On June 1, 2017, President Donald Trump announced the withdrawal of the United States from the Paris Climate Accord. Under the terms of the Paris pact, withdrawal could take up to four years, but the President’s recent action signals his administration’s intent to step away from the agreements and commitments detailed in agreement. The President’s action has already set in motion a host of political reactions, including a variety of pronouncements at the state and local level in the U.S. in response to the President’s move.
Amidst these actions on the political stage, a host of other actors, including shareholders, activists, and non-governmental organizations (NGOs) have continued to press climate change-related disclosure issues. These developments ensure that notwithstanding the President’s actions on the Paris accord, climate change will remain a high profile issue for many corporate boards, and potentially could be a source of future corporate claim activity.
It needs to be stressed at the outset that climate change related issues have already been the source of claims against corporate officials. As I noted in a prior post (here), in November 2016, shareholders filed a climate change-related securities class action lawsuit against ExxonMobil, in which the claimants allege that the company’s did not adequately disclose the impact from climate change-related issues on its ability to realize the value of its hydrocarbon assets. Activists and others frustrated by climate change-related developments in the political arena increasingly may try in the future to use the courts as a way to advance their agendas. The administration’s withdrawal from the Paris accords only reinforces these possibilities and underlines the concern about the possibility of future activist driven climate change-related litigation, as activists frustrated by the political process seek to use other means to advance their agendas.
Activist investors have in fact been active on a variety of other fronts. In particular, activist shareholders recently have had a run of success in advancing shareholder resolutions directed at requiring the companies involved to upgrade their climate change-related disclosures. Over the past weeks, shareholder resolutions targeting climate change disclosure at a number of companies have been successful.
First, May 12, 2017, Occidental Petroleum investors approved a shareholder resolution mandating that the company produce a report detailing how climate change may impact its business. Among other things, the resolution provides that the company produce an “assessment of long-term portfolio impacts,” detailing “how capital planning and business strategies incorporate analyses of short- and long-term financial risks of a lower carbon economy.” The resolution was sponsored by a group of institutional investors led by CalPERS. A similar resolution had failed the year prior after receiving about 42 percent of the vote.
Second on May 17, 2017, at the annual meeting of utility PPL Corp., more than 50 percent of the shareholders voted in favor of a nonbinding resolution asking the company’s management to publish “an assessment of impact” of public policy changes and technological advances will have on the company. The company had urged a no-vote on the resolution, which had been led by the New York State Common Retirement Fund.
Finally, on May 31, 2017, shareholders of ExxonMobil approved a nonbinding shareholder resolution to require the company to report on the impacts of climate change to its business. The resolution was led by the New York state retirement fund. The resolution passed with 62.2% of votes in favor. A similar resolution a year earlier received a favorable vote from only 38.1% of shareholders.
A June 7, 2017 Harvard Business Review article (here) called the ExxonMobil vote “a tipping point,” providing a “strong signal that climate change is an important financial risk and that shareholders want to know more about what companies are doing to transform their operations and products to remain competitive in a low-carbon world.” The article predicts that “more shareholder proposals will address climate change issues,” which will “raise important questions for boards of directors.” Boards, the article suggests, will “have to demonstrate competence at monitoring the organization’s transformation process” and will “need to demonstrate that grasp how climate change and the adaptation to a low-carbon economy” will affect their company.
As the AG Deal Diary commented in a June 6, 2017 blog post (here), these various shareholder votes and the investor activism behind them “could spur companies to take greater steps to investigate and disclose climate change risk.”
It is worth noting under the heading of shareholder activism that in the wake of President Trump’s announcement of his administration’s withdrawal from the Paris accord that several of the largest institutional investors issued statements reiterating their support for their support for the accord and its goals.
For example, on June 1, 2017, CalPERS issued a statement reiterating its support for the accord, stating that “supporting its goals ultimately benefits our members and their long-term retirement security.”
Along the same lines, and also on June 1, 2017, New York State Comptroller Thomas DiNapoli issued a press release on behalf of the New York State Common Retirement Fund (here) stating among other things that “I will continue to seek out sustainable investments and changes in corporate behavior that help the promise of the Paris Agreement become a reality.”
In other words, the administration’s withdrawal from the Paris accords is unlikely to deter these large institutional investors from seeking to use the shareholder resolution process to try to influence climate change-related disclosures.
In addition to these activist-backed shareholder resolution initiatives, other actors have been taking steps to try to force increased climate change-related disclosures. These other actors include NGOs. As detailed in recent news reports (here), the U.K.-based campaign group ClientEarth, through pressure on the Financial Reporting Council, the U.K. corporate governance and reporting authority, has compelled oil and gas firms SOCO International and Cairn Energy to increase their climate reporting and update their climate-related disclosure practices.
Soco International, for example, in its annual report, added disclosure that the transition to a low-carbon economy could result in reduced demand and increased operating costs, capital costs, regulation, and taxation. Cairn also supplemented its disclosure to identify business risks associate with a low-carbon environment.
The ClientEarth initiatives are interesting and noteworthy here not only because they illustrate the involvement of NGOs in the climate change related disclosure efforts, but also because in this instance the organization efforts highlights the fact that these initiatives and developments are happening across borders and affecting companies around the world, not just in the U.S. These developments are likely to be advanced by efforts of other organizations such as the Financial Stability Board’s Task Force on Climate-Related Finance Disclosures (TCFD), an international body chaired by Michael Bloomberg, which will present a report on climate change-related disclosures at the G20 meeting in Hamburg in July. (An overview of the task force’s recommendations can be found here.)
In addition to activist shareholders and NGOs, another set of actors that are active in this arena in the U.S. are the states’ attorneys general. For example, New York’s attorney general is actively pursuing an investigation regarding ExxonMobil’s disclosures (as discussed here), as part of a coalition of states’ attorneys general pursuing climate change-related disclosure issues. The states’ attorneys general activism in this arena underscores the fact that among the risks facing companies related to climate change related issues is the possibility of regulator enforcement activity, and that this possibility continues at the state level even as the current administration pulls back from an activist approach on climate change issues.
The fact is that even with the administration’s withdrawal from the Paris accords, climate change related issues will remain a concern for many company’s boards. Indeed, the setback on the political front associated with the administration’s withdrawal increases the likelihood that the various actors identified above may resort to other measures to try to advance their agendas.
At a minimum, this means that many companies will face pressure from shareholders and NGOs about their climate change-related disclosures. Companies in a variety of different industries could face this pressure, including the possibility of shareholder resolutions of the kind described above. Companies in the energy, mining, transportation, manufacturing, and insurance sectors, among many others, seem likeliest to face these kinds of concerns. Along with pressures to alter or improve disclosures may come claims that prior disclosures were inadequate or misleading. The 2016 ExxonMobil securities class action lawsuit that I mentioned above is an illustration of the form that this type of lawsuit might take. In addition, the possibility of future claims in this area includes the risk of a regulatory enforcement action similar to the one that the NY AG is pursuing against ExxonMobil, as also noted above.
The bottom line is that notwithstanding – and perhaps even because of – the current administration’s move to withdraw the U.S. from the Paris climate accords, climate change and climate change-related disclosures likely will remain an area of concern for corporate boards. The concerns include, among other things, the risk of climate change disclosure-related claims.
In the interests of full consideration of these issues, I acknowledge here that for quite some time I have been suggesting the possibility that climate change-related issues could become a significant source of D&O claims. Even with the ExxonMobil securities class action lawsuit that I mentioned above, the fact is that there has not been a significant level of D&O claims activity in this area. Whether or not there will in fact be any significant level of climate change-related activity in the future of course remains to be seen. All of that said, I continue to believe that boards will find that climate change-related disclosure issues are going to be important areas of concerns notwithstanding the U.S. move to withdraw from the Paris climate accord.
House Passes Financial Choice Act: On Thursday, June 8,2017, the U.S. House of Representatives passed the Financial Choice Act of 2017 (H.R. 10) by a party-line vote of 233-186. The legislation will now go to the Senate for consideration. The Act would roll back many of the financial reforms instituted in the Dodd-Frank Act. As I discussed in prior posts, the legislation would also introduce a number of disclosure and corporate governance reforms and would significantly alter important aspects of the SEC’s enforcement authority. The legislation’s prospects in the Senate are at best uncertain; as John Jenkins noted earlier on TheCorporateCounsel.net blog (here), the likelihood is that if the Senate, with its already crowded agenda, takes up the Dodd Frank Act rollback question at all, it will pursue regulatory reform that is more limited in scope than the House bill. The timing of Senate action is at best uncertain, but it could be 2018 before the Senate takes up these issues at all.