We’ve talked about increased ESG litigation in the past and a big development happened Monday. According to the Financial Times:
“ClientEarth, a Shell shareholder, notified the energy major on Monday that it would commence legal proceedings against the company’s 13 executive and non-executive directors for what it said was the board’s failure to adopt a strategy that ‘truly aligns’ with the 2015 Paris climate agreement… ClientEarth is encouraging institutional investors to join or support its claim ahead of Shell’s annual meeting in May.”
This could end up being a very big deal. Shell has not had much ESG success in the past few months. As examined in this Cleary Gottlieb memo, a Dutch Court ruled that the company is to reduce its worldwide CO2 emissions by 45% by 2030. Shell filed an appeal that is still pending. They are facing public scrutiny for the operation of a carbon sequestration facility. Just last week, the company CEO issued an apology only days after purchasing a shipment of Russian crude oil following the invasion of Ukraine and a general embargo on Russian trade. It may be challenging to convince ESG-centric shareholders – or a court – that the company is committed to ESG.
Or, it could end up being little more than a symbolic gesture concerning Shell. A settlement could be reached or the court could rule against ClientEarth to bring the claim. But maybe it will serve as the cocktail party ice-breaker, with additional similar lawsuits to follow against other companies and in other jurisdictions.
Staying on the theme of litigation, John Quinn of Quinn Emanuel Urquhart & Sullivan LLP warned yesterday in Forbes that
“There are several litigation risks that may arise from ESG ratings. To date, no one has been sued based on a misleading ESG rating. But in recent years, there has been a noticeable uptick in cases seeking to hold businesses liable for ‘greenwashing,’ i.e., creating the impression through branding or marketing that products and practices are environmentally friendly when they are not, or not to the extent implied. It is not a stretch to imagine investors or regulators alleging greenwashing based on the misleading use of ESG ratings. Ratings providers, too, could find themselves in the crosshairs…
The extraordinary shift in capital to ESG investments, combined with the precipitous rise in the use of ESG ratings and other metrics generated in a largely unregulated manner, creates significant litigation and regulatory risk. ESG ratings providers must ensure they clearly explain what their ratings actually mean, how they were derived and their limitations. Users of ESG ratings should take care to understand what the ratings really show, how they are generated, and what is disclosed about their meaning and significance. There will be no accountability until there is comparability. In the meantime, given the lack of comparability, what is needed is transparency.”
That someone of Quinn’s stature is commenting on litigation risk of ESG ratings could be seen as a “tell.” Might he see something significant in his crystal ball? Companies may want to give that some consideration.
What You Can Do
ESG presents a myriad of opportunities for companies, but there are also major risks with both undertaking ESG initiatives, as well as brushing them aside. The time has come to give credence to the possibility of new legal threats based on ESG – going all the way to the Board. Companies should conduct vulnerability analyses, scenario development and contingency plans to prepare for legal challenges to company operations, compliance management, strategy execution, fiduciary responsibility, leadership and governance for ESG action and inaction.