Climate Change and Shareholder Lawsuits

Abstract

As climate change has accelerated, activists have become frustrated with the waffling of governments and grown progressively vocal in their demands that the largest companies take action to slow global warming. These calls have resulted in a cascade of voluntary climate and ESG disclosures, and recently, the SEC’s promulgation of draft rules mandating climate disclosures for public companies. The goals of such disclosures include prodding firms to be more climate-friendly, and enabling climate-conscious investors to pull their money out of firms that don’t share their values.

But the positive effects of such disclosures are likely to be muted if the disclosures are not accurate. The controversy surrounding climate disclosures has largely overlooked an important question: Can shareholder litigation effectively police the accuracy of firms’ climate-related disclosures? To answer this question, I examine the climate-related lawsuits that shareholders have brought against their firms, creating a typology illustrating where such lawsuits are likely to arise. I find that much climate-related shareholder litigation has so far been follow-on litigation, piggy-backing off information produced either by the government, or by market participants such as short-sellers who are willing to do substantial digging, usually because they have an interest in the firm’s relatively short-term financial prospects.

While some inaccuracies in climate risk disclosures may be adequately – or even excessively – litigated under this regime, others that do not directly affect the firm’s bottom line might slip through the cracks. Key among these may be greenhouse gas disclosures, which so far have failed to generate any shareholder lawsuits. Moreover, the plaintiffs who seem best suited to bring these lawsuits – the climate activist investors who have lobbied so hard for firms to act on climate – have been virtually absent in climate-related shareholder litigation to date. Accordingly, I argue that under the current regime for shareholder litigation, climate disclosures may not live up to the hopes of their proponents.

Keywords: securities, corporate, litigation, climate