The benefits of ESG reporting to mitigate the threat of D&O Litigation

This article discusses positive and negative examples of good ESG performance and how poor governance can lead to D&O litigation.

First, let’s look at a case that can be considered groundbreaking. This action could be the first effort to hold the board personally accountable for failing to properly plan the transition to net zero.

Shell shareholder environmental law firm ClientEarth announced Tuesday that it has notified Shell of the claims against the company’s 13 executive and non-executive directors. ClientEarth alleges that the Council failed to comply with its obligations under English law by failing to implement a climate policy that fully complied with the historic Paris Agreement (5). This can also be viewed as a breach of fiduciary duty that occurs when a fiduciary acts in its own interest rather than that of an employer or principal.

Another example of poor ESG practices is the multiple lawsuits filed against the Chief Operating Officer and CEO of Facebook (now renamed META) over data privacy.

There are several class action lawsuits filed against META. Price v. Facebook, Inc. et al. Comforte et al v. Cambridge Analytica; Renken et al. v. Facebook, Inc. et al. All of the aforementioned lawsuits concern violations of privacy and unlawful commercial practices regarding the use and distribution of personal data. These misconducts in enforcing proper regulations to protect user data lead to poor reporting of corporate governance and user care.

On March 23, META shareholder Ronald Martin filed a complaint in connection with class action lawsuits including Price v Facebook. Martin is suing META, its CEO Zuckerberg, and his directors Thiel, Andreessen, Bowles, Desmond-Hellmann, Hastings, and Koum. Defendants have been accused of misappropriating business assets and breaching fiduciary duty in shareholder lawsuits (6).

A good example of an ESG report and implementation is graphics processing unit maker Nvidia. The company continued to pay its vendors and contractors while its facilities were closed due to COVID-19, thus increasing trust among all beneficiaries and stakeholders and creating a stable and financially responsible image of the company was created. As a result, Nvidia’s overall annualized return to shareholders over the decade has exceeded 50%. Revenue increased 61% to $26.91 billion in fiscal 2022 and GAAP EPS increased 123% to $3.85.

Another example of a good ESG report is swimming pool supplier ‘Pool’. The company features his Eco Select products and participates in the EPA’s WaterSense program. The company makes information available to its customers to promote responsible water and wastewater management. The pool donated to charities such as the National Forest Foundation and human rights groups, as well as providing free swimming lessons to children. The aforementioned measures taken by the company contribute to building a good public image of the company involved in the daily life of the local community and all stakeholders. The company’s EPS for the 12 months to March 31, 2022 was $17.96, an increase of 68.8% year-over-year. His 10-year annual total return for the pool is almost 30% (7).

After reviewing and weighing the risks of inadequate ESG reporting and practice, and experiencing the aforementioned lawsuits against D&O as a result of inadequate ESG reporting and practice, investing in a superior ESG portfolio can It can be concluded that it mitigates and prevents threats. D&O litigation makes a company more competitive and more attractive in the public market.

sources:

1. Boutellis-Taft, O. Sustainability reporting as a driver of a sustainable economy. Climate Change and Audit. June 2020; Volume 2: P. 112-115;
2. European parliament.Synthesized text: Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on environmental responsibility for the prevention and remediation of environmental damage, Strasbourg, France, 2019 [cited 2022 November 22]Available from: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02004L0035-20190626;
3. European parliament. Directive 2008/99/EC of the European Parliament and of the Council of 19 November 2008 on the protection of the environment by criminal law, Strasbourg, France, 2008; [cited 2022 November 22]Available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32008L0099.
4. European parliament. Regulation (EU) 2018/1725 of the European Parliament and of the Council of 23 October 2018 provides for the protection of natural persons with respect to the processing of personal data by European Union institutions, bodies, offices and bodies and the protection of such personal data It concerns the free movement of Data, Strasbourg, France, 2018, [cited 2022 November 22]Available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32018R1725.
5. client earth. www.clientearth.orgEngland and Wales: Client Terrestrial Communications. 15 Mar 2022. We are suing the Shell Board of Directors for mismanaging climate risk. Available from 2022.03.15. https://www.clientearth.org/latest/latest-updates/news/we-re-taking-legal-action-against-shell-s-board-for-mismanaging-climate-risk/.;
6. street. www.thestreet.comNew York, USA: Franceska Fontana 29.03.2022. Lawsuits against Facebook over data privacy issues are piling up. Available March 29, 2022 at: https://www.thestreet.com/technology/everyone-who-is-suing-facebook-for-cambridge-analytica-14536213;
7. Motley Fool. www.fool.comVirginia, USA: Allison Prout 19.09.2022. Top 10 Stocks for Environmental, Social and Governance (ESG) Investing. Available September 19, 2022, at: https://www.fool.com/investing/stock-market/types-of-stocks/esg-investing/esg-stocks/