Legal risk

An under-appreciated area in the context of corporate climate lobbying activities is that of legal risks to companies and their investors.

With the link between industry associations and governments being crucial to the implementation of ambitious climate policies, a lack of industry buy-in will often guarantee defeat for regulatory reform. In relation to climate policy, industry groups can often take positions that are inconsistent with or misaligned to those of their membership base. Although, conversely, a specific trade association on coal or oil, for example, may do a good job of protecting their members’ interests and views. It is not surprising that this should sometimes be the case, as of course there will always be a divergence of views on an area of public policy within sectors. However, where positions are severely misaligned, this may give rise to legal risks, ultimately translating into financial risk for companies and their investors. Two areas of potential litigation risk are discussed below.

Shareholder/consumer claims

The implementation of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations is likely to mean an increase in climate-related disclosure in the market, providing investors with more information about their existing emissions footprint, and their preparedness for the transition to a low-carbon future. However, where such information is contradicted by the positions or activities of industry groups of which the company is a member, this could lead to questions regarding the veracity of the company’s climate-related disclosures.

Where information disclosed in periodic or ad hoc disclosures is false, misleading or incomplete, companies may face claims brought on behalf of regulators, investors and third parties arising under statute, contract law, in tort or potentially even under laws regulating consumer rights.Investigations brought by the New York State Attorney-General under the Martin Act demonstrate the real risks associated with evidence coming to light indicating that a company has different internal and external positions on climate risk and policy. Recently filed litigation by local government in California, Colorado, the City of New York and Washington relies heavily on allegations of fraud by certain defendants, allegedly arising from contradictory internal and external positions on climate-related policies and activities, as well as the activities of trade associations.

Information from external sources (such as that provided to a lawmaker regarding the impact of a regulation on its business) that differs from formal disclosures could indicate that a company may be presenting a misleading picture to investors. Whilst the law will usually not find companies or directors liable where a statement has been made in good faith, is based on reasonable assumptions and is appropriately qualified, it does carry risks in scenarios where directors or companies cherry pick scenarios or hold contradictory information that is not disclosed to the market. In most markets, including the US and the UK, where the information contained in annual filings is false or misleading or contains misrepresentations, investors may have specific statutory rights to recover any subsequent losses from the company. Additionally, consumer claims may arise from suggestions of fraud or misleading conduct in the course of commerce.

Claims brought by regulators and third parties pose financial and reputational risks to companies (and their investors). Claims brought by other shareholders (assisted by class action lawyers in the US) could also have financial implications for those investors who may not participate in such claims, due to the costs of defence and consequent damage to reputation and share price.

Tort claims arising from industry memberships

Significantly, in late 2017 and early 2018, a wave of climate change litigation against several large primary energy companies was filed in the US. At the time of writing, 13 separate counties and cities (in California, Colorado, New York and Washington) have filed complaints against groups of companies. The plaintiffs believe that the companies should be made liable for part of the costs of adapting to climate change. Although these claims all rest on different legal bases, they share a common element. They allege that the companies operated through industry bodies that perpetrated a fraud regarding climate change on consumers by downplaying the risks and impacts of climate change and funding climate denial. In the suit filed by New York City, the filings appear to allege that the American Petroleum Institute acted as an agent for the companies. This demonstrates the risks arising from continued associations with industry groups that undertake activities that arguably mislead consumers, contradict or advocate against scientific consensus or stated corporate policy.

Shareholder approval of political donations by UK companies

In the UK, Part 14 of the Companies Act requires companies to have prior shareholder approval of political donations made by companies to, and political expenditure incurred by, companies in relation to political parties, political organisations and independent election candidates. As the definition of political organisations and political expenditure is quite broad, many listed companies pass “precautionary resolutions” although they may not give money to political parties directly. Many companies request shareholder approval of these resolutions in the event that payments to trade associations, think tanks, and political donations made by these organisations, are caught by the section. Unfortunately, companies do not usually provide any details of the payments that they are ostensibly asking shareholders to approve.

This means that shareholders already have a vote to approve company support for various trade associations and think tanks. However, these resolutions are usually approved without full transparency of the recipient organisations and without any assurances to shareholders regarding the alignment of the views expressed by those organisations with those of the company and/or its shareholders.

Investors should therefore consider the following actions:

• asking for greater transparency regarding payments that could be caught by the provision, including how such payments benefit the company and governance processes for managing such payments;
• abstaining/voting against the resolution until this information is provided; or
• simply voting against the resolution, particularly where a company’s stated climate position is severely misaligned with its industry bodies.