"The dark side clouds everything. Impossible to see, the future is"
Yoda, Jedi Order Grand Master
In 2015, almost half of Poland's electricity production was generated at hard coal-fired power plants and almost one third at lignite-fired (brown coal) power plants. So when Polish energy companies Energa and Enea greenlit the construction of the Ostrołęka C coal fired power plant in 2018, could the directors who approved the investment have foreseen that in 2020 the project would be abandoned with PLN 1bn of investment written off?
Impossible to see, the future is. Or is it?
Well a few people thought so. Carbon Tracker published a report in August 2018 highlighting that the project could have a negative net present value (NPV) over its lifetime citing competition from renewables (that were cheaper), the impact of EU energy reforms and rising carbon prices as well as difficulties in securing necessary financing.
ClientEarth took legal action against the project in 2018 and won their case in 2019. A couple of years later Najwyższa Izba Kontroli, Poland's Supreme Audit Office, recommended action against former board members of Enea.
Indeed, now the current management of Polish energy company Enea, with the backing of 87% of Enea's shareholders, are suing the company's former directors and insurers for lack of due diligence over the project and investment decision which has ended up losing the company PLN 650m (USD 160m).
This quote from one of ClientEarth's lawyers, Marcin Stoczkiewicz summarises an important point:
“This case is a notable first and underlines board directors’ potential liability for ongoing fossil fuel investments in a rapidly shifting economic, policy and regulatory landscape. It is also highly relevant to directors’ and officers’ insurers, named as defendants in the company’s damages claim.”
Marcin Stoczkiewicz, ClientEarth lawyer
It also raises a broader issue than future fossil fuel investments and climate change.
Are directors properly discharging their fiduciary duty by taking into account the changing landscape in which they operate? In other words taking into account future risks and opportunities in their decision making including systemic risks. Are they using foresight?
I'll look at that issue more broadly but let's start by focusing on the biggie. Climate risk.
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Climate change and fiduciary duty.
The Financial Markets and Law Committee (FMLC) recently completed a review of pension trustees' fiduciary duties, as part of the UK government's Green Finance Strategy 2023. Their conclusion was that trustees incorporating the financial perspective of climate and other sustainability matters into their investment decision-making process is consistent with their fiduciary duties. They went further to say that sustainability is integral to the decision-making process.
The Commonwealth Climate and Law Initiative (CCLI) and the Climate Governance Initiative published a briefing at the back end of last year highlighting key developments in the landscape of sustainability-related corporate responsibilities.
Amongst the developments are the EU's Corporate Sustainability Due Diligence Directive (CSDDD) whose decision to proceed to a final vote in the European Parliament was postponed on Friday (9th Feb) as Germany abstained. The CSDDD would add consideration of human rights, climate change and environmental consequences to existing fiduciary duties of directors to act in the best interests of the company. Competitiveness appears to be a concern for German corporates who are already subject to requirements of Lieferkettensorgfaltspflichtengesetz or the German Supply Chain Due Diligence Act.
CCLI also pointed out in the briefing that whilst two climate-related derivative claims, which are actions brought by shareholders on behalf of the company against directors personally failed (including ClientEarth v Shell), CCLI point out that "directors will want to consider climate-related risk to avoid potential costs to the company."
This jumped out at me from their comments too: "Since derivative claims can also be made against former directors, decisions that directors make today could lead to future liability once loss has crystallised. The court will consider whether, based on the knowledge that was reasonably available at the time of the decision, directors failed to give due consideration to early warning signs."
This brings me on to the meat of my discussion and why I think the Enea lawsuit has more resonance beyond climate change.
Let's pause for a second and remind ourselves what we mean by 'fiduciary duty'