In early August 2023, wildfires broke out on the Hawaiian island of Maui. The wildfires caused the deaths of at least 115 people, and also caused massive property damage. In the aftermath, questions began to circulate about what had caused the fires. Among those under the spotlight is Hawaii’s largest electrical utility, Hawaiian Electric Industries. Indeed, on August 24, 2023, Maui County filed a lawsuit against the utility, alleging that its power lines caused the wildfire. With the adverse publicity, the utility’s share price has slumped. Now, a plaintiff shareholder has filed a securities lawsuit against the company. As discussed below, the new securities lawsuit may represent something of a prototype for future litigation involving companies whose business operations are disrupted by changing climate conditions and by the increase in extreme weather conditions and events. A copy of the securities suit complaint can be found here.
The August 2023 Hawaiian wildfires were among the deadliest in U.S. history. The most destructive wildfire spread near Lahaina on August 8, 2023. Large portions of the city were destroyed, and many people were killed. According to the subsequently filed securities lawsuit complaint, videos quickly circulated online that purported to show downed power lines belonging to Hawaiian Electric sparking several of the fires. Stories began circulating the media questioning whether Hawaiian Electric had taken adequate precautions to safeguard its electricity distribution facilities to mitigate the risk of wildfires.
On August 17, 2023, the Wall Street Journal, in a frontpage article, reported that Hawaiian Electric had for years been aware of the increasing threat of wildfire but allegedly failed to act. The Journal reported that between 2019 and 2022, the utility spent less than $245,000 on wildfire-specific projects on Maui and did not seek state approval to raise utility prices to pay for broad wildfire safety improvements until 2022. According to the complaint, following this news, as well as related news that the utility had retained a restructuring consultant to advise the company on dealing with the financial and legal challenges from the wildfires, caused the company’s share price to decline significantly.
On August 24, 2023, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against the utility and certain of its directors and officers. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between February 28, 2019, and August 16, 2023.
The complaint alleges that during the class period, the defendants made false or misleading statements or failed to disclose that: “(1) Hawaiian Electric’s wildfire prevention and safety protocols and procedures were inadequate to meet the challenges for which they were ostensibly designed; (2) accordingly, despite knowing the risk that wildfires posed for Maui, the Company’s inadequate safety protocols and procedures placed Maui at a heightened risk of devastating wildfires; and (iii)as a result, the Company’s public statements were materially false and misleading at all relevant times.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
The question of what caused the Hawaiian wildfires will of course be discussed and debated for some time to come. Whether the Hawaiian electric distribution facilities caused (“sparked”) fires will be closely scrutinized in numerous courtrooms. Many factors undoubtedly contributed to the fires or made them more severe. On Saturday, the Wall Street Journal had an interesting article (here) in which the newspaper quoted multiple sources that saying that the “catastrophic spread” of the fires may have been due to the growth of invasive grasslands that took over abandoned sugar plantations on Maui.
Another significant factor contributing to the wildfires’ origination and spread could be climate change. Rising temperatures, declining rainfall, longer and more active fire seasons create conditions ripe for more severe fires. Indeed, the spread of invasive species could itself be a product of a changing climate. As the Los Angeles Times put it in an article about the role of climate change in the Hawaiian wildfires is that the changing climate acted as a “force multiplier” increasing the impact of weather, development, and, some will argue, poor facilities maintenance by the electrical utility.
Climate change altered the conditions in which Hawaiian Electric had to operate. The new lawsuit against the utility shows how changing climate conditions can translate into securities litigation. Indeed, Hawaiian Electric is not the first utility to be hit with a securities suit after a utility’s transmission facilities allegedly sparked wildfires in extreme drought conditions. In addition to the new lawsuit against Hawaiian Electric, PG&E was sued after its electrical distribution facilities allegedly caused November 2018 wildfires in Southern California (discussed here). There was also a separate lawsuit filed against Edison International in connection with the 2018 California wildfires.
There is more to be concerned about here than just whether electric utilities could get hit with securities litigation if the utilities’ facilities are alleged to have sparked wildfires. The larger concern here has to do with the challenges many companies may face as changing climate conditions alter long-standing operating conditions and as increasingly disruptive extreme weather events further contribute to altered business circumstances.
There has of course been a great deal of speculation in recent years about the possibilities for climate change-related D&O claims. Much of the discussion, however, has been about whether companies could be sued for failing to meet their carbon reduction goals or failing to achieve sufficient sustainability. Less focus has been paid to the possibilities that companies may find themselves hit with securities suits as changing climate conditions and increasingly common extreme weather events disrupt business operations. The fact is that many companies may be vulnerable to climate conditions and events, including in particular, extreme heat, increased and more severe drought, cyclonic storms, coastal flooding, rising sea levels, and other disruptive events. Just as the extreme weather in Hawaii led to unprecedented conditions for Hawaii Electric, other companies could find themselves facing unprecedented operating challenges as more extreme weather and weather events proliferate. And, as the recent Hawaiian Electric lawsuit illustrates, these consequences can translate into securities litigation.
In thinking about these issues, it is important to keep in mind that it is not just the impact of changing climate conditions on the company’s own operations that could create challenges. The impact of changing climate conditions on companies’ vendors, customers and suppliers could disrupt the companies’ business as well. A good example of this is the securities suit filed in 2021 against the mattress manufacturer, Sleep Number. Sleep Number had experienced a steep drop in revenues after its primary source for the foam used in making its mattresses had its manufacturing operations shut down by the Winter Storm Uri. The Sleep Number lawsuit eventually was dismissed, but it the suit does show how supply chain disruption owing to an extreme weather event can translate into securities litigation.
As I noted in a recent post about the new EU ESG disclosure guidelines, various global regulatory bodies are trying to get companies to make increased climate change-related disclosures. Much of the focus is on increased disclosures about companies’ carbon reduction, in their operations and in the “value chain.” I wonder whether greater attention should be paid to disclosures surrounding companies’ efforts to plan and prepare for the impacts of climate change. For example, how could water-intensive industries such as agriculture, brewing, and mining be affected by drought? Or to think of it another way, NASA has taken extraordinary measures to protect its Cape Canaveral launch facilities from rising sea levels. What steps are companies taking to protect their climate change-exposed facilities? Are companies considering whether their suppliers’ facilities are exposed?
For some time now, one of the recurring issues in the D&O liability arena has been question of potential litigation and liability risks arising from climate change. In my view, amidst this ongoing discussion, an important consideration has all too often been overlooked, and that is the possibility of litigation arising from the impacts of climate change on business operations. The disruptive impact of changing climate conditions and more extreme weather events is likely to have an increasingly significant role to play going forward. As this new lawsuit shows, these disruptive impacts can translate into D&O litigation.