Key ESG Issues for US GCs and Compliance Officers
ESG is not yet fully understood by legal professionals. And, while there is a strong desire to upskill and build capacity in this area, most attorneys are still just beginning to reckon with how new ESG legislation, novel litigation claims and parent-company liability trends will impact the businesses they serve.
For US attorneys, much of the developments in ESG law are happening in Europe which may suggest to them that ESG is a ‘nice to have’ but unnecessary part of their client’s risk register. But the momentum driving recent legislation and common law precedent–and its jurisdictional reach–makes clear that this activity is but a preview of the inevitable developments that will soon envelop American businesses.
Moreover, increasing reputational risk for business decisions seen as doing harm suggests that GCs and compliance officers who fail to adapt to ESG paradigms with sufficient speed will undermine the long-term interests of the companies they serve. In 2022, the new mandate for American corporate legal professionals requires both horizon scanning to understand and advise businesses on a rapidly changing operational environment, and staying ahead of these changes so their institutions can continue to thrive. This means going beyond mere compliance to doing the right business in the right way.
The growing codification of Human Rights Due Diligence principles will expand and increasingly implicate American multinationals.
While for the last decade, responsible business conduct in this area has been guided by the UN’s Guiding Principles on Business and Human Rights and the OECD Guidelines on Responsible Business Conduct, recent legislation has sought to codify these principles with due diligence mandates that open up multinationals to potential liability for human rights abuses. France’s Duty of Vigilance Law (2017) is an example of one such law, as are several human rights transparency laws enacted in the UK, Germany and Norway, with the Netherlands’ law set to come into effect in 2023.
Just last month, the European Commission issued its Proposed Directive on Corporate Due Diligence which builds on this member-state legislation and applies to:
Companies based in the EU with 500+ employees and a net worldwide turnover of more than EUR 150 million during the last financial year.
Companies based in the EU with 250+ employees and a net worldwide turnover of more than EUR 40 million in the last financial year, if at least half of that net turnover was generated in high-risk sectors.
AND, companies established outside the EU with either (i) a net turnover in the EU of more than EUR 150 million during the financial year preceding the last financial year, or (ii) a net worldwide turnover of more than EUR 40 million but a net turnover in the EU of less than EUR 150 million, if at least 50% of the net worldwide turnover was generated in the high-risk sectors.
Human rights abuses may be implicated where businesses:
use construction project timelines that don’t permit sufficient community consultation;
employ gig workers, and unpaid interns;
provide online platforms with potential for on- and off-line harm;
employ algorithmic decision-making that can result in discrimination.
The World Benchmarking Alliance provides an open data set on the efforts of nearly 1000 companies to perform Human Rights Due Diligence. In reviewing these scores, keep in mind that a score of 8-10 out of 20 is a sufficient floor for due diligence efforts. Most companies do not meet this threshold.
The Common Law is expanding Parent-Company Liability for harms caused by overseas subsidiaries.
While novel human rights litigation is primarily happening in the European courts, the US Alien Torts Statute, which provides a judicial remedy for International harms, may expose American firms to liability.
Whether a parent company owed and breached their duty of care for harms caused by their overseas subsidiary was a question raised in the English courts with Vedanta Resources Plc and Konkola Copper Mines Plc v Lungowe and Ors. The action for breach of statutory duty and unjust enrichment was brought by 1800 Zambian citizens who claimed they’d been harmed by the toxic discharge of a copper mine into their water system. The English Supreme Court dismissed an early jurisdictional challenge and allowed the case to proceed. It has since settled.
In Okpabi v Royal Dutch Shell plc, Nigerian citizens claimed that the parent company had assumed a duty to protect them from harms resulting from a subsidiary’s oil leaks. The English Supreme Court permitted the action to proceed in the English courts on the basis that Shell was arguably responsible for the systemic pollution of this community. The decision highlights that corporate global policy frameworks and public commitments by multinational parent companies can give rise to liability for environmental and human rights abuses, and is of particular interest to corporations which operate in emerging markets, or whose businesses pose particular operational hazards.
Board-Member Liability - ClientEarth v. Royal Dutch Shell
In March, 2022, ClientEarth, a shareholder of the company, alleged that Shell’s Board breached its legal duties–both personal and corporate–when it failed to implement a climate strategy aligned to the Paris Agreement goal of keeping global temperature rises below 1.5℃ by 2050. ClientEarth said the directors had not acted in a way that promoted the company’s success and had failed to exercise reasonable care, skill and diligence as required under the UK Companies Act.
“The longer the board delays, the more likely it is that the company will have to execute an abrupt ‘handbrake turn’ to retain commercial competitiveness and meet the challenges of inevitable regulatory developments.” Insufficient targets to reduce Shell’s emissions over the next 3, 5 and 10 years, undermine its ability to meet net zero and secure the company’s long-term value while protecting investor’s capital.
While this action is in its early days, we can expect to see similar shareholder claims arising against board members where companies: (1) purport to be addressing climate change while in practice failing to align with the 1.5℃ PCA target or (2) where directors have failed to exercise their duty of care in relation to ESG-related risks that result in a harm to the company.
Reputational harms attributable to ESG factors are increasingly relevant to corporate strategy.
The corporate world’s extraordinary pull-out from Russia offers a strong signal that ethical conduct is now a material business concern. For oil and gas companies, their announced departures could prove particularly costly as they potentially jettison billions in assets. Notwithstanding, the companies determined that the reputational cost of remaining in or doing business with Russia outweighed these losses. This demonstrates that those owing a fiduciary duty to a corporation should be rapidly reappraising their potential ESG risks–including the consideration of potential international sanctions–and working to mitigate exposure.
Oversight trends suggest that public companies will increasingly be required to provide regulators and investors with ESG information.
Annual filings and stand-alone reports (e.g., CSR or sustainability reports, GRI9, SASBE and TCFD) are an increasing requirement for the investor community. But material misstatements or omissions can trigger both an SEC civil action AND a private right of action. (See SEC Commissioner Elad L. Roisman’s July 7, 2020 Keynote Speech at the Society for Corporate Governance National Conference).
Resources for General Counsels:
Updated guidance for General Counsel on sustainability from the UN Global Compact, helps corporate attorneys drive an ESG agenda.
The Legal Sustainability Alliance Business Case for Sustainability
The Chancery Lane Project - Open source tools and contract clauses to help businesses get to net-zero.