Carbon, Caremark, and Corporate Governance

William Savitt, Sabastian V. Niles, and Sarah K. Eddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

Developments this week highlight the urgent imperative for boards and management teams to address climate-related challenges as part of their regular risk assessment practices:

  • A Dutch court held Royal Dutch Shell partially responsible for global warming and ordered the company to reduce its carbon emissions.
  • Engine No. 1, an activist investor laser-focused on climate change, won at least two seats on ExxonMobil’s 12-person board in a proxy fight.
  • Likewise bucking management’s recommendation, Chevron stockholders approved an investor-backed resolution calling for cuts in carbon emissions, focusing on the challenging area of “Scope 3” emissions.

These developments come on the heels of a federal executive order and related statement from the Secretary of the Treasury announcing that “financial regulators, financial institutions and investors need to have the best information and data to measure climate related financial risk” and declaring a policy to “act to mitigate [climate] risk and its drivers” (emphasis added) and support “science-based [carbon] reduction targets.”

All of this will reverberate in boardrooms and courtrooms. Directors should expect continuing waves of electoral challenges from issue-oriented activist investors seeking representation on corporate boards. And companies should anticipate the risk of, and take prophylactic steps to avoid, costly fiduciary litigation alleging corporate failures to address and adequately disclose climate-related costs, risks, and mitigation plans. As we have written previously, the Caremark doctrine—which requires directors to monitor enterprise-level risk and is newly invigorated by recent Delaware court rulings—is the likely tool of choice for plaintiffs complaining about board inaction in the face of climate-related exposure.

The growing challenge ranges far beyond natural resource companies. Firms throughout the economy—anyone who manufactures, sells, or finances products that are implicated in environmental harm—should be preparing today for governance, regulatory, and litigation challenges. Thus, among other steps:

Companies that take these steps, and then tailor bespoke responses to any remaining climate-related risks, will earn goodwill with regulators and investors and be better prepared to weather the climate-litigation and climate-activism storm.

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One Comment

  1. John Ruggie
    Posted Sunday, May 30, 2021 at 2:34 pm | Permalink

    One critical point about the Shell case that isn’t mentioned here is that the ruling was actually based on human rights grounds. “RDS [Royal Dutch Shell] has an obligation, ensuing from the unwritten standard of care pursuant to Book 6 Section 162 Dutch Civil Code28 to contribute to the prevention of dangerous climate change through the corporate policy it determines for the Shell group. For the interpretation of the unwritten standard of care, use can be made of the so-called Kelderluik criteria, human rights, specifically the right to life and the right to respect for private and family life, as well as soft law endorsed by RDS, such as the UN Guiding Principles on Business and Human Rights, the UN Global Compact and the OECD Guidelines for Multinational Enterprises.” The UN Guiding Principles and OECD Guidelines are similarly referenced in the new EU Sustainable Finance Disclosure Regulation, the forthcoming EU mandatory human rights and environmental due diligence directive (with civil liability provisions), and in the German ‘Lieferkettengesetz’ (supply chain law) — both of which are applicable to all large firms operating within those jurisdictions that includes U.S.-based businesses). So, it is highly advisable to look at the Guiding Principles and alert clients.

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