corporations involved in particular industries will likely increase. Advancements in attribution science may make the determination of a causal link between sources of emissions and their climate-related harms more likely.6 Climate science researchers now represent that they are able to identify groups of defendants whose contributions to climate change are “identifiable, measurable and significant.”7 There is evidence linking climate change to “specific anticipated impacts.”8 This means that claimants in tort actions may have a better chance of demonstrating the probability and severity of the harms caused by a particular business’ emissions.9
The American tobacco litigation of the 1990’s may potentially act as a blueprint for plaintiffs advancing claims based on climate change. In those cases, states alleged that companies knew about the adverse effects of smoking, yet attempted to hide such information from consumers and regulators.10 The resulting settlement included an agreement to pay states billions of dollars annually.11 Large carbon emitters could potentially be held liable in similar actions if it could be demonstrated they hid climate change data which resulted in harm.12
However, as the U.S. and Australian experience demonstrates, even publicly traded companies not at risk of litigation arising out of their direct greenhouse gas emissions face the risk of shareholder actions alleging a failure to adequately disclose material risks facing the company arising out of climate change. In both the U.S. and Canada, publicly traded companies can be sued in shareholder class actions alleging that misrepresentations were made in offering documents and other public disclosure documents such as press releases, including in relation to the company’s disclosure of risks facing the business.13 As well, at least in Canada, securities regulators have taken proceedings against both corporations and their directors and officers for authorizing, permitting or acquiescing in the corporation’s breach of its public disclosure obligations.14
Liability for Officers and Directors
None of this is good news for corporate officers and directors or their insurers. There is a well established tendency, at least in North America, for plaintiffs to name officers and directors of a corporation as defendants alongside the corporation whenever possible in order to add additional sources of potential recovery, on the assumption that there is insurance coverage for such claims.
This could result in directors and officers being named as defendants in actions advancing tort claims, in securities class actions, in derivative actions brought in the name of the corporation against directors for failure to discharge their duties to the corporation, and in regulatory investigations and proceedings pursuant to legislation that imposes duties upon directors in relation to, for example, harm caused to the environment by the corporation or breaches of the corporation’s public disclosure obligations.
In the U.S., directors have been included as defendants in litigation initiated against corporations relating to climate change15 and derivative shareholder actions have been commenced against directors of corporations alleged to have misled shareholders concerning climate change related issues. Climate change has already made it more risky to serve as a director of companies in certain industries, such as energy.16
Numerous commentators have cautioned corporate directors that they ignore the risks posed by climate change at their peril. For example, In 2015, Mark Carney, then Governor of the Bank of England, issued a statement warning that directors and officers could be held liable for failures to reasonably manage risks associated with climate change, for misleading investors about the business risks of climate change, or for failing to comply with reporting requirements.17 In 2018 the Australian Securities and Investment Commission (ASIC) issued a report cautioning that directors and officers of public companies “need to understand and continually reassess existing and emerging risks (including climate risk) that may affect the company’s business”, including both short-term and long-term risks.18 In 2019 the Canadian Securities Administrators published a list of questions that boards of directors should be asking in relation to climate change, including whether the board has been provided with appropriate information to assist it in understanding sector-specific climate change related issues and to oversee management’s assessment of the materiality of climate change risks, whether oversight and management of climate related risks and opportunities have been integrated into the company’s strategic plan, and whether the board has considered the effectiveness of disclosure controls and procedures in place in relation to climate change related risks.19
What should directors be doing now?
In Canada and other common law jurisdictions such as Australia, directors’ duties are owed to the corporation, not to individual shareholders or third parties.20 In Canada, for example, federal and provincial corporate statutes incorporate provisions that require directors and officers to act honestly and in good faith and in the best interests of the corporation (a fiduciary duty), and to exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances (the standard of care). In assessing the reasonableness of a director’s actions, courts will consider steps taken by the board to obtain relevant information and whether directors exercised prudence in acting on that information in the best interests of the company.21 Where directors can establish that they were duly diligent, were not in a conflict of interest and made a decision that was within the range of reasonableness, courts will defer to their exercise of business judgement.22 However, an uninformed decision will not pass muster.
How do these duties apply in the context of climate change risks and impacts on the corporation?
In order to demonstrate that directors acted diligently (and in Canada, qualify for the protection of the business judgment rule) at a minimum directors should take steps to educate themselves about the risks that climate change create for the business, consider how those risks are being managed, and determine what, if any, action should be taken by the corporation to mitigate those risks in the short, medium and long term.
The adequacy of the resources available to the company to deal with climate change risk should be objectively assessed, and external expertise sought as appropriate. These issues should be considered on an ongoing basis.
If the corporation is a public issuer, its public disclosure obligations specifically relating to climate change and the likely impact on the business must be addressed. In recent years, considerable attention has been devoted to the need for standardized climate-change disclosure standards to allow for the comparative analysis of climate risk across different companies and industries.23 Guidance from relevant securities regulators, industry organizations and accounting bodies concerning recommended and required climate change-related risk disclosure should be carefully considered. For sectors where climate change risks are the most evident, it has been suggested that “rigorous financial analysis, targeted governance, comprehensive disclosures and, ultimately sophisticated corporate responses at the individual firm and system level” are all required.24
Finally, the scope and adequacy of the company’s D&O insurance should be reviewed, with particular regard for both the amount of coverage and specified exclusions from the policy that may affect coverage.