This article was originally posted on the Oxford Business Law Blog on 1 July 2021.
By Brett McDonnell, Hari M. Osofsky, Jacqueline Peel and Anita Foerster
We should never expect these corporate and securities law mechanisms to replace serious environmental regulation [but they can] usefully supplement other strategies
The world is struggling to address the pressing challenge of climate change. As efforts for comprehensive regulation fall short in some leading countries, including the United States, many advocates are pressuring large companies to respond more effectively. Consider ExxonMobil. In 2017, shareholders approved a proposal requiring the company to produce a report disclosing the potential effects of climate change on its business. Very recently, activists elected several new ExxonMobil directors who they believed had useful environmental experience, against the existing board’s opposition.
In our paper Green Boardrooms?, we explore three tools being used to pressure companies to manage climate-related risks better: disclosure, shareholder proposals, and fiduciary duty suits. We examine developments in both the United States and Australia. We draw heavily on several dozen interviews conducted in 2018 with corporate leaders and investors. We find that disclosure and shareholder proposals have not yet transformed operations much, if at all, though ongoing developments since our interviews could be creating conditions for change.
Company officers were skeptical that increased disclosure would ever have much effect on substantive operations
Both countries currently have few securities law requirements concerning climate change, although the Biden administration is reviewing such disclosure. Companies make voluntary disclosures in annual sustainability reports. Private standards concerning such disclosure have proliferated, including TCFD and CDP on climate change, and GRI and SASB on a range of matters. Our interviewees reported rapid change in voluntary disclosure, with significant improvement in both quantity and quality. However, disclosure remains highly inconsistent, with quality hard to trust and items hard to compare across companies. Respondents saw little evidence that disclosure had yet transformed underlying operations. Company officers were skeptical that increased disclosure would ever have much effect on substantive operations, while investors hoped that more quantitative disclosure of specific targets would eventually shape operations. The interview results were broadly similar in the two countries, with more of an emerging consensus favoring TCFD over other standards evident in Australia.
Investor-side interviewees thought that a range of proposals may succeed in changing company culture, and ultimately behavior, over time
The US has also seen an explosion of shareholder proposals, receiving significant support, on climate change and a variety of other environmental, social, and governance (ESG) topics. More informal engagement of shareholders with companies through private meetings has also become much more common. Several legal developments during the Trump administration created obstacles. These include new limits on the ability of ERISA fiduciaries to engage on non-financial topics, increased shareholding requirements for shareholder proposal proponents under Rule 14a-8, and interpretation of that Rule that makes it easier for companies to exclude some proposals as micromanaging the business. Our interviewees reported a large increase in engagement but could point to little visible effect on company operations so far. But investor-side interviewees thought that a range of proposals may succeed in changing company culture, and ultimately behavior, over time. They pointed to many proposals that could have some effect. Most obvious are proposals aimed at disclosure of climate change targets, though the new interpretation making it easier for companies to exclude threatens these proposals. Proposals that allow shareholders to nominate director candidates are also significant, as are those concerning disclosure of lobbying expenses and an emerging category of proposals requesting that executive compensation be tied to climate change targets. Practice in the US and Australia differs significantly, with Australia lacking the legal history of advisory shareholder proposals that exists in the US under Rule 14a-8, but with Australia having a longer history of informal shareholder engagement. That is changing though with the recent success of several shareholder resolutions.
An emerging category of activism concerns potential lawsuits claiming that directors and officers have violated their fiduciary duties by failing to adequately monitor and respond to climate change risks. Australia has already seen one case against a superannuation fund. In the US, such suits are conceivable under the Caremark duty to monitor legal compliance. Such suits are extremely difficult for plaintiffs, though several recent cases have eased the legal barrier somewhat. Interviewees in both countries reported a mixed understanding of what duty requires in responding to climate change. They also reported a variety of structures used for monitoring at the board and officer level.
We suggest that the SEC could adopt one of the leading private standards for mandatory disclosure on a comply or explain basis
Our interview results suggest that we should never expect these corporate and securities law mechanisms to replace serious environmental regulation. But the interviews do suggest ways in which the mechanisms could usefully supplement other strategies. Strong reform would empower a range of corporate stakeholders, rather than focusing on shareholders. However, currently feasible reform within the US and Australia will focus on long term shareholder value. We suggest that the SEC could adopt one of the leading private standards for mandatory disclosure on a comply or explain basis, with SASB being the most likely candidate in the US. We advocate rolling back Trump-era ERISA and Rule 14a-8 rules and suggest a variety of shareholder proposals that could improve company behavior, including proposals on compensation, board expertise, and advisory councils on sustainability matters. We suggest that American litigators and judges could learn from duty suits in Australia and other jurisdictions.
The full paper is available at:
McDonnell, Brett H. and Osofsky, Hari M. and Peel, Jacqueline and Foerster, Anita, Green Boardrooms? (April 5, 2020). Connecticut Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3569303
This post is based on contributions to and the discussion at the 5th Annual Oxford Business Law Blog conference on ‘Business Law and the Transition to a Net Zero Carbon Economy’ which took place online on 25 to 27 May 2021. The post is forthcoming in Andreas Engert, Luca Enriques, Georg Ringe, Umakanth Varottil and Thom Wetzer (eds), Business Law and the Transition to a Net Zero Carbon Economy (CH Beck - Hart Publishing 2021) (forthcoming).
Brett McDonnell holds the Dorsey & Whitney Chair in Law at the University of Minnesota.
Hari M. Osofsky is Dean of Penn State Law and the Penn State School of International Affairs and Distinguished Professor of Law, Professor of International Affairs, and Professor of Geography. On August 1, she will become the Dean at the Northwestern Pritzker School of Law.
Jacqueline Peel is a Professor of Law at the University of Melbourne.
Anita Foerster is a Senior Lecturer in Business Law & Taxation at Monash University.
Event: Business Law and the Transition to a Net Zero Carbon Economy (25 - 27 May 2021)