A Changing Climate: the Rising Tide of ESG Liability and Implications for D&O Coverage

 

Celestine Montague and Christopher Quillan, White and Williams LLP

via JD Supra - Aug 3, 2022

 

The latest legal buzzword, ESG, represents the environmental, social and governance factors that many corporations are now required to consider and disclose alongside traditional financial information such as operating results and management compensation.† Environmental concerns may involve carbon footprints, greenhouse gas emissions, deforestation, biodiversity, climate change and pollution mitigation, and waste management. Social concerns may include labor standards, wages and benefits, workplace and board diversity, racial justice, pay equity, and other human capital and social justice issues. Finally, governance concerns may involve corporate board composition and structure, strategic sustainability oversight and compliance, and lobbying.

 

With a step-up in enforcement activity at the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ), and an increase in litigation by shareholders, a companyís affirmative ESG strategies and disclosures are creating liability issues for publicly-traded companies and their directors and senior management. For instance, corporate directors and officers (D&Os) face increased investor and regulatory scrutiny when it comes to corporate policies and disclosures on climate-related risks. In 2021, the SEC launched the Climate and ESG Task Force within the Division of Enforcement to develop initiatives to proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosures and investment. Then, in March 2022, the SEC proposed rule amendments that would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K, including climate-related risks and their actual or likely material impacts on the registrantís business. In May 2022, the SEC proposed a rule for registered investment companies, business development companies, registered investment advisers and certain unregistered advisers, that would require funds and advisers engaged in ESG investing to provide more specific disclosures related to their ESG strategies in fund prospectuses, annual reports and adviser brochures. At the same time, the SEC also proposed a rule to prevent misleading or deceptive fund names, part of the SECís campaign against "greenwashing," that would require a fund to invest 80% of its assets in the ESG factor suggested by its name.

 

We still do not know to what extent the SEC will scale back its proposed rules to avoid or diffuse constitutional challenges based on the "major questions" doctrine, i.e., that questions of "vast economic or political significance" cannot be regulated by agencies without a clear statement of approval for such measures by Congress. This doctrine, of course, was recently the basis upon which the United States Supreme Court struck down Environmental Protection Agency regulations regarding power plant emissions. See West Virginia v. EPA, 142 S. Ct. 2587 (2022).

 

Institutional and activist investors are proactively challenging corporate conduct regarding ESG policies and reporting. Given the high level of public interest, we highlight herein some of the recent ESG lawsuits, and then consider some of the D&O insurance policy language worth examining before and as ESG-related risks materialize into shareholder or regulatory actions.

 

1. Recent ESG Litigation That Could Implicate D&O Coverage Issues ...

 

a. Exxon and Climate Change ...

 

b. Tyson Foods and Environmental Impacts

 

In 2019, two consumer advocacy nonprofits sued Tyson Foods, Inc. in Washington, D.C. Superior Court for allegedly misleading consumers with false statements claiming their chicken products are produced in an environmentally responsible way. Organic Consumers Ass'n v. Tyson Foods, Inc., 2021 D.C. Super. LEXIS 7 (D.C. Super. Ct. Mar. 31, 2021). The nonprofit plaintiffs alleged Tyson Foods marketed its company as "stewards of the planet," dedicated to "environmental leadership," when, in reality, Tyson pollutes the environment and treats animals cruelly.

 

Tyson Foods moved to dismiss alleging its statements were merely opinion and puffery, protected by the First Amendment. The D.C. Superior Court denied Tyson Foodsí motion, holding that its statements that its products were a humane choice and that it was committed to excellence in animal welfare were detailed and concrete enough to be actionable under the D.C. Consumer Protection Procedures Act.

 

c. Wells Fargo and Diversity Hiring ...

 

2. The Potential for ESG Claims Under D&O Coverage ...

 

a. Interrelated Wrongful Acts / Prior Policies ...

 

b. Fines, Penalties, Punitive Damages and Disgorgement ...

 

c. Potentially Applicable Exclusions ...

 

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