United States of America

Corporation Law and Climate Change

Executive Summary

As corporate activities increasingly influence the global environment, the intersection of corporation law and climate change reflects a paradigm shift in corporate responsibilities toward sustainable practices. Corporations, wielding substantial influence over environmental outcomes, are now subject to a transformed corporate governance model that integrates Environmental, Social, and Governance (“ESG”) considerations. Legal developments demonstrate an evolution in shareholder and stakeholder actions, utilizing fiduciary duties to enforce corporate accountability for environmental impact. Governments worldwide are adapting corporation laws to address climate-related concerns, imposing transparency mandates and encouraging sustainable practices. Notably, recent landmark cases, such as the ExxonMobil and PG&E litigations, exemplify the growing importance of climate-related disclosures and fiduciary duties in corporate management. The concept of “piercing the corporate veil” emerges as a vital tool in overcoming corporate structures that may impede environmental claims, enabling courts to hold individuals personally liable. Furthermore, the imposition of unprecedented duties on corporations for climate change mitigation, as seen in the Royal Dutch Shell case, underscores a shifting legal landscape. State-level initiatives, exemplified by California’s greenhouse gas disclosure laws, reinforce the momentum toward increased corporate transparency. Looking forward, the integration of climate change considerations into corporate law is poised to shape a new era where environmental consciousness becomes inherent in corporate governance, emphasizing accountability and sustainability in navigating the complexities of the business world.

• Corporation Law’s Vital Role: The intersection of corporation law and climate change is a crucial and evolving domain, recognizing the profound influence of corporate activities on the environment.
• Paradigm Shift in Corporate Governance: Corporations are increasingly integrating ESG considerations into their governance structures, signaling a shift towards viewing sustainability as integral to long-term success.
• Legal Mechanisms for Accountability: Shareholders are employing legal tools within existing corporation law frameworks, such as fiduciary duties, to hold corporations accountable for their environmental impacts.
• Global Legislative Adaptations: Governments worldwide are modifying corporation laws to address climate concerns, enacting legislation that mandates transparency, encourages sustainable practices, and holds corporations responsible for their carbon footprint.
• Duties of Care and Loyalty in Focus: Developments in case law highlight the expanding application of fiduciary duties, such as the duty of care and duty of loyalty, to corporate actions addressing environmental challenges.
• Investor Appetite for ESG Disclosure: A growing investor appetite for disclosures on climate and ESG matters emphasizes the integral role of fiduciary duties in guiding corporations toward ESG-prudent actions.
• Board Consideration of ESG Factors: Major corporations and boards are giving due consideration to ESG factors, with influential entities like BlackRock and State Street emphasizing the importance of boards overseeing sustainability factors for long-term business success.

General Impacts

In the modern era, the intersection of corporation law and climate change has emerged as a critical and dynamic field, reflecting the growing recognition of the profound impact that corporate activities can have on the global environment. Corporation law, a body of legal principles governing the formation, operation, and dissolution of corporate entities, plays a pivotal role in shaping the behavior of businesses. Simultaneously, the escalating concerns about climate change have prompted a reevaluation of corporate responsibilities and the need for sustainable practices.

Corporations, as key economic actors, wield significant influence over environmental outcomes through their operational decisions, resource utilization, and adherence to environmental regulations. In response to mounting environmental challenges, there has been a paradigm shift in corporate governance, emphasizing the incorporation of ESG considerations. This shift is not merely altruistic but is increasingly viewed as integral to long-term business success and resilience.

Legally, the relationship between corporation law and climate change is multifaceted. Shareholders and stakeholders are increasingly utilizing legal mechanisms to hold corporations accountable for their environmental impact. This involves exploring avenues within existing corporation law frameworks, such as fiduciary duties, to ensure that corporate decision-makers prioritize sustainability and climate resilience.

Governments worldwide are also adapting corporation laws to address climate-related concerns, enacting legislation that mandates transparency regarding environmental practices, encourages the adoption of sustainable technologies, and holds corporations accountable for their carbon footprint. This evolving legal landscape reflects a broader recognition of the role corporations play in either exacerbating or mitigating the impacts of climate change.

Duties of Care/Loyalty and Climate Change

Traditionally, boards of directors regarded many ESG issues as beyond their scope. “Corporate social responsibility” (“CSR”) has always been a part of the discussion surrounding corporate action, but was not always part of a strategic approach supporting the core activities of generating revenue and maximizing profits.[1] Discussions on director responsibilities regarding climate and ESG frequently concerned whether directors were allowed to address issues traditionally associated with corporate social responsibility.[2] Historically, the courts regarded shareholder interests as controlling: “it is not within the lawful powers of a board to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefitting others, and no one will contend that, if the avowed purpose of the defendant directors was to sacrifice the interests of shareholders, it would not be the duty of the courts to interfere.”[3]

However, investor appetite for disclosure on climate and ESG matters increased over time.[4] What is more, major asset managers and institutional investors, including the world’s largest, have been explicit and outspoken about their perspective that ESG considerations are integral to their decision-making processes.

While there is considerable debate about whether ESG factors should take precedence in the operation and management of corporations, the evolution of case law highlights instances where the scope and application of fiduciary duties can serve as a valuable guide in evaluating whether a specific corporation has acted ESG-prudently. The answer might be found in the solid case law dealing with the types of fiduciary duties – the duty of care and duty of loyalty.

The duty of care mandates that directors inform themselves “prior to making a business decision, of all material information reasonably available to them.”[5] The rule itself “is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company”.

The duty of loyalty requires the corporate officers and directors (as well as controlling shareholders) not exercise their discretion over corporate policy to benefit themselves at the expense of their co-investors.[6] A subset of the duty of loyalty is a “good faith” duty which prohibits the corporate directors from knowing or deliberate indifference to their duty and underlines the necessity to act faithfully and with appropriate care.[7] In other words, corporate decisionmakers must act honestly and in good faith to advance the best interests of the company.[8]

In the light of these fiduciary duties, case law has developed a “red and yellow flags” doctrine ( “Caremark Duties”)[9], which provides for of breach of fiduciary duty claims in the event the corporate board 1) fails to implement a board-level system to monitor company compliance with applicable rules and associated company protocols or mandatory reporting related to those issues or 2) consciously disregards red or yellow flags indicating material noncompliance with such laws and company protocols.[10]

The recent trends also indicate that boards of larger corporations should give due consideration to ESG factors. In a white paper published last year by the World Economic Forum, advocated for ESG integration into corporate governance out of a recognition that “business value creation” is increasingly dependent on understanding and managing these risks and opportunities.[11] Notably, in 2021, BlackRock underscored its anticipation for boards to influence and oversee management’s handling of significant sustainability factors within a company’s business model.[12] BlackRock has indicated a commitment to holding directors accountable in cases where they fall short of these expectations.[13] Likewise, State Street has declared its intention to vote against the boards of companies that lag behind their peers in meeting ESG standards.[14] Proxy advisory firms ISS and Glass Lewis have also introduced updated voting policies that incorporate director accountability for failures in ESG governance.[15]

Duty to Mitigate Climate Change

Even though the US case law has not explicitly imposed any affirmative duty on part of the directors or corporate entities to mitigate climate change, a new trend in has emerged in the European Union (“EU”), where legal rulings impose unprecedented duties on corporations concerning the emission of greenhouse gasses. In a landmark decision from November 26, 2021, the District Court of The Hague, Netherlands, ordered Royal Dutch Shell to reduce its greenhouse gas emissions by 45% by the year 2030[16] This decision is also noteworthy for applying global climate change objectives directly to corporate actors, marking a significant step in holding energy companies accountable for their environmental impact. In reaching its decision, the court referenced various non-binding instruments, including the United Nations Guiding Principles on Business and Human Rights (“UNGPs”), and reports from the Intergovernmental Panel on Climate Change[17] It’s worth noting that none of these reports explicitly outline parameters for determining specific carbon contributions or numerical targets for corporations or other entities.

While the Hague’s judgment represents a revolutionary stride toward holding corporations accountable for their role in climate change, it also underscores the challenges and uncertainties in the evolving landscape of corporate climate litigation. The introduction of a new duty of care for corporations raises unanswered questions regarding the size, nature, geographical presence, and business processes of different corporations, as well as their respective contributions to climate change and the extent of their legal liability.

Global Legislative Adaptations

Governments worldwide are increasingly recognizing the critical role that corporations play in addressing climate change. As a result, they are enacting legislation and modifying corporation laws to mandate transparency, encourage sustainable practices, and hold corporations accountable for their carbon footprints.

AB 1305 is a legislative proposal in California aimed at enhancing corporate transparency regarding climate-related financial risks. The bill requires publicly traded companies headquartered in California to disclose their greenhouse gas (“GHG”) emissions and climate-related financial risks. The goal is to provide investors and the public with better information about the environmental impact and sustainability practices of these companies. This transparency is intended to drive corporate behavior towards more sustainable practices and reduce overall carbon footprints.

On September 12, 2023, the Governor of California Gavin Newsom signed two landmark bills, marking a significant step in environmental accountability. These pioneering pieces of legislation mandate large corporations to disclose their greenhouse gas emissions, shedding light on their contributions to climate change and the associated financial risks.

Senate Bill 253, one of the approved measures, compels large companies with annual revenues exceeding US $1 billion to report their direct and indirect greenhouse gas emissions starting in 2026 and 2027.[18]

Similarly, under the provisions of SB 261, over 10,000 companies with revenues surpassing $500 million must articulate how climate change poses threats to the profitability and financial stability of their operations, extending beyond California to impact global activities.[19] Factors such as high temperatures, wildfires, droughts, and other climate-altered conditions must be detailed. Notably, this directive applies to any qualifying company engaged in selling or producing goods or services in California, encompassing global giants like Amazon, Chevron, McDonald’s, Kroger, and Walmart.[20]

The reporting mandate extends beyond companies’ direct emissions, requiring them to account for greenhouse gases stemming from their entire global operations, energy consumption, supply chains, contractors, and even the end-users of their products. The overarching objective of these legislative measures is to enhance corporate accountability for their role in climate change. Many businesses, despite positioning themselves as environmental stewards, have historically fallen short in fully tracking or disclosing their emissions. The legislation seeks to rectify this by fostering increased transparency, potentially resulting in widely publicized lists of “top polluters”. This heightened visibility aims to make major corporations more accountable by exposing their comprehensive contributions to climate change.

The U.S. Securities and Exchange Commission (“SEC”) has proposed a rule that would require publicly traded companies to disclose climate-related risks and their impact on business operations. This rule mandates the inclusion of climate-related financial metrics in annual reports and registration statements. Companies would need to disclose direct and indirect GHG emissions, including those from the entire value chain. The proposed rule aims to provide investors with consistent, comparable, and reliable information to make informed decisions and to encourage companies to adopt more sustainable practices.

A proposed US Federal contractor climate disclosure rule also contemplates requiring Federal contractors to disclose their GHG emissions and climate-related financial risks. The rule is part of a broader effort to ensure that the Federal government, as a significant purchaser of goods and services, supports sustainability and climate resilience. This initiative aims to leverage the federal government’s purchasing power to drive broader adoption of sustainable practices in the private sector.

In Europe, corporate sustainability regulation is well-established. The EU Corporate Sustainability Reporting Directive (“CSRD”) mandates that large companies and listed SMEs disclose detailed information on ESG matters including: (1) environmental factors (e.g., GHG emissions, energy use); (2) social and employee-related aspects; (3) human rights issues; and (4) anti-corruption and bribery matters. The CSRD aims to ensure that investors and other stakeholders have access to reliable and comparable sustainability information, thereby promoting transparency and encouraging companies to adopt more sustainable practices.

Similarly, the EU has proposed a new directive – the Corporate Sustainability Due Diligence Directive (“CS3D”) – that would require companies to conduct environmental and human rights due diligence on their supply chains to identify, prevent, mitigate, and account for adverse human rights and environmental impacts.

Litigation against Corporate Players

Climate change litigation against corporate management is a rapidly evolving legal landscape reflecting heightened concerns about environmental sustainability. Recent cases and legal trends demonstrate a growing emphasis on issues such as insufficient disclosure, inadequate efforts to mitigate environmental impacts, and a misalignment of business strategies with climate goals.

In Fentress v. ExxonMobil Corp, employees of the Exxon Savings Plan initiated a class action suit, alleging that senior corporate officers, acting as fiduciaries for the employee stock pension plan, were aware or should have been aware of the artificially inflated stock value due to climate change risks.[21] The plaintiffs contended that despite these risks, pension managers purchased $800 million worth of Exxon stocks, and the company should have recognized and written down its assets as stranded, constituting a breach of the duty of prudence. The Texas court granted Exxon’s motion to dismiss on March 30, 2018, asserting that the plaintiffs failed to demonstrate that climate change risks were not already factored into the stock price. The judge, relying on the efficient market hypothesis, concluded that markets could consider public information on climate change, and the plaintiffs had not convincingly linked climate change realities to the future health of an oil and gas company. The case highlighted the issue of fiduciary duties for pension fund managers, requiring the plaintiffs to prove a violation of the duty of prudence based on non-public information. Although the plaintiffs suggested alternative actions, such as corrective disclosures, halting stock purchases, and low-cost hedging stock investments, these were dismissed as inappropriate by the judge. Despite this specific case’s outcome, the trend of suits addressing disclosure issues within the context of fiduciary duties is anticipated to persist, especially in scenarios where stock prices experience shortfalls.

Climate change-related contentions have surfaced in the securities litigation filed against the California utility Pacific Gas and Electric Company (“PG&E”), its directors, officers, and underwriters, stemming from the severe wildfires in the region. Plaintiff noteholders contend that despite warning about the potential impact of droughts, climate change, and wildfires on PG&E’s financial outcomes in the offering documents, these statements were materially deceptive.[22] The complaint asserts that PG&E failed to disclose the risks associated with purportedly inadequate safety practices, which led to wildfires causing fatalities, damages, and over US$30 billion in potential liabilities, ultimately resulting in PG&E’s bankruptcy. Additionally, plaintiffs contend that PG&E’s assertions about mitigating climate change and extreme weather risks, such as through vegetation management activities to reduce wildfire risk, were inaccurate and misleading.

‘Piercing the Corporate Veil‘: the Corporate Structure as a Barrier to Environmental Claims

The concept of “piercing the corporate veil” has gained significance in the context of climate change litigation due to concerns that complex corporate structures may be used to shield executives from environmental claims. In some instances, corporations employ intricate structures that make it challenging for litigants to hold individuals accountable for environmental harms. However, piercing the corporate veil serves as an effective legal tool in specific instances, allowing courts to set aside the corporate entity and hold executives or the shareholders personally liable.

Whether a court would pierce the corporate veil and hold a parent company or major shareholders’ liable is a multi-faceted and fact-specific analysis. Traditional factors include whether the company was adequately capitalized, solvent, observed corporate formalities, had funds siphoned by shareholders, or functioned as a façade.[23]

No single factor is dispositive, and an element of fraud or injustice is also required. In Banks v. Banks, the court explained Delaware’s high standard for veil piercing, requiring a showing of “exclusive domination and control” over the entity being used as a sham, as well as an overall element of injustice or unfairness.[24]

In Kraft Power Corp. v. Merrill, the Massachusetts Supreme Judicial Court discussed the general principle that parent corporations are not liable for subsidiaries, but explained how courts can pierce the corporate veil to hold corporate principals liable for fraud, wrongdoing, or to remedy injuries.[25]

The instrumentality rule widely used in piercing the corporate veil disputes relies routinely on the following three elements;

• Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
• Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff’s legal rights; and
• Aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.[26]

Piercing the corporate veil can become a motivating factor for corporations’ ESG-related conduct. By holding individuals and parent companies responsible for the consequences of the actions of subsidiaries and corporate entities, courts and litigants can promote accountability in the face of complex corporate framework.

Future Trends

In the realm of corporate law, a prominent future trend is the heightened integration of climate change considerations. As environmental concerns continue to gain global attention, there is an increasing expectation that corporations will be held accountable for their impact on the climate. This trajectory suggests a shift towards more robust regulatory frameworks that mandate greater transparency and disclosure regarding a company’s environmental practices. Boards of directors are likely to face mounting pressure to incorporate climate risk assessments into their decision-making processes, reflecting a broader recognition of the financial implications associated with environmental sustainability. The evolving legal landscape is anticipated to encourage businesses to adopt proactive measures, fostering a new era where corporate governance and climate consciousness are intertwined in navigating the complexities of the business world.

[1] See Mauricio Andrés Latapí Agudelo, Lára Jóhannsdóttir & Brynhildur Davídsdóttir, A literature review of the history and evolution of corporate social responsibility, 4 Intl. J. of Corp. Soc. Resp. 1 (2019). 

[2] See Sarah Barker, An Introduction to Directors’ Duties in Relation to Stranded Asset Risks, in Stranded Assets and the Environment (Routledge 2018).

[3] See Dodge v. Ford Motor Co., 170 N.W. 668 (1919).

[4] See Martin Lipton, Steven A. Rosenblum, Karessa L. Cain, Sabastian V. Niles, Amanda S. Blackett, and Kathleen C. Iannon, Wachtell, Lipton, Rosen & Katz, It’s Time To Adopt The New Paradigm (Feb. 11, 2019). Available at: link. British Columbia Investment Management Coalition, CEOs of eight leading Canadian pension plan investment managers call on companies and investors to help drive sustainable and inclusive economic growth (Nov. 25, 2020). Available at: link.

[5] See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), Smith v. Van Gorkom, 488 A.2d 858 (1985).

[6] See Weinberger v. UOP, 457 A.2d 701 (1983).

[7] See In re the Walt Disney Company Derivative Litigation, 825 A.2d 275 (Del. Ch. 2003).

[8] Id.

[9] See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch.1996) (holding that “Bad faith is established when “the directors [completely] fail [ ] to implement any reporting or information system or controls[,] or … having implemented such a system or controls, consciously fail [ ] to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention”.

[10] Id. See also Marchand v. Barnhill, 212 A.3d 805, Supreme Court of Delaware (2019).

[11] See Allison Herren Lee, Climate, ESG, and the Board of Directors: “You Cannot Direct the Wind, But You Can Adjust Your Sails”. Available at: link.

[12] See BlackRock, Our 2021 Stewardship Expectations (2021). Available at: link.

[13] Id.

[14] See State Street, CEO’s Letter on Our 2021 Proxy Voting Agenda (January 11, 2021). Available at: link.

[15] See Matteo Tonello, 2021 Proxy Season Preview and Shareholder Voting Trends (2017-2020), Harvard Law School Forum on Corporate Governance (Feb. 11, 2021) (“In March 2020, ISS announced the launch of a new specialty voting policy on climate-related factors. Under the new policy, the proxy advisor will recommend adverse votes on the re-election of board members in situations where the company appears (based on signals such as inadequate disclosure, norm violations, or the assessment of sector-specific materiality metrics) to have ‘failed to sufficiently oversee, manage or guard against material climate-change related risks.’ In November 2020, Glass Lewis followed suit with a similar revision to its voting policies for S&P 500 companies, where the inadequate disclosure of environmental issues will first be noted as a concern in research reports and then, starting in 2022, trigger a recommendation to vote against the governance committee chair.”). Available at: link.

[16] See Harshitha Kasarla, Taking Corporations to Court for Climate Change, April 25, 2023. Available at: link. See also Joana Setzer and Catherine Higham, Corporations, Climate Change Litigation, and the Rule of Law, October 28, 2021. Available at: link. Note that judgment on the appeal if this case is pending.

[17] Id.

[18] See Alejandro Lazo, Newson Signs Climate Bills That Force Large Companies To Reveal Role And Risks In Climate Change, October 7, 2023. Available at: link. See also Analysis: The Potential Global Impact Of California’s New Corporate Climate Disclosure Laws, October 15, 2023. Available at: link.

[19] Id.

[20] Id.

[21] See Fentress v. ExxonMobil Corp 304 F. Supp. 3d 569, 572 (S.D. Tex. 2018).

[22] See In re PG&E Corp. Secs. Litig., No. 5:18-cv-03509-EJD (N.D. Cal.).

[23] See Winner Acceptance Corp. v. Return on Capital Corp., 2008 Del. Ch. LEXIS 196.

[24] See Banks v. Banks, 2022 Del. Ch. LEXIS 342.

[25] See Kraft Power Corp. v. Merrill, 2013 464 Mass. 145.

[26] See Lowendahl v. Baltimore & O.R. Co., 247 App. Div. 144, 157, 287 N.Y.S. 62, Zaist v. Olson, 154 Conn. 563; 227 A.2d 552 (1967).