Shareholder derivative actions targeting ESG discrepancies are accelerating. We examine the legal exposure and what boards can do to protect themselves.
The past 18 months have seen a significant increase in shareholder derivative actions targeting alleged discrepancies between corporate ESG commitments and actual practice. These claims are being brought in multiple jurisdictions simultaneously, and they are becoming more sophisticated in their legal theory and more aggressive in their remedies sought. Boards that have not yet conducted a rigorous audit of their ESG disclosures are exposed. The question is no longer whether ESG litigation will affect your company, but when.
In this analysis, we examine the key legal theories being deployed, the jurisdictions where exposure is greatest, and the steps that boards can take now to reduce their risk.
The primary legal theory in most ESG derivative actions is that directors breached their fiduciary duty by approving or failing to correct materially misleading ESG disclosures. In the United States, plaintiffs have had early success in Delaware courts by arguing that boards were aware of the gap between public commitments and internal practice and failed to act. In the United Kingdom, the Financial Conduct Authority has signalled that it will treat greenwashing as a disclosure failure with regulatory consequences, opening a parallel enforcement track alongside private litigation.
The jurisdictions of greatest current exposure are the United States, the Netherlands, Australia, and the United Kingdom. Each has seen at least one significant ESG-related derivative or class action reach the merits stage in the past 24 months. Germany and France are emerging as secondary fronts, driven by the EU Corporate Sustainability Reporting Directive and its mandatory disclosure requirements.
Boards that wish to reduce their exposure should begin with a gap analysis comparing public ESG commitments against internal data and operational reality. Where gaps exist, the board must decide whether to close them operationally or revise the public disclosure. Either path requires documentation of the decision-making process. Directors who can demonstrate that they were informed, deliberate, and acted in good faith are significantly better positioned to defend derivative claims than those who cannot.
This article represents the personal analysis of the author and does not constitute legal advice. It should not be relied upon as a substitute for specific legal counsel on your particular circumstances. If you have a legal matter you wish to discuss, please contact us directly.
