Climate Change Legal Strategy: Key Considerations
As greenhouse gases continue their relentless rise into the atmosphere, companies must assess the risks of climate change to their businesses and to their boards.
Companies should work with ESG and/or climate counsel to assess risks related to:
● Company representations to investors with respect to climate change practices;
● Direct or indirect liability with respect to the company’s business practices and any connection to climate change;
● “Cancelation” risks, to the extent the company or one of its products or brands is viewed as toxic or dangerous by material subsets of consumers; and
● Liability on the company’s board of directors stemming from the company’s business practices and any connection to climate change.
We recommend and encourage companies to consider whether to appoint a Chief Climate Officer or Climate Envoy as a representative of the business on all issues related to climate change.
Companies must review their representations with respect to the direct and indirect implications of climate change.
In September of 2021, Bloomberg noted the commencement of an SEC “crackdown” on potentially dubious representations made by money managers with respect to environmental, social, and governance focused funds, as well as information related to ESG compliance programs, policies, and procedures. This crackdown reflects that in the case of climate change, a company’s affirmative statements to the markets about either (i) its climate change impact, or (ii) the risks to the business posed by climate change, are in each case a potential source of liability.
These risks are not limited to companies operating in highly polluting industries. For example, a complainant recently filed paperwork with the SEC alleging that Facebook was making misrepresentations to investors with respect to Facebook’s efforts to combat climate change denial on the platform. Facebook’s direct impacts on the climate are presumably the same or similar as any other major social network technology platform; however, and in this case, there is the potential for liability based on Facebook’s affirmative representations related to its efforts to police and moderate climate change content by users on its platform. Companies whose business practices directly contribute to global warming should review their disclosures and representations and confirm the accuracy of such representations. But in addition, companies who make any representations on the potential impacts of climate change on the business must also review those representations for accuracy.
Companies must assess the risk of liability with respect to climate change damages.
The prospect of a business being held directly liable for the production of greenhouse gases is currently being litigated in several federal courts, specifically in the context of lawsuits brought by U.S. cities against major fossil fuel producers. In February 2022, the United States Court of Appeal for the Tenth Circuit rejected arguments from ExxonMobil and Suncor Energy that a lawsuit brought by Boulder County, San Miguel County, and the City of Boulder belonged in federal court. The lawsuit seeks damages from these defendants allegedly caused by climate change under state law tort theories including public nuisance; private nuisance; trespass; unjust enrichment; violation of the Colorado Consumer Protection Act, Colo. Rev. Stat. § 6-1-105(1), et seq.; and civil conspiracy. While it remains uncertain as to whether energy companies will be held liable for alleged damages caused by greenhouse gas emissions, it is possible that one such case premised on specific types of state law claims could one day succeed and ultimately set a precedent for widespread liability.
In the Netherlands, the non-profit group Friends of the Earth received a court order in May 2021 against Shell, ordering Shell to reduce its emissions 45% relative to 2019 levels by 2030. While the decision is on appeal, Shell is required to comply with the order pending the outcome of appeal. In January 2022, the same non-profit organization sent a letter to dozens of multinational corporations in the Netherlands demanding that they reduce their emissions 45% relative to 2019 levels by 2030, consistent with the court order against Shell. Companies which received this letter included KLM, ExxonMobil, and Unilever. Companies must thus assess the risk of climate liability in whatever jurisdiction they do business, and also assess the risk of whether a court in any specific jurisdiction may order and compel global reductions in emissions.
Companies must assess the risk of being ‘canceled’.
Companies should consider the impacts of being “canceled” because of social media campaigns that can strike with lightning speed and can torpedo a company’s valuation overnight. By now, most of us are aware of how cancelation risks affect celebrities, but users of social media are increasingly aware of the power of networked technologies to change business practices. Damage from social media on a company’s brand value, including the impacts of de facto boycotts on brands because the brand is viewed as toxic or dangerous, is a real risk of doing business today. Companies must assess cancelation risk and disclose such risks to their investors, particularly if their business practices could be viewed as being antithetical to values of a significant portion of current or potential consumers.
Are the company’s directors complying with applicable law in their duty of care on the issue of climate change?
The increasing awareness of the effects of climate change, combined with the growing specter of liability as climate change cases make their way through the courts, presents the question whether members of boards could themselves face liability to the extent they know of risks to the business related to climate change but fail to take action. So-called “Caremark” liability is, traditionally, a very difficult standard to meet. Nonetheless, boards of directors should assess the risk of Caremark liability to the extent that the business is directly producing greenhouse gases, or, to the extent the business is on notice from regulators, plaintiffs, or otherwise that its business practices are potentially dangerous from the perspective of climate change.
Companies should consider appointing a Chief Climate Officer or Climate Envoy.
Companies can assess whether concerns related to climate change warrant attention at the officer level in the form of a “Chief Climate Officer” or a Climate Envoy. Appointing a specific company representative may make sense, depending on the circumstances, in order to:
● coordinate and centralize internal efforts with respect to risks of climate impacts on the business;
● provide a company face and name on issues related to climate change and the business, and act as a spokesperson for the business on such topics;
● liaise with other representatives from other companies and governments who are tasked with issues related to climate change, including net-zero efforts consistent with the Paris Agreement; and/or
● provide assurances to the market that the business takes climate change seriously, including through an officer level position bound by fiduciary responsibility to the business.
While the position of a “Chief Climate Officer” may make most sense for businesses, the concept of a “Climate Envoy” could also be appropriate to the extent that this representative is charged with more outward facing or multi-jurisdictional duties, including representation at international discussions. We note that both the United States and Germany have now formally appointed specialized climate envoys, and we expect this trend to extend into the private sector and deepen over time, commensurate with the increasing challenges posed by climate change.