Clifford Chance

Despite increased focus on social issues related to COVID-19, climate change, and climate change litigation, will remain and may increase as a risk. In particular, recent developments highlight the continued significance of securities-based climate litigation.

In recent weeks, ESG issues have been the subject of ongoing attention, primarily focused on social issues related to COVID-19. However, climate change litigation, which has proliferated in recent years, has continued, and commentary has been vigorous about maintaining a focus on climate change while drawing links between the world's responses to both. In short, climate change, and climate change litigation, will remain and may increase as a risk.

The recent decision by a Massachusetts federal judge to return a climate change securities case against Exxon to state court highlights the continuing significance of climate-related lawsuits against corporations.

Historically, U.S. climate change litigation focused on claims against state and federal governments, which were intended to influence or enforce climate laws and policies. Over the past five years, however, plaintiffs have increasingly sued corporations that contribute to climate change. The stated goal of these suits is to try to change corporate behaviour. Some suits seek to stop corporations from taking actions that damage the environment. Others focus on ensuring that corporations provide accurate information about climate change and its potential impact on the business.

One tool that plaintiffs have tried to use in these cases is the U.S. securities laws. These suits typically focus on the latter goal and allege that corporations have provided inaccurate disclosures regarding the costs of climate change. The plaintiffs' goal is to force the companies to provide more detailed disclosures, in order to incentivize operational change. In parallel, shareholder groups have engaged in direct activism that seeks the adoption of corporate resolutions about climate-related disclosures and actions.

This post provides an update on these suits, which are still progressing despite the delays in the judicial system caused by COVID-19-related shutdowns.

Securities-Based Climate Litigation

Securities-based climate litigation involves investors or regulators filing suit against companies for allegedly misrepresenting or failing to adequately disclose material risks resulting from climate change. Under federal law these suits allege that the corporation has failed to provide "material" and not misleading information to investors.

Plaintiffs bring these claims as an alternative to tort-based climate litigation, because courts often dismiss tort-based actions due to justiciability concerns or lack of causation. According to one source, 36 cases involving climate change related to securities and financial regulation had been filed as of April 1, 2020. This includes cases filed by state prosecutors and regulators and cases filed by private plaintiffs.

Securities-Based Litigation Initiated by Regulators and Prosecutors

Early securities-based climate litigation primarily took the form of enforcement actions by prosecutors and regulators. For example, in 2007 the New York State Attorney General ("NYAG") subpoenaed five major energy companies seeking information on whether disclosures to investors in filings with the SEC adequately described the companies' financial risks related to their emissions of global warming pollution. The NYAG has since entered into at least three settlements requiring companies to revise or provide more detailed disclosures of climate-related risks. (See press releases here, here, and here).

The most high profile cases by state regulators, however, are the climate litigation by New York and Massachusetts against the ExxonMobil Corporation ("Exxon"). These matters first became public in 2015, when the NYAG subpoenaed Exxon demanding documents on the company's climate change research and related communications following the disclosure in the press of internal research materials. After a three-year investigation, the NYAG filed suit in October 2018 alleging that Exxon had violated the Martin Act, a New York state securities law, by misleading investors about the risks of climate change in connection with various public statements. Specifically, the NYAG alleged that Exxon used a different, lower cost for the potential impact of regulation of greenhouse gas emissions ("GHG") when assessing the capital costs of specific projects than it did in its public disclosures, thereby inflating the value of its assets. Exxon contested these claims, stating that it justifiably used separate proxy costs for separate purposes: a "GHG cost" that, among other things, took into account the potential cost of local regulatory conditions on the economics of specific projects, and a "proxy cost" in broader discussions of GHG-related impacts.

The case went to trial in late 2019, and Exxon prevailed. Describing the NYAG's complaint as "hyperbolic," the court held that the NYAG failed to prove that Exxon had misled the public about the risks of climate change. Significantly, the court expressed skepticism about the importance of potential future climate regulation to investor decisions. According to the court, "no reasonable investor would have viewed speculative assumptions about hypothetical regulatory costs projected decades into the future as 'significantly altering the total mix of information made available.'" In fact, the court described the disclosures as being "essentially ignored by the investment community"—drawing parallels to the sorts of "tentative and generic" corporate statements of ethical compliance that the federal court of appeals in New York has held are not material, as well as to forward-looking statements, which are generally subject to a safe harbor.

Despite its success in New York, Exxon still faces a similar suit by the Massachusetts State Attorney General ("MAAG"). In that case, which was filed during the NYAG trial, the MAAG alleged violations of Massachusetts state securities laws based on factual allegations similar to those in the NYAG's suit. In addition, the MAAG complaint alleges violations of state consumer protection laws which—unlike the securities laws at issue in New York—require a showing of reliance by someone who heard the allegedly misleading statements. This case remains ongoing, most recently with the Massachusetts federal court's remand to state court, as the NYAG case does not have a precedential effect in Massachusetts.

Securities-Based Climate Cases by Private Litigants

On the private litigation front we have seen three types of securities-based climate cases against energy companies: (1) shareholder securities fraud class actions, (2) shareholder derivative actions, and (3) employee class actions under the Employee Retirement Income Security Act ("ERISA").

Here too Exxon has been a prominent target. In July 2017, shareholders on behalf of a putative shareholder class filed a securities class action in the U.S. District Court for the Northern District of Texas making similar allegations as the NYAG regarding Exxon's use of the proxy and GHG costs of carbon. Exxon moved to dismiss on the grounds that it has fully disclosed its risks from climate change and that plaintiffs' allegations confused "two distinct concepts: a proxy cost of carbon and [GHG] costs." In August 2018, the court denied Exxon's motion, finding that the plaintiffs had sufficiently pleaded claims that Exxon had made material misrepresentations about its proxy costs. After Exxon's victory in New York, however, and before scheduling a hearing on class certification, in January 2020 the court ordered the parties into mediation.

Shareholders have also filed various derivative actions against directors and officers of Exxon alleging that they misled shareholders about the risk of climate change on Exxon's business and about Exxon's use of proxy costs, based on the allegations in the NYAG complaint. These cases are on behalf of the corporation and request damages and restitution from its directors and officers as well as equitable relief directing Exxon to change its internal governance procedures, including with respect to climate proxy costs. The cases are in their early stages, and Exxon is attempting to consolidate them so that they can be handled together. In August 2019, two were consolidated in the U.S. District Court for the Northern District of Texas, and in March 2020, two were consolidated in the U.S. District Court for the District of New Jersey. Exxon has now moved to transfer the New Jersey cases to Texas and consolidate them all.

Finally, participants in Exxon's employee stock ownership plan filed suit in the U.S. District Court for the Southern District of Texas alleging breaches of fiduciary duties in the management of the plan under ERISA—which is a difficult standard for plaintiffs to establish. In particular, the employees alleged that Exxon knew that its stock had become artificially inflated due to misrepresentation of the risk from climate change and thus investing Exxon stock was imprudent. The court rejected these claims on two principal grounds: that the plaintiffs had not alleged facts showing that Exxon misrepresented its use of proxy cost and that the plaintiffs had not alleged facts showing that climate change information was not already incorporated into Exxon's stock price. The plaintiffs then amended their complaint to assert that the defendants should have persuaded Exxon not to make affirmative representations regarding climate change. On February 4, 2019, the court dismissed the amended complaint because it could not conclude that plaintiffs' proposed actions would have been more helpful than harmful to the fund.

Implications

The future of securities-based climate litigation remains uncertain, but Exxon's victory against the NYAG suggests that plaintiffs will have difficulty prevailing. The NYAG action was brought under the Martin Act, one of the many "Blue Sky" laws passed by state legislatures in the early twentieth century that grants the NYAG authority to investigate, prosecute, and remediate "fraudulent practices" in the securities markets. The Martin Act, however, has a lower liability standard than federal securities laws, as the NYAG does not need to establish scienter, reliance, or damages—all of which are required elements of a federal securities law claim. Therefore, if the NYAG cannot succeed with a Martin Act claim, there are serious questions about the viability of a federal securities claims.

At the same time, the differences in state laws and the vagaries of the litigation process allow ample opportunity for regulators and investors to continue testing securities-based climate litigation as a means of furthering their goals. The continued litigation of the MAAG case and the private securities claims shows that plaintiffs have not yet been deterred by the NYAG decision. Further, even if the claims are unlikely to succeed, regulators may still initiate investigations to use the threat of litigation to convince companies to change or increase their climate risk disclosures.

Given these risks, companies should ensure that they have adequate resources to assess their climate-related disclosures, and that the disclosures are accurate and appropriately qualified. The SEC has provided little specific guidance on this front, generally adhering to the position that companies must disclose material risks in order to make their public statements not misleading. The leading current resource in the US is the Financial Stability Board's Task Force on Climate-Related Financial Disclosure's recommendations, which were released in June 2017. Providing attention to climate-related disclosures and following a generally-accepted approach will both decrease the risk from securities-based climate litigation and improve understanding and management of climate risks to the business.