ESG Trends and Hot Topics – Sullivan & Cromwell LLP

May 2022

Hot Topics in ESG for Directors and Executives to Consider

This memorandum highlights key recent developments in environmental, social and governance matters of relevance to public and private companies globally. For more information on this evolving business and legal landscape, we encourage you to reach out to your regular Sullivan & Cromwell contact or the lawyers listed on our ESG practice website
 Key Developments
US Supreme Court Hears Greenhouse Gas Regulation Lawsuit.  On February 28, 2022, the Supreme Court heard oral arguments in West Virginia v. US Environmental Protection Agency, which raises the issue of whether the EPA has the power to regulate greenhouse gas emissions. The plaintiffs (twenty Republican-led states) argued that the EPA has exceeded its statutory authority under the Clean Air Act by implementing measures such as emissions caps. Many large power companies sided with the EPA in amicus briefs. Although the oral argument focused largely on the EPA’s remit, the Court may avoid reaching the substantive question on standing grounds.

US Courts Dismiss Board Diversity Lawsuits.  A group of high-profile suits in US federal courts brought by private plaintiffs claiming that directors of public companies had breached fiduciary duties and/or made misstatements in securities filings as a result of inadequate diversity policies or discriminatory practices have ended in dismissals. In one of the latest examples, Kiger v. Qualcomm, a derivative action brought against Qualcomm’s directors decided in November 2021, a Delaware federal district court found that, among other things, defendants’ statements about having “goals” of assembling a diverse board were not actionable under US securities laws and the plaintiff failed to identify any specific violations of anti-discrimination laws to support a breach of fiduciary duty claim. The dismissals indicate there is a high hurdle for derivative lawsuits challenging US board diversity going forward.

Vale S.A. SEC Enforcement Action.  In April 2022, the SEC filed a complaint in a New York federal court against  Vale S.A., alleging it made false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The SEC’s complaint alleges that Vale knew about safety shortcomings in its Brumadinho dam, but continued to assure investors in presentations and sustainability reports that all of its dams were in stable condition. The complaint alleges breaches under Sections 10(b), 17(a) and 13(a) and Rules 10b-5, 12b-20 and 13a of the Securities Exchange Act of 1934. When announcing the charges against Vale, the Director of the SEC’s Division of Enforcement noted that investors rely on ESG disclosures in sustainability reports, signaling an early focus of the SEC’s  newly created Climate and ESG Task Force.

ClientEarth Pre-Action Letter to Shell plc.  On March 15, 2022, ClientEarth, an environmental law non-governmental organization, announced that it had sent a pre-action letter to Shell plc’s board of directors. ClientEarth stated that it intends to seek permission from the UK High Court to bring a derivative action against Shell’s directors for breach of their statutory duties under the UK Companies Act 2006 to act in a way that promotes the company’s success, and to exercise reasonable care, skill and diligence. ClientEarth alleged that Shell’s long-term viability is endangered by the board’s alleged failure to properly manage climate risks, leaving Shell ill-prepared for the energy transition to net zero. If ClientEarth brings a derivative action in the UK High Court, it would be the first such case in the UK which seeks to hold directors personally liable in this way.
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