Will the U.S. ESG backlash get board directors off the hook for climate change?

In October of 2021 The Commonwealth Climate and Law Initiative (CCLI) published “Fiduciary Duties and Climate Change in the United States” by Sarah Barker, Cynthia Williams, and Alex Cooper. CCLI is a UK-based NGO which works with leading academic institutions (e.g., the University of Oxford), corporate law firms (e.g., MinterEllison), and civil society organizations (e.g., ClientEarth). The focus of the CCLI is to analyze board directors’ legal obligations regarding climate change and to disseminate its findings in order to increase directors’ understanding and to improve their ability to fulfill their fiduciary duties.  Working together with the Climate Governance Initiative, and with leading law firms throughout the world, CCLI has also published a legal primer on directors’ duties regarding climate change in 26 countries and the EU. It finds remarkable similarities across jurisdictions, regarding the obligations of board directors to incorporate climate change into strategy, oversight, and disclosure, even between common-law and civil-law regimes.

This result could hardly be otherwise, given the financial risks and opportunities that climate change poses across industries, technologies, and geographies, and the scientific consensus on which the need to act on climate change is built.   As one exemplar of the implications of that strong consensus, in 2021, as part of the COP 26 climate negotiations in Glasgow, the Glasgow Financial Alliance for Net Zero, GFANZ, was announced.  This Alliance of banks, asset managers, and insurance companies, with more than $130 trillion of assets under management today, was based on a pledge by the participating companies to work towards net-zero status in their businesses by 2050 or sooner.  Led by former UK Bank of England Governor Mark Carney, who is now the U.N.’s Special Envoy on Climate, it has promise as a “soft law” governance mechanism to develop voluntary industry standards for the constituent entities in reducing the carbon emissions of their businesses, and of their investment portfolios.

Gunfire is being pointed by Republicans at the asset managers and banks that are founding members of GFANZ,  accusing them of “boycotting” fossil fuel companies 

Yet, the visibility of this and other climate initiatives is creating a dangerous backlash in the United States,  framed as “anti-ESG” or “anti-woke capitalism,” but with a particular focus on slowing the climate transition.  Most of this gunfire is being pointed by Republicans at the asset managers and banks that are founding members of GFANZ,  accusing them of “boycotting” fossil fuel companies (even though they aren’t). The response has been to “boycott the boycotters” by not using them to manage state pension fund assets. Texas passed the “Section 809 Boycott Provision,” the logic of which is weak at best. The American Legislative Exchange Council (ALEC) proposed a “Eliminate Political Boycotts Act” as model legislation for Red states to pass. Somewhat embarrassingly, ALEC’s board of 23 Republicans rejected this proposal in January of 2023 and the page explaining this act no longer exists. Presumably some Republican members of the board recognized that it is inconsistent with traditional Republicans’—or Democrats’—principles for government to pass laws telling asset managers what risks they may or may not consider in constructing portfolios or voting their shares of stock.

Much of this is political theater and time will tell whether it makes any substantive differences in how asset managers make their investment decisions. We suspect the answer will be “Not much, if at all.” At the same time, we are seeing companies becoming nervous about all this drama and wondering if they should scale back on, or at least be less vocal about, their sustainability efforts, including climate change  The answer here is a definite “No.” 

Another CCLI report has evaluated litigation risk for companies around the world reporting on trends in litigation that increasingly target companies and boards for failing to incorporate climate change risk into strategies, oversight, and disclosure.  In recent months cases have been brought against the directors of Shell plc  and against BNP Paribas for failing to align their operational strategies (Shell) or lending (BNP Paribas) to the realities of climate change.  While these cases will undoubtedly take a long time to be resolved, the direction of travel is clear.  Doing nothing about climate change is not an option that is consistent with board directors’ duties and company operations.

Politics doesn’t make physical risks go away and it increases economic transition risks, resulting in increased litigation and liability risks.

Thus, board directors must ensure that the company is adequately prepared to deal with risks that can interfere with shareholder value creation. In the case of climate these are physical risks (e.g., more extreme and intense weather events), economic transition risks (e.g., changes in policy and regulations and technological and business model obsolescence), and litigation and liability risks (e.g., from the attribution of a company’s activities to climate change or from failing to manage the previous two risks at the expense of shareholder value). Politics doesn’t make physical risks go away and it increases economic transition risks, resulting in increased litigation and liability risks.

The board’s fiduciary duty is grounded in duty of loyalty (e.g., to at least monitor the company’s compliance with legal obligations) and duty of care (e.g., make lawful and informed decisions through a robust process of information gathering and deliberation). The only way for these duties to disappear would be a fundamental change in company law and there is nothing on the horizon that suggests this is going to happen. It is certainly hard to imagine any Republican initiative that weakens the discretion of board directors given the concern some of them have about the alleged ideological motives of some large asset managers, with BlackRock being a prime target.

The ESG Culture Wars will no doubt rage on, at least until the next Presidential election. Entertaining, amusing, frustrating, and maddening though these activities may be, they change nothing about the board’s fiduciary duty to ensure the company is addressing climate change.

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By Robert Eccles & Cynthia Williams. Robert Eccles is Visiting Professor of Management Practice at Said Business School, University of Oxford and Cynthia Williams is Osler Chair in Business Law at York University.

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