Are shareholders the new champions of climate justice?

25/6/19 - Maysa Zorob & Antonella Angelini, Business & Human Rights Resource Centre

Institutional and private shareholders are increasingly bringing legal claims against the companies or private institutions in which they own shares.

This piece was originally published on the blog section of the Business and Human Rights Journal here.

For several decades, individuals and communities affected by climate change – as well as the lawyers, advocates and civil society organizations who represent them – have been using litigation as a strategic tool to hold corporations accountable for climate change-related human rights harms. Traditionally, these lawsuits were brought against governments. However, and as we demonstrated in our 2018 Annual Briefing, Turning up the heat: Corporate legal accountability for climate change, companies are increasingly becoming the direct targets of litigation.

What is more, the “usual suspects” are no longer the only drivers of action. Institutional and private shareholders are increasingly bringing legal claims against the companies or private institutions in which they own shares (so-called shareholder litigation). Shareholders are therefore emerging as an important group of advocates in the fight against corporate impunity for climate-related harm (see our most recent Legal Briefing on Climate Litigation for further details).

The world’s first shareholder-led lawsuit over alleged failure to adequately disclose climate risk was filed against Exxon Mobil Corporation (Exxon) in 2016. This class action was initiated by a group of US investors who sought damages from Exxon after its stock price fell by 13% that year. Plaintiffs argued that the company had made false and misleading statements relating to the impact of climate change on its business, thus substantially overstating the value of its oil reserves, and artificially inflating the company’s value. While the case was later dismissed, it paved the way for what seems to be a lively trend of federal class action litigation in the US.

At least two new such cases have been initiated in California Federal Courts since late 2018, where shareholders are claiming monetary compensation for the alleged damages they sustained as a result of false and misleading statements relating to the impacts of climate change. Barnes v. Edison International, for instance, is a fraud lawsuit alleging that the company provided misleading information about its mitigation measures related to climate change and the heightened risk of wildfires in California. In York County v. Rambo, a coalition of pension funds and investors is suing Pacific Gas and Electric Company and its parent company (PG&E). The lawsuit alleges that the value of the bonds has declined as a result of the defendants’ failure to disclose the true state of their business and operations and the risks posed by their lax wildfire safety practices.

Litigation is also used to seek the enforcement of other fiduciary duties and procedural rights. In July 2018, Mark McVeigh brought a world-first lawsuit against the trustee of his retirement fund, the Retail Employees Superannuation Trust (REST). The plaintiff argues that REST breached the fiduciary duties owed to him by failing to adequately consider climate change risks. He is consequently demanding that REST provide him with the requested information and seeking injunctions from the court to prevent future misconduct by the defendant.

Along similar lines, in October 2018, Client Earth a non-profit environmental organization and shareholder in the Polish energy company Enea SA, sued the company in the Regional Court of Poznań in Poland. The lawsuit claims that, due to climate-related financial risks, Enea’s approval to construct a coal-fired power plant harms the economic interests of the company and its shareholders and should not proceed. Ambitiously, this type of lawsuit aims to change the very climate change-related strategy of fossil fuel companies, by forcing them to abandon controversial investments.

Another compelling case of shareholder litigation is Fentress v. Exxon Mobil Corp. This recently dismissed class action lawsuit was brought against the company by employees who participated in an Exxon Mobil Savings Plan and who had invested in Exxon stocks. The lawsuit alleged that the company’s failure to disclose climate change information violated fiduciary duties under the Employee Retirement Income Security Act (ERISA). The plaintiffs argued that Exxon’s stock had become artificially inflated in value due to fraud and misrepresentation, thus making Exxon stock an imprudent investment under ERISA and damaging the Plan and those Plan participants who bought or held Exxon stock.

As these lawsuits demonstrate, shareholders have emerged as increasingly important actors in global efforts to achieve responsible corporate climate policies and practices. Unlike strategic lawsuits which attempt to attribute climate change impacts to specific companies, shareholder litigation is essentially about the assessment of climate change related financial risk. As plaintiffs, shareholders typically invoke one of two arguments: that their lack of knowledge about climate risks has undermined their ability to exercise their rights as shareholders, and/or that the company’s misleading use of knowledge has harmed their interests as shareholders. The range of remedies claimed is large, spanning from monetary compensation and restitution, to the enforcement of obligations on climate disclosure and declaratory relief for breaches of rights of information, to more ambitious attempts to change the business strategy of fossil fuel companies.

While many of the lawsuits are ongoing, the innovative legal strategies on which they are based have yet to withstand the test of time. Their chances of success will depend on many factors, including how courts will assess the link between specific actions of the boards – such as investment choices – and climate change, and in turn the link between these actions and the financial interests of shareholders.

This centrality of financial risk and financial harm means that shareholder litigation is only marginally suited for purposes such as proving that a particular fossil fuel company has contributed to climate change through its specific emissions, or for providing reparation for climate change-related harm to the public at large rather than to shareholders. Nonetheless, shareholders can and have used litigation to force companies to adopt more climate-friendly policies, or at the very least disclose how climate related risks might affect the company’s bottom line. As such, shareholder litigation is a compelling strategy for climate accountability – one that pressures companies to pay heed to omnipresent demands to adequately address their climate impacts, including by their own shareholders.