.png)
Climate change litigation has emerged as a potent force shaping the landscape of Corporate Governance and accountability worldwide. In recent years, there has been a significant uptick in lawsuits targeting companies for their role in contributing to climate change or for their perceived inadequacy in addressing its impacts. These legal actions span a spectrum of issues, from allegations of greenhouse gas emissions exceeding legal limits to claims of inadequate disclosure of climate-related risks to investors and stakeholders.
The escalation in climate change litigation mirrors growing public and regulatory scrutiny of corporate environmental practices. Governments, shareholders and advocacy groups are increasingly holding companies accountable for their environmental footprint and demanding transparency regarding climate risks. Increased awareness of the negative effects of climate change, such as extreme weather events, sea level rise, and biodiversity loss, which pose serious risks to businesses' finances, operations and reputations, has sparked this shift.
In response to these challenges, companies are under pressure to enhance their Environmental, Social and Governance (ESG) frameworks to mitigate climate risks effectively. Independent directors play a crucial role in this regard, as they are tasked with overseeing governance practices that promote long-term sustainability and resilience. By advocating for robust ESG strategies, independent directors can help organizations integrate climate risk considerations into their core business strategies and operational decisions.
What are typical ESG D&O exposures?
There are two main ways that ESG might lead to a D&O lawsuit: event-driven lawsuits resulting from an ESG-related occurrence and disclosure-related litigation involving an ESG issue. As we will see later, good Corporate Governance is important for spotting and dealing with big risks so that bad things do not happen or are less likely to happen. It is also important to make sure that rules are followed and that information is given correctly in both required reports and optional ESG communications.
Event-driven litigation:
The growing importance of ESG issues aligns with the now-common legal risk that businesses face anytime an unfavourable event occurs: so-called "event-driven" litigation. This form of action typically follows a headline that purports to expose negative facts or claims regarding a company's business operations or goods. While many have questioned the merits of these lawsuits, they are becoming increasingly common, and the litigation and settlement costs may be significant. Many of the event-driven claims filed so far include a "material" danger to the corporation. That is, the unfavourable incident affected some components of the firm's operations that were "intrinsically critical to the company.
An unfavourable occurrence may result in a securities class action (SCA) if shareholders are damaged, a shareholder derivative action if the firm is hurt or loses money, or both. If the adverse incident involves a "material" risk or a "mission critical" part of the company's operations, the directors and officers would most certainly face a difficult road to early removal. This is because both the United States securities laws and Delaware corporate law expect — and compel — corporations to handle their substantial risks proactively. (More than half of S&P 500 companies are incorporated in Delaware; thus, they must observe the state's regulations, which have an impact on the whole business world.) The rise of event-driven derivative litigation aligns with a recent trend in which derivative settlements involve substantial monetary components and plaintiff lawyer fee awards. According to one study, the average settlement in event-driven litigation was more than three times higher than in other instances.
Disclosure-related litigation:
Robust and accurate disclosure has always been a critical component of maintaining the integrity of public equity markets. According to securities regulations, public firms must provide trustworthy, timely and accessible information regarding key company matters regularly. We have seen securities litigation based on alleged misstatements in corporate filings with the United States Securities and Exchange Commission (SEC) that cover a wide range of topics, including those now included under the ESG umbrella, with the most common reliance on Section 11 of the Securities Act and Section 10(b) of the Securities Exchange Act. In recent years, plaintiff attorneys have used new procedures to broaden the scope of corporate communications that might be the foundation of a disclosure lawsuit. For example, several recent board diversity cases brought against public firms allege breaches of Section 14(A) of the Exchange Act as a result of alleged misstatements in Corporate Social Responsibility filings and other sources.
Disclosure-related litigation, like event-driven litigation, often takes the form of an SCA if investors are damaged and a shareholder derivative case if the firm is affected. Incomplete or deceptive disclosures may result in regulatory inquiries and procedures.
As stakeholders continue to urge corporations to establish, enhance, and report on ESG activities, public company directors and officers must respond appropriately and ethically to these difficulties.
Climate risk: Directors are facing a rising flood of liability
Climate risk has increasingly become a focal point in Corporate Governance, ushering in a paradigm shift where directors face mounting scrutiny and potential liability for their handling of environmental challenges. A confluence of factors, such as increased awareness of the effects of climate change, evolving regulatory frameworks and a growing body of case law holding directors accountable for failing to adequately address climate-related risks, are driving this shift.
One of the pivotal developments contributing to this liability landscape is the rise in climate change litigation against companies and their directors. Lawsuits are increasingly targeting board members for alleged negligence in overseeing corporate strategies that mitigate climate risks. Claims range from insufficient disclosure of climate-related risks to shareholders to failure to align corporate actions with climate-related goals outlined in international agreements such as the Paris Agreement.
Legal actions often assert that directors have breached their fiduciary duties by not adequately considering climate risks in strategic planning, failing to conduct thorough risk assessments, or neglecting to disclose material information related to climate impacts that could affect the company's financial performance. Such cases signal a growing expectation from stakeholders that boards must proactively manage and disclose climate risks with the same rigour as other financial and operational risks.
Moreover, regulatory bodies worldwide are increasingly mandating climate risk disclosures, reinforcing the expectation that directors must integrate climate considerations into their oversight responsibilities. This regulatory environment places directors under pressure to ensure their companies adopt robust ESG practices that encompass climate risk management. Failure to do so not only risks regulatory penalties but also exposes directors to shareholder lawsuits alleging breaches of duty in safeguarding long-term shareholder value.
In response to these challenges, directors are urged to adopt a proactive approach to climate risk management. This includes advocating for comprehensive ESG frameworks, engaging with stakeholders on climate-related issues and ensuring that corporate strategies align with global sustainability goals. Directors who take proactive steps to address climate risks not only enhance organisational resilience but also mitigate potential legal liabilities associated with inadequate oversight.
The Indian Climate Law Sector's Genre-Bending
The Supreme Court of India rendered its first climate verdict in a highly lauded decision recently (M.K. Ranjitsinh and Others v. Union of India). The Court used Article 21 and Article 14 of the Constitution to establish the right to be free from the negative impacts of climate change.
Heatwaves getting hotter and authoritarianism getting stronger
The effects of the continuing heatwave in India and South Asia have dominated the news this past month. Many Indian towns lack access to water, and severe air pollution is a corollary of the heatwave. Like other climate-vulnerable nations, India's environmental and climate realities are representative of the ecological polycrisis, which includes pollution, loss of biodiversity, scarcity of water and housing and climate change.
An additional political issue that frames the polycrisis is the growth of authoritarianism globally, which falls under the anti-green category. Decisions that worsen the environmental catastrophe have been connected to the emergence of authoritarianism in India as well. In a recent statement, over seventy civil society organisations exposed how the present administration has been weakening important environmental legislation, such as the Forest Conservation Act of 1980.
Since the climate crisis is a component of the greater poly-crisis, addressing it in court calls for a more comprehensive strategy that takes into consideration its links to other ecological problems. Nonetheless, a distinct category of litigation known as "climate litigation" has developed around the world, concentrating on analysing the effects of climate change and creating precedents related to loss and damage, adaptation, and mitigation. There is a fictitious divide in the climate litigation community between climate litigation and more general environmental litigation. There are instances of current environmental laws and principles being adapted for climate impacts; nonetheless, there are still differences in the kinds of cases and issues that these two legal genres handle. In my opinion, rather than encouraging a more comprehensive solution to the polycrisis, this division runs the risk of fracturing jurisprudence.
The Court Cases' Genre-bending on Climate Change
The court started M.K. Ranjitsinh and Others v. Union of India by looking at the great Indian bustard's situation and listing the challenges that the endangered species is facing. The court states that "among the many threats that exacerbate the challenges faced by these vulnerable species are pollution, climate change, predators, and competition with invasive species." By doing this, the court is already acknowledging that it is necessary to consider other environmental impacts, such as pollution, in addition to climate change while examining this case.
The opposite side of the right to a clean and healthy environment is the expansion of the right to life including the right to be free from the negative consequences of climate change. This strengthens and unites the many jurisprudential perspectives on the ecological issue. The court observes that "the right to life is not fully realised without a clean environment that is stable and unimpacted by the vagaries of climate change," further reinforcing the connections between environment and climate. In some respects, protecting oneself against the effects of climate change and maintaining a clean environment go hand in hand.
In other cases, such as Bombay Environmental Action Group v. State of Maharashtra, the petitioner used important environmental laws to support the preservation of biodiversity and the preservation of mangroves as a means of shielding the city from sea level rise. The 2006 case of Karnataka Industrial Areas Development Board v. Sri. C. Kenchappa, which included an illegal land purchase, made the court consider how important it is to give environmental issues priority to protect against the negative effects of climate change. In a more recent case involving a property dispute and the classification of forest land, The State of Telangana v. Mohd. Abdul Qasim, the court took advantage of the situation to include issues of the rights of nature and climate change. "India's forest and tree cover is serving as a major mode of carbon mitigation for India and the world," the court says in the ruling.
The case of Ridhima Pandey V Union of India also supports the implementation of current environmental regulations as a means of addressing climate catastrophe more effectively. "There are various environmental legislations and rules/notifications made thereunder existing in India which, if effectively implemented in its true spirit, would aid in tackling the issue of adverse climate change impacts," the petition states. Enforcing important laws about forests and biodiversity is emphasised in the petition. The connections between environmental law and climate law are well-defined here as well.
These cases—and many more to follow—offer a potential path towards addressing the climate catastrophe holistically through the use of environmental litigation and the body of current environmental law. Even if there may be gaps in environmental law and jurisprudence at the moment to handle certain climate-related legal issues, these holes can be remedied with more recent legal theories. However, the risk of artificially separating environment and climate law from one another could result in a highly specialised and fragmented body of legal precedent that is unable to adequately address the multifaceted environment and climate reality that the poly-crisis has produced.
The Surge in Climate Change Litigations
Climate change lawsuits have become a potent tool for stakeholders seeking accountability from corporations deemed responsible for exacerbating environmental degradation. These lawsuits typically fall into several categories:
Disclosure and Transparency:
Shareholders and advocacy groups are increasingly filing lawsuits alleging that companies have failed to disclose material risks associated with climate change. This includes risks related to physical impacts (e.g., extreme weather events) and transition risks (e.g., policy changes and technological shifts affecting business models).
Greenwashing Allegations:
Companies that mislead stakeholders by overstating their environmental commitments or green credentials face lawsuits alleging "greenwashing." These claims assert that companies misrepresent their sustainability efforts, leading to reputational damage and potential financial losses.
Failure of Fiduciary Duty:
Directors and officers are being targeted for breaching their fiduciary duties by not adequately managing climate-related risks. Plaintiffs argue that directors failed to consider long-term sustainability impacts, thus jeopardising shareholder value.
Legal and Regulatory Landscape
The legal landscape for climate change litigation is evolving rapidly. Courts are increasingly open to hearing climate-related cases, and judgments are starting to set precedents. Key developments include:
Securities and Exchange Commission (SEC) Regulations:
The SEC requires companies to disclose material climate-related risks and their impact on financial performance. Non-compliance can lead to regulatory penalties and shareholder lawsuits.
International Agreements:
Commitments under international agreements like the Paris Agreement influence legal interpretations of corporate responsibilities regarding climate change mitigation and adaptation.
Precedents and Case Law:
Lawsuits that successfully establish liability for climate-related harms set precedents for future litigation, influencing corporate behaviour and regulatory expectations.
Proactive Risk Management Through Robust ESG Practices
Given the complex and evolving legal environment surrounding climate change, independent directors play a crucial role in safeguarding companies against litigation and reputational damage.
Here’s how they can proactively manage these risks through robust ESG practices:
Board Oversight and Accountability:
Independent directors must ensure robust oversight of climate-related risks. This includes integrating climate risk assessments into corporate governance frameworks and monitoring compliance with regulatory requirements.
Strategic Integration of ESG Factors:
Directors should advocate for the integration of ESG factors, including climate considerations, into corporate strategies and decision-making processes. This involves aligning business goals with global sustainability objectives and setting clear targets for emissions reduction and environmental impact mitigation.
Stakeholder Engagement:
Engaging with stakeholders, including investors, regulators, and community groups, enhances transparency and accountability. Regular dialogue on ESG issues demonstrates a commitment to sustainable practices and reduces the likelihood of litigation stemming from a perceived lack of transparency.
Risk Disclosure and Reporting:
Ensuring comprehensive and accurate disclosure of climate-related risks in financial reports and other public disclosures is essential. Directors should oversee the development of robust reporting frameworks aligned with international standards, such as the Task Force on Climate-Related Financial Disclosures (TCFD).
Continuous Learning and Adaptation:
Directors should stay informed about evolving regulatory requirements and emerging best practices in climate risk management. Continuous education and adaptation of governance practices enable directors to anticipate risks and proactively mitigate them.
Conclusion
As climate change litigation continues to rise, companies and their directors face increasing pressure to demonstrate proactive and effective management of climate-related risks. Implementing robust ESG practices not only mitigates legal liabilities but also enhances corporate resilience and long-term sustainability. Independent directors, in particular, have a pivotal role in fostering a culture of transparency, accountability, and environmental stewardship within organizations. By embracing these practices, directors can navigate the evolving legal landscape and contribute to a more sustainable future for businesses and communities alike.
Our Directors’ Institute- World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out efficiently, helping you make a significant contribution to the board and raise corporate governance standards within the organization.
Comments