Hereto in this paper will be highlighted positive and negative examples of good ESG performance, and how bad governance can lead to D&O Litigation.
First, we shall look at a case which could be considered groundbreaking because this action may represent the first ever effort to hold a board of directors personally accountable for failing to adequately plan for the net-zero transition.
The environmental law firm ClientEarth, a Shell shareholder, announced on Tuesday that it notified Shell of their claim against the 13 executive and non-executive directors of the corporation. ClientEarth claims that the board has failed to uphold its obligations under English law by failing to implement a climate policy that fully adheres to the historic Paris Agreement (5). This could also be considered a breach of fiduciary duty, which occurs when the fiduciary acts in the interest of themselves rather than the interest of the employer or principal.
Another example of bad ESG practices are the multiple lawsuits that have been filed against the chief operating officer and the CEO of Facebook (now renamed to and hereinafter META) in regard to data privacy.
There are several Class action lawsuit filed against META, of which the most significant are O’Kelly v. Facebook Inc., et al; Price v. Facebook, Inc. et al; Comforte et al v. Cambridge Analytica; Renken, et al, v. Facebook, Inc., et al. All of the beforementioned lawsuits are in regard to invasion of privacy and unlawful business practices concerning personal data use and distribution. These misconducts in regard to implementing adequate regulations to secure the users data results in bad reports of corporate governance and user care.
On March 23, Ronald Martin, a shareholder in META, filed a complaint in connection with the class action litigation Price v. Facebook et al. Martin is bringing legal action against META, its CEO Zuckerberg and board members: Thiel, Andreessen, Bowles, Desmond-Hellmann, Hastings, and Koum. The defendants are accused of misusing business assets and breaching fiduciary duties in the stockholder lawsuit (6).
An example for good ESG reporting and implementation is the graphics processing units manufacturer – Nvidia. The company continued paying vendors and contractors even while facilities were closed due to COVID-19 thus raising trust among all the beneficiaries and stakeholders, and making an image of a stable and fiscally responsible company. As a result of this, the overall annualized return to stockholders for Nvidia over a ten-year period exceeds 50%. Revenue increased by 61% to $26.91 billion for the 2022 fiscal year, and GAAP EPS increased by 123% to $3.85.
Another instance for good ESG reporting is the swimming pool supplier “Pool”. The firm features Eco Select products and is a participant in the EPA’s WaterSense program. The company makes information available to customers to encourage responsible water and wastewater management. Along with making donations to charities like the National Forest Foundation and human rights organizations, Pool provided free swimming lessons for kids. The aforementioned steps taken by the company contribute to building a good public image of a company that is involved in the daily life of the community and all stakeholders. The company’s 12 month EPS ending March 31, 2022 was $17.96, a 68.8% increase year over year. Pool’s 10-year annualized total return is almost 30% (7).
After reviewing and examining the risk of improper ESG reporting & implementation and by going through the aforementioned lawsuits against D&O which is a result of improper ESG reporting & implementation, it can be concluded that investing in a good ESG portfolio will mitigate and prevent the threat of D&O litigation and furthermore make a company more competitive and attractive on the open market.
- Boutellis-Taft, O. Sustainability reporting as a driver of a sustainable economy. Climate change & audit. June 2020; Volume 2: p. 112-115;
- European Parliament. Consolidated text: Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage, Strasbourg, France, 2019 [cited 2022 November 22]. Available from: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02004L0035-20190626;
- European Parliament. Directive 2008/99/EC of the European Parliament and of the Council of 19 November 2008 on the protection of the environment through criminal law, Strasbourg, France, 2008, [cited 2022 November 22]. Available from: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32008L0099 ;
- European Parliament. Regulation (EU) 2018/1725 of the European Parliament and of the Council of 23 October 2018 on the protection of natural persons with regard to the processing of personal data by the Union institutions, bodies, offices and agencies and on the free movement of such data, Strasbourg, France, 2018, [cited 2022 November 22]. Available from: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32018R1725 ;
- ClientEarth. www.clientearth.org. England and Wales: Client Earth Communications. 15.03.2022. We’re taking legal action against Shell’s Board for mismanaging climate risk. 15.03.2022. Available from: https://www.clientearth.org/latest/latest-updates/news/we-re-taking-legal-action-against-shell-s-board-for-mismanaging-climate-risk/. ;
- TheStreet. www.thestreet.com. New York, USA: Franceska Fontana 29.03.2022. Lawsuits Against Facebook Over Data Privacy Issues Are Piling Up. 29.03.2022, Available from: https://www.thestreet.com/technology/everyone-who-is-suing-facebook-for-cambridge-analytica-14536213;
- The Motley Fool. www.fool.com. Virginia, USA: Alison Plaut 19.09.2022. 10 Best Stocks for Environmental, Social, and Governance (ESG) Investing. 19.09.2022, Available from: https://www.fool.com/investing/stock-market/types-of-stocks/esg-investing/esg-stocks/