Financial institutions feeling direct pressure to address climate change concerns
This article was co-authored by Alex Cooper, Trainee Solicitor.
Since our last article on climate change considerations, perception has moved to a recognition that climate risks affect all sectors, including financial institutions.
2020 has already given us a prime example of this shift in perception as a climate-related shareholder resolution, the first ever at a European bank, was filed at Barclays.
Criticism of financial institutions
The resolution called for Barclays to put a plan into action to phase out services to energy companies that fail to meet the standards of the Paris Climate Agreement. The proposal was put to a vote at Barclays’ AGM (Annual General Meeting) on 7 May 2020.
The resolution was filed by a group of 11 pension and investment funds managing £130 billion worth of assets and signed by more than 100 additional shareholders. It was co-ordinated by ShareAction, a charity focused on responsible investment, who singled out Barclays as the biggest financier of fossil fuel companies in Europe. Jeanne Martin, the campaign manager at ShareAction stated that Barclays “has one of the weakest energy policies in Europe. Barclays not only has some catching up to do but it also needs to take a more proactive stance on fossil fuel financing.”
ShareAction’s resolution failed at the AGM. However, prior to the AGM, Barclays put forward an alternative proposal to shrink the bank’s carbon footprint to net zero by 2050. The alternative proposal passed with 99.9% of investors voting in its favour. ShareAction viewed the alternative proposal as a positive result for investor engagement but were not left completely satisfied with Martin stating it “leaves a lot of unanswered questions about the bank’s harmful financing activities in the short-term since it fails to commit to phase out support for fossil fuels.”
In contrast, BNP Paribas have publicly stated that it would stop doing business with companies whose primary activities involve oil and gas extracted from shale deposits or tar sands. Crédit Agricole and Standard Chartered have also implemented stricter policies on financing fossil fuel producers.
While the legal basis for forcing financial institutions to take responsibility for climate change remains limited, it is clear that if financial institutions fail to take action to respond to climate change, they will not only face harsh public criticism, but also risk losing the support of climate conscious funds, which will have a direct effect on shareholders’ capital.
D&O risk and the US perspective
Directors and officers need to assess all climate risks that impact the company directly. Climate change regulation and changing norms (as a result of climate change) impacting the business should also be reviewed.
The PG&E shareholder securities class action against the company’s executives filed in the US last autumn is a further example of how increased accountability for climate change actions can affect business. This class action followed PG&E’s bankruptcy filing in January 2019, since it faced an estimated US$30 billion in liabilities tied to the California wildfires in 2017 and 2018.
The complaint alleges PG&E’s D&Os “mismanaged PG&E in bad faith for years by deferring monies earmarked for maintenance, safety tests… for other purposes, including lavish bonuses and compensation to management," and "[D&Os] deliberately ignored internal budgets and knowingly allowed core operations to remain under-maintained and ripe for a catastrophic incident." In addition to the securities class action, PG&E announced that it will plead guilty to criminal charges for its role in the 2018 fires in Northern California, which we discussed in our April 2020 London Market Brief.
While public companies in the US have announced climate change initiatives, these must comport with representations made to the public about the companies’ goals and short- and long-term business prospects. Specifically, the costs of implementing environmentally responsible initiatives can cause companies to lose competitive advantages with which some shareholders may take issue. Further, a company risks the filing of shareholder litigation in the form of derivative litigation or actions for securities fraud if it makes announcements about such initiatives but fails to then follow through or to consider the potential detrimental consequences.
Such litigation risks are not limited to US companies. In Stoyas v Toshiba Corp., the Ninth Circuit held that a non-US issuer can be liable under US securities laws for the sale of its securities (in the form of American Depository Receipts, or “ADRs”) in the US, even when the company is not involved in the sale. Accordingly, a non-US issuer making alleged misrepresentations about climate change activities to the public may be held liable in US courts as the misrepresentation pertains to the company’s ADRs. In the same case, earlier this year following remand from the Ninth Circuit, the district court denied a further motion to dismiss holding that the plaintiffs adequately alleged they purchased the unsponsored ADRs in domestic transactions, as well as that the foreign issuer was sufficiently involved in the sale of those securities to satisfy the “in connection with” element of US federal securities laws. Foreign issuers should keep this in mind when considering taking any position that looks appealing from a corporate social responsibility perspective, but which could also create adverse financial consequences for the company and potential shareholder litigation.
The benefits to shareholder resolutions and initiatives like the one filed at Barclays relating to climate change are clear, but they are not without risks.
Executives of companies have to:
- Carefully assess what steps they are willing to take.
- Consider how these steps will impact their business, shareholders, and whether the impact will be positive or negative.
- Consider the types of representations they are willing to make about taking such steps.
- Carefully follow through with those stated goals in order to avoid potential litigation, like the litigation filed against PG&E.
Public and institutional pressure from investors, action groups (i.e. ShareAction), governments and regulators is growing. It is therefore increasingly important that D&Os consider climate related risks when discharging their duties and mitigate these risks where possible. We have already seen the mounting climate related class action lawsuits in the US. It is increasingly likely that such claims and investigations will occur globally in the coming years.