In recent years, environmental, social, and governance (ESG) factors have emerged as key considerations for boards of directors.

As businesses face mounting pressure to address societal and environmental challenges, many boards have embraced ESG principles to align their organizations with sustainability and responsible practices. However, there has also been a growing wave of anti-ESG sentiment, presenting boardrooms with the complex task of balancing the interests of diverse stakeholders. Two recent court decisions showcase these complexities.

A claim filed in the English High Court by a non-profit organization against directors of an oil and gas company was one of the first known attempts to bring a derivative action against directors for alleged mismanagement of climate risk. In bringing its action, the plaintiff asserted that the directors breached their statutory duties by:

• failing to adopt a measurable and realistic pathway to meeting the absolute net zero (NZ) emissions reduction target by 2050 set out in the company’s energy transition strategy
• failing to properly manage climate risk—including commercial, regulatory and stranded-asset risk
• failing to comply with an earlier Dutch court ruling requiring the company to reduce its worldwide aggregate CO2 emissions by at least net 45% at the end of 2030, relative to 2019 levels

The court criticized the plaintiff for seeking to impose absolute duties on directors which cut across their general duty to have regard to the myriad of complex and competing considerations directors face. In particular, the English High Court reiterated that management decisions made by the board of a company, in large part, could not be appealed to courts of law. For example, while the court noted there may be disagreement between the plaintiff and the company as to how best to achieve NZ 2050 targets, “the law respects the autonomy of the decision making of the Directors on commercial issues and their judgments as to how best to achieve results which are in the best interests of their members as a whole.”¹

In a decision emanating in the United States, a Delaware court rejected a shareholder’s attempt to obtain further materials from a company via a Delaware General Corporation Law §220 proceeding.² At issue was a company’s public opposition of a state’s proposed legislation. A shareholder contended that, in directing the company to publicly oppose the bill, the directors “either put their own beliefs ahead of their obligations to stockholders or flouted the risk of losing rights associated with [a special land district].” The court, in dismissing the plaintiff’s proceeding and entering judgment for the company, acknowledged that “corporate speech on external policy matters brings both risks and opportunities,” and explained that the board is “empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).” The court added, “a board may conclude in the exercise of its business judgment that addressing interests of corporate stakeholders – such as the workforce that drives a company’s profits — is ‘rationally related’ to building long-term value.” As a result, the court determined that the plaintiff did not have a “credible basis” to suspect wrongdoing or mismanagement, and therefore plaintiff’s request for additional production of books and records pursuant to §220 was rejected.³

These decisions should be welcome and refreshing to a board of directors. They offer cautious reassurance that courts will be slow to allow shareholders to use litigation to either drive shareholder ESG agendas or to challenge ESG related board decisions.

Aon can help with D&O insurance considerations in the ESG context and ensure companies and their board of directors have a robust D&O policy in place to respond to claims when appropriate. Coverage for Books and Records Demands, Derivative Demand Investigations, and Securities Claims should be reviewed continuously to ensure as broad of coverage as possible in the marketplace.

Read more insights like this in the latest edition of the Legal & Claims Review.

1 ClientEarth v Shell plc & Ors [2023] EWHC 1137 (Ch).
2 8 Del. C. §220
3 Simeone v. Walt Disney Co., 2023 Del. Ch. LEXIS 154 (Del. Ch. 2023)

Contact

If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker. Discuss this article with Financial Services Group professional Adam Furmansky.



Adam Furmansky
Senior Vice President, Deputy D&O Product Leader - East
New York