Storm clouds ahead: The US Supreme Court sidesteps issues relevant to ESG and climate change, while international and other pressures on corporate and D&O disclosures continue to mount
The US Supreme Court is trying its best to sidestep any material rulings on climate change decisions in view of its recent BP P.L.C. et al. v. Mayor and City Council of Baltimore decision and its refusal to review the Chevron Corp. v. City of Oakland, California case, wherein the Ninth Circuit held that climate change cases against large oil companies belong in state court. Additionally, although the US Supreme Court had an opportunity to address generic corporate disclosures that could impact environmental, social and governance (“ESG”) issues such as climate change in the recently decided Goldman Sachs Group v. Arkansas Teacher Retirement System case, the Court’s decision did not significantly move the needle with respect to the materiality of generic disclosures made by companies and Directors & Officers (“D&Os”) under the US securities laws other than to recognize that such statements could potentially be actionable depending on the circumstances. In the meantime, international pressure appears to be increasing to hold companies accountable for statements made about climate change. For example, a Dutch court recently addressed the issue head-on by requiring Royal Dutch Shell (“RDS”) to reduce its carbon emissions by 45% before 2030. Moreover, pressure on companies to make proper disclosures about carbon emissions will continue to gain momentum in the US through the Securities Exchange Commission’s (“SEC”) expected ESG reporting requirements, as well as through social accountability, state regulation, and civil litigation. The combination of these factors require that companies and D&Os more carefully scrutinize any public statements they make addressing ESG-related issues and climate change going forward.
Recent developments in international climate lawsuits
As noted above, a Dutch court ruled on May 26, 2021, that RDS must reduce its carbon emissions by 45% before 2030. The class action suit, brought by Dutch environmental groups, alleged that RDS has an obligation to contribute to efforts to prevent climate change and asked the court to order the company to reduce its emissions. In a landmark decision, the court ordered RDS to drastically reduce its carbon emissions under the “unwritten standard of care” provided in the Dutch Civil Code. Although the decision only applies in the Netherlands, the impact could have broader implications going forward.
In reaching its decision, the court focused on the global effects of climate change, explaining that, over time, it will have drastic, devastating, and irreversible consequences. The court also focused on RDS’s own corporate climate policy, which had set more stringent climate goals for the RDS group in 2019 and 2020. The court found that, despite the company’s purported intent to reduce emissions, the policy lacked concrete specifications as to how it would implement and execute those goals. In the court’s view, the “policy intentions and ambitions for the Shell group largely amount to rather intangible, undefined and non-binding plans for the long-term (2050).” The court concluded that “[i]n light of the broad international consensus that each company must independently work towards achieving net zero emissions by 2050 [which is the goal date set in the Paris Agreement in 2016 to reach net zero in terms of carbon emissions] . . . RDS may be expected to do its part.” Shell can appeal the ruling, which the company has announced it expects to do.
The impact of climate change issues on US companies
The Dutch court’s ruling against RDS is just one of many legal developments highlighting the growing international interest in actively pressuring companies to address climate change. While climate change has been a topic of discussion in the US for decades, the US Supreme Court has refused to directly address the issue and continues to reject cases that impact climate change. At the same time, recent efforts from the SEC and state courts have highlighted the seriousness of this issue and set the legal framework for greater corporate responsibility, risk, and exposure resulting from both public and private liabilities.
A. Social pressure is also causing corporate changes
Major oil companies are making internal changes in light of social pressure encouraging the reduction of carbon emissions. For example, Chevron investors recently voted in support of a proposal to cut the company’s carbon emissions and Exxon Mobil Corporation (“Exxon”) shareholders recently elected two climate change activists to its board.
Social pressure can come in many other forms, too. For example, with today’s “cancel culture” companies can suffer material monetary setbacks in relation to their positions on a host of event-driven issues. Many commentators have opined on this issue and have suggested that event-driven securities and derivative litigation is on the rise where a company’s given position (or failure to take a position) on social responsibility issues, including the environment, have a material impact on their financial positions.
B. The SEC’s Upcoming ESG Disclosure Requirements
The SEC Chairman Gary Gensler has stated publicly that ESG rulemaking will be a “top priority” in the near term. In particular, the SEC has indicated that it will be developing a framework to address ESG disclosures, including those regarding climate change. Gensler’s recent predecessor (Allison Herren Lee) also noted in March 2021, that “no single issue has been more pressing . . . than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy.” With this in mind, the SEC requested public comment on climate change risk disclosure rules by June 15, 2021. Given that the deadline has now passed, it is possible the SEC could propose rules on climate change disclosures as soon as late summer or early fall 2021.
C. State-brought climate change civil actions continue to mount while the US Supreme Court sidesteps the issues
Numerous states and municipalities have also taken initiative in the push for climate change by leading investigations into companies’ practices and disclosures to shareholders and the public. According to the Sabin Center for Climate Change at Columbia Law School, approximately 1,375 lawsuits seeking some form of relief related to climate change have been filed in the United States alone (compared to approximately 425 in other countries). The suits filed typically alleged tort (in the form of public nuisance) or public trust doctrine claims concerning the physical damage climate change has caused, as well as securities and consumer protection law claims concerning the adequacy of climate disclosures and/or alleged misleading statements relating to climate change.
For example, New York, Massachusetts, and the US Virgin Islands initiated investigations to determine whether Exxon misrepresented how climate change might impact its business operations to investors. Interestingly, the claims against Exxon at that time, which contained elements of materiality and reasonable reliance, were based on statements made in voluntary disclosures. Specifically, in the 2018 New York action, the state court ruled in Exxon’s favor because it found that statements made in voluntary disclosures, as opposed to mandatory ones, was fatal to the materiality and reliance elements. In light of the forthcoming SEC disclosure requirements, the court’s distinction between voluntary and mandatory disclosures is potentially critical and could form the basis for holding companies liable in the future.
More recently, the Massachusetts Attorney General filed a lawsuit against Exxon alleging that it deceived consumers and investors about the risks the business poses to climate change. Significantly, on June 23, 2021, the state court held that the allegations that Exxon lied to consumers by marketing its products as environmentally friendly could proceed, as could claims that Exxon misled investors by downplaying financial risks to the company posed by climate change.
While states are tackling these issues head on, the U.S. Supreme Court has refused to directly address climate change. First, in BP P.L.C. et al. v. Mayor and City Council of Baltimore, Baltimore’s Mayor and City Council (“City”) sued various energy companies in Maryland state court alleging that they concealed the environmental impacts of the fossil fuels they promoted. While the company-defendants removed the case to federal court, the case was ultimately remanded back to state court, and the remand order was appealed. The Fourth Circuit upheld the remand, and that order was appealed to the US Supreme Court. The Supreme Court held that the Fourth Circuit improperly limited its review and remanded the case back to the Fourth Circuit for further consideration. In so holding, the Court essentially left unanswered questions about whether federal courts have proper jurisdiction over climate tort cases filed against energy companies.
Next, on June 14, 2021, the US Supreme Court declined to review a Ninth Circuit decision involving climate change torts filed by San Francisco and Oakland Counties against several energy companies, holding instead that the action properly belonged in California state court. The Supreme Court’s failure to review the case will leave in place a holding by the Ninth Circuit that a district court wrongly dismissed state-law nuisance claims on the grounds that they were not completely preempted by the Clean Air Act.
As the public has put greater focus on ESG issues (and climate change in particular), so have investors. As a result, shareholder securities and derivative suits related to climate change continue to be filed. These suits typically allege that the company issued public statements and financial disclosures containing false and misleading statements concerning climate change that misled the investors and the public.
One question that is sometimes raised in these lawsuits is how specific climate change statements must be to be actionable. On June 21, 2021, the US Supreme Court issued a decision in Goldman Sachs Group v. Arkansas Teacher Retirement System, a case involving the nature of how specific statements must be to be actionable under the securities laws, i.e., to what extent companies can be liable for making “generic” statements that are false or misleading. In that case, certain Goldman Sachs Group (“Goldman”) shareholders alleged that Goldman and several of its executives committed securities fraud by misrepresenting Goldman’s ability to avoid conflicts of interest in its business practices with respect to dealings in certain collateral debt obligation investments, which ultimately resulted in an SEC enforcement action. The shareholders allege that they were misled by Goldman’s “generic” public statements such as: “Our clients’ interests always come first” and “[i]ntegrity and honesty are at the heart of our business.” The Second Circuit Court of Appeals held that the case could proceed as a class action because, among other things, the defendants failed to show that these generic statements did not have an impact on Goldman’s share price.
In reviewing the Second Circuit’s decision on class certification, the US Supreme Court noted that the plaintiffs conceded that the generic nature of an alleged misrepresentation often will be important evidence in determining whether share price was, in fact, impacted in securities class actions because more general statements would potentially impact a company’s share price less than more specific statements. However, the US Supreme Court concluded that the Second Circuit may not have properly considered the generic nature of Goldman’s alleged misrepresentations in upholding class certification, and remanded the case back to the Second Circuit to reassess the district court’s price impact determination.
The US Supreme Court’s opinion did indicate that the generic nature of an alleged misrepresentation is to be considered when evaluating whether a given statement by a company or its D&Os impacted the price of a company’s shares at the class certification stage in securities class actions. The decision to remand, however, ultimately deferred ruling on the merits of the claim and is unlikely to have a significant impact on these types of shareholder class actions. However, the decision clarified that the burden is on the defendant to establish that the alleged generic statements had no impact on the stock price, suggesting that generic statements may largely come into play to rebut a claim that such generic statements impacted the stock price.
At the very least, it is clear that companies and their D&Os should closely scrutinize any public statements they may make going forward addressing ESG-related issues and climate change, no matter how generic they may be, or else risk having securities class actions filed against them if the company’s stock drops in relation to circumstances that could arguably be attributed to such statements. It is also foreseeable that follow-along derivative litigation could be filed after climate change securities litigation is filed. Such litigation could cite securities class action liabilities as a basis for potential liability and damages with respect to breaches of D&Os corporate fiduciary responsibilities.
In these recent cases, the US Supreme Court continues to sidestep addressing issues pertaining to ESG and climate change disclosures. The recent ruling in the Goldman Sachs case does indicate that even generic misrepresentations can be evidence of price impact at the class certification stage in securities class actions, and that the burden is still on the defendant to establish that that such alleged misstatements had no impact on the stock price. That decision, however, did not contain a significant ruling as to the merits of class actions based on generic statements and is unlikely to have a dramatic effect on ESG-related class actions. Despite the Supreme Court’s trend of sidestepping these issues, it is clear that D&Os will continue to face exposure in this area on various fronts when looking at the growing international focus on climate change, the SEC’s expected ESG and climate change disclosure requirements, and an increase in climate-related litigation in recent years. It is also clear that corporations must take any ESG or climate change statements they make – no matter how generic in nature – more seriously in order to address mounting social, regulatory and litigation pressures.
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