Corporate executives could face hot water over conservation claims

There is a growing trend of investments being driven by non-financial factors, including environmental, social and governance (ESG) concerns. This, in turn, leads to increased shareholder activism.

As a result, companies announce certain pledges to address shareholder environmental concerns, such as water conservation and water quality improvement. The CEOs of 3M and Pepsi made such statements in August 2021, which were followed by similar promises from Facebook (now Meta Platforms Inc.) and Google. Companies such as Microsoft and IKEA have also made similar statements in recent years.

However, failure to meet ESG commitments can sometimes result in both derivatives and securities lawsuits against companies and their directors and officers (D&O). Examples include litigation against D&Os demanding corporate liability for #MeToo and cybersecurity incidents.

Lawsuits seeking corporate liability for environmental issues have generally not been brought against the D&Os, but have instead been brought directly against the company. Water conservation lawsuits are even less prevalent, but the concern is whether these new statements by corporate CEOs about “net water positivity” or replenishing more water than used, may lead to new types of derivative actions against D&Os.

Companies are changing their environmental focus

In recent years, many corporate environmental statements have focused more on strategies to reduce energy or greenhouse gas emissions and less on environmental issues related to water. However, this trend is changing. With increasing frequency, companies are publishing more reports on water quality, water withdrawals and water impact.

Technology is a growing water-intensive industry, relying on water to cool data centers and cryptocurrency mining. As such, Google has committed to replenishing 120% of its average water usage across its facilities and data centers. Meta’s proposal to be net water positive is tied to the construction of a new solar-powered data center in Arizona to “restore more than 200 million gallons of water annually to river basins.” Colorado and the Salt River”.

Microsoft is testing the immersion of a small data center in the ocean off the coast of Scotland. While these tech companies pledge to be water positive, if their actions are perceived as insufficient or inadequate by their investors, these promises can lead to litigation.

Directors and executives coming under shareholder scrutiny for environmental issues are not as prevalent, but that could change in the wake of greater ESG activism. Previous litigation against D&Os on environmental issues often involved misrepresentations in SEC filings, such as failure to disclose corporate exposure regarding a company’s use of fossil fuels and the link such non-disclosure to a host of environmental concerns.

Examples are the Exxon Mobil D&O lawsuits with the 2016 derivative action Ramírez c. Exxon Mobil Corp. and the 2019 shareholder derivative action In Re Exxon Mobil Corp. Derivative disputeboth in the same Texas federal court.

Water use claims

There have been a few lawsuits regarding positive water claims made by a company. One such question captioned Friends, Artists and Neighbors of Elkhorn Slough v. California Coastal Commission involved the Heritage Corporation, which sought to develop the property.

This claim was initially denied by California Coastal Commission staff, primarily because Heritage’s plan “did not demonstrate positive (or even neutral) groundwater recharge.” The commission then backtracked and approved Heritage’s permit application.

However, the Court of Appeals for the Sixth District of California, on November 15, 2021, found that “the Coast Commission’s environmental review was incomplete at the time it approved Heritage’s coastal development permit application…and that this failure to complete the required environmental review prior to approving the permit application necessitates that the approval be revoked.”

Other lawsuits that have addressed water use issues include actions against government agencies. Such action is VSAlifornia v. US Department of Energy, which challenged the U.S. Department of Energy’s rule creating new product classes for short-cycle washers and dryers as part of the energy conservation program.

While the petitioning states argued that excessive energy and water consumption by short-cycle clothes washers, the United States Court of Appeals for the Second Circuit, May 18, 2021, refused to stay the Department of Energy’s rule finding that there was insufficient evidence of irreparable harm in the absence of a suspension.

Another trial, AquAlliance vs. US Bureau of Reclamation, addresses water use issues in a groundwater pumping program in California. The complainants in AquaAlliance charged that “California faces water supply shortages due to over-appropriation and continued worsening climate effects.”

As such, they sought a reduction in water use and challenged the defendants’ environmental review and approval of a groundwater pumping project in 2021. The plaintiffs’ challenge was refused in September 2021; however, their action against the government over water use may presage future lawsuits over water use involving the private sector.

Increased control of upcoming D&Os

Looking to 2022, we expect ESG issues, including those related to water use issues, to continue to be fertile ground for D&O consideration. Of course, the more companies make public statements about the environment, the more those words can be used against them in litigation.

While D&Os, including those at big tech companies like Google and Meta, continue to make such corporate promises about water use, disclosure-related lawsuits like Ramirez and Exxon Mobil may just be the beginning of climate change actions against D&Os.

We have already seen trials, like Elkhorn Swamp, challenge claims about the net positivity of water. So while it remains to be seen whether environmental groups or activist shareholders will make their case against D&Os in proxy contests or in court, the environment will likely be a factor in corporate decisions in years to come. future.

D&Os have a duty of loyalty to their companies and shareholders to do their best. So when making an ESG commitment on behalf of their organizations, directors and leaders should be careful about making sweeping statements that they cannot live up to.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Jonathan Merer is a partner at Wilson Elser and focuses his practice on insurance coverage, including supervision and coverage determinations, with a focus on directors and officers, professional errors and omissions, attorney employment practices and cyber liability programs.

Carl Pernicone is Co-Chair of Wilson Elser’s Insurance and Reinsurance Coverage practice. It focuses on issues involving insurance coverage for tort and environmental liability claims, including property insurance claims.

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