New SEC Climate-Related Disclosure Rules and Caremark Implications
BY: Erin Hunter
In their 2019 report, the World Economic Forum identified varying types of environmental risk as three of the top five global risks in their Global Risk Perception Survey. These risks range from extreme weather events to loss of biodiversity and failure of climate policy. In response to increased awareness of the broad risk that climate change poses, and increased investor demand for climate information, the Securities and Exchange Commission (“SEC”) amended their disclosure rules to include climate-related information. The final rule is effective 60 days after its publication and in accordance with its phase-in period. Upon its implementation, companies must comply with increased disclosure requirements, some of which involve disclosure of material climate-related risks, board oversight of climate mitigation strategies, and climate-related target goals.
In the same year, the Delaware Supreme Court made a significant indication of their willingness to allow plausibly pled Caremark claims to survive a motion to dismiss. Caremark claims generally allege that corporate directors breached their fiduciary duty to make a good faith effort to oversee the operations and compliance of the corporation. Caremark claims are historically difficult for plaintiffs to win because of the extremely high pleading standard and necessary showing of bad faith. However, in Marchand v. Barnhill, the Court reversed the dismissal of the claim against the board of Blue Bell, alleging that the board failed to make a good faith effort to oversee a mission critical aspect of the company’s operations. In the years following Marchand, various other Caremark claims survived motions to dismiss for failure to make a good faith effort to oversee mission critical operations. However, Caremark claims continue to be challenging for plaintiffs and are generally only viable when the claim involves a failure to oversee legal or financial compliance of a company.
Oversight of climate risk has not yet been incorporated into the Caremark framework. In fact, some scholars argue against including climate issues into Caremark duties, arguing that it would fundamentally shift corporate purpose away from profit and towards social responsibility. However, the SEC’s efforts to incorporate climate-related information into corporations’ required disclosures could open the door to new Caremark litigation in the climate risk space. SEC disclosure rules impose a legal obligation on registered companies to comply with those rules. Pursuant to their Caremark duties, directors will now be responsible to make a good faith effort towards adequate oversight of those climate-related disclosures. This addition of climate-related information into legal disclosure obligations may increase litigation risk for corporations and create an avenue for incorporation of climate policy into corporate fiduciary duties. However, any potential Caremark litigation impact from the new rules will likely be significantly delayed, as the Fifth Circuit temporarily halted implementation of the rules in response to constitutional challenges based on the scope of SEC authority to regulate climate.
Key Sources:
World Econ. F., The Global Risk Report 2019, at 6 (14th ed. 2019)
The Enhancement and Standardization of Climate-Related Disclosure for Investors, 89 Fed. Reg. 21668 (Mar. 28, 2024)
SEC, The Enhancement and Standardization of Climate-Related Disclosure: Final Rules, Fact Sheet (Mar. 28, 2024), https://www.sec.gov/files/33-11275-fact-sheet.pdf
In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996)
Marchand v. Barnhill, 212 A.3d 805 (Del. 2019)
Stephen M. Bainbridge, Extending Caremark to Climate Change Risk Management and Other ESG Issues Would Simply Compound the Original Mistake (Dec. 8, 2021), https://www.professorbainbridge.com/professorbainbridgecom/2021/12/extending-caremark-to-climate-change-risk-management-and-other-esg-issues-would-simply-compound-the-.html
Jacob H. Hupart et al., Caremark Liability Following the SEC’s New ESG Reporting Requirements, Mintz: Insight Center (Dec. 16, 2022), https://www.mintz.com/insights-center/viewpoints/2301/2022-12-21-caremark-liability-following-secs-new-esg-reporting
Hiroko Tabuchi, Court Temporarily Halts S.E.C.’s New Climate Rules, N.Y. times (Mar. 15, 2024), https://www.nytimes.com/2024/03/15/climate/sec-climate-rules-lawsuit.html#:~:text=A%20federal%20court%20on%20Friday,Approved%20by%20the%20S.E.C.