United States: Corporate Officers Could Face Hot Water For Conservation Claims

Lawsuits over water conservation are rare, but concern is growing over whether new statements from corporate CEOs about "net water positivity," or replenishing more water than is being used, may lead to new types of derivative actions against directors and officers, say Wilson Elser partners Jonathan Meer and Carl Pernicone.

There is a growing trend toward investments driven by non-financial factors, notably environmental, social and governance (ESG) concerns. That, in turn, is leading to increased activism i by shareholders.

As a result, corporations are announcing certain pledges to address shareholders' environmental concerns, such as water conservation and improving water quality. The CEOs of 3M and Pepsi made such statements in August 2021, which were followed by similar pledges from Facebook (now Meta Platforms Inc.) and Google. Companies such as Microsoft and IKEA have made like statements in years past as well.

The failure to meet ESG pledges, however, can sometimes result in both derivative and securities lawsuits against corporations and their directors and officers (D&Os). Examples include litigation against D&Os demanding corporate responsibility for #MeToo and cybersecurity incidents.

Lawsuits seeking corporate responsibility for environmental issues typically have not been seen against D&Os but rather have been made directly against the corporation. Suits over water conservation are even less prevalent, but the concern is whether these new statements from corporate CEOs about "net water positivity," or replenishing more water than is being used, may lead to new types of derivative actions against D&Os.

Corporations Shift Environmental Focus

In recent years, many corporate statements about the environment have focused more on strategies for reducing energy or greenhouse gas emissions and less on water-related environmental issues. That trend is changing, however. With increasing frequency, corporations have been reporting more on water quality, water withdrawal, and water impact.

One growing water-intensive sector is technology, which relies on water for cooling data centers and cryptocurrency mining. As such, Google has made a commitment to replenish 120% of its average water consumption across its facilities and data centers. Meta's proposal to be net water positive is in connection with building a new solar-powered data center in Arizona to "restore over 200 million gallons of water per year in the Colorado River and Salt River basins."

Microsoft is testing submerging a small data center in the ocean off the coast of Scotland. While these tech companies are making pledges to be net water positive, if their actions are perceived as insufficient or inadequate by their investors, those pledges may lead to litigation.

Directors and officers becoming the subject of shareholder scrutiny for environmental issues is not as prevalent, but this may change in the wake of greater ESG activism. Prior litigation against D&Os over environmental issues often focused on misrepresentations on SEC filings, such as the failure to disclose corporate exposure regarding a company's use of fossil fuels and the nexus between such non-disclosure and a host of environmental concerns.

Examples are suits against D&Os of Exxon Mobil with the 2016 derivative action Ramirez v. Exxon Mobil Corp. and the 2019 shareholder derivative action In Re Exxon Mobil Corp. Derivative Litigation, both in the same Texas federal court.

Litigating Water Usage Claims

There have been a few lawsuits that addressed water-positive claims made by a corporation. One such matter captioned Friends, Artists & Neighbors of Elkhorn Slough v. California Coastal Commission involved the Heritage Corporation, which sought to develop property.

This request was initially denied by the staff of the California Coastal Commission, primarily since Heritage's plan "did not demonstrate positive (or even neutral) groundwater recharge." The commission later reversed itself and approved Heritage's permit application.

However, the California Sixth District Court of Appeal on Nov. 15, 2021, found that "the Coastal 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 before approving the permit application requires that the approval be vacated."

Other lawsuits that have addressed water usage issues include actions against government agencies. One such action is California v. U.S. Department of Energy, which challenged the U.S. Department of Energy rule creating new product classes for short-cycle washers and dryers in the energy conservation program.

While the state petitioners argued that excessive consumption of energy and water by short-cycle washers, the U.S. Court of Appeals for the Second Circuit on May 18, 2021, declined to stay the Department of Energy's rule finding that there was no sufficient showing of irreparable injury absent a stay.

Another lawsuit, AquAlliance v. U.S. Bureau of Reclamation, addresses water usage concerns in connection with a groundwater pumping program in California. The plaintiffs in AquAlliance charged that "California is facing water supply shortages due to over appropriation, and ongoing worsening climate effects."

As such, they requested reduced water usage and challenged defendants' environmental review and approval of a 2021 groundwater pumping project. Plaintiffs' challenge was denied in September 2021; however, their action against the government over water usage may presage future lawsuits regarding water usage involving the private sector.

Increased Scrutiny of D&Os Ahead

Looking at 2022, we expect that ESG issues, including those related to water usage issues, will continue to be fertile ground for D&O scrutiny. Of course, with more public statements by corporations about the environment comes additional opportunities for those words to be used against them in litigation.

As D&Os, including those at big technology companies such as Google and Meta, continue to make such corporate pledges about water usage, disclosure-related suits such as Ramirez and Exxon Mobil just may be the beginning of climate change-related actions against D&Os.

We already have seen lawsuits, such as Elkhorn Slough, challenge claims about net water positivity. Thus, while it remains to be seen whether environmental groups or shareholder activists will bring their views against D&Os in proxy fights or in the courts, the environment likely will be a factor in the decisions of companies in the years to come.

D&Os have a duty of loyalty to their companies and their shareholders to do their very best. Thus, when making an ESG commitment on behalf of their organizations, the directors and officers should be cautious about making sweeping statements that they cannot meet.

Originally published by Bloomberg Law

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.