In recent years, there has been a growing interest in environmental, social, and corporate governance (ESG) issues in companies across all sectors in Latin America, which has led to the ESG concept becoming generally accepted in strategic decision-making.
Part of this change is brought by enthusiastic shareholders navigating their corporations to address ESG matters. There are several reasons why shareholders promote ESG – a commitment to personal ideals, seeking long-term profitability, or reducing latent risks such as regulatory penalties, reputational damage, or supply chain disruptions. Regardless of the reason, if the outcome of the corporation’s ESG strategy is considered negative by shareholders, the first to respond are the governing bodies of companies.
Around the globe, we have seen preliminary glimpses of what is coming for directors generally. ClientEarth v Shell [2023], a shareholder action brought in the UK, was initiated due to alleged breach of fiduciary duties of directors by “mismanaging climate risk”. ClientEarth alleged that Shell’s directors breached their legal duties under UK law by failing to implement a climate strategy that would allow the company to be net zero by 2050. The case was dismissed due to insufficient evidence.
Another case was reported in Poland where Enea, a power generation company, with the support of 87% of its shareholders, filed a claim against former directors who, in 2018, participated in the decision to invest in a coal power plant that did not consider the risks of climate transition. Here, the directors ignored warnings of rising carbon prices, competition from cheaper renewable energy, and the impact of new EU regulations that disincentivized coal power. In fact, at the time, this led shareholders to turn to the courts to stop construction of the plant. It was alleged that the company’s best interests and its shareholders would be damaged by the investment.
The aforementioned cases are a sample of a possible trend in ESG litigation that may expand to Latin America.
Latin America is an active region in climate litigation, with cases filed in Argentina, Chile, Colombia, Mexico, Peru, and especially, Brazil. The latter accumulated 82 cases by 2024, and is ranked amongst the top 4 most active jurisdictions in climate litigation, along with the US, UK, and Germany. As shareholder claims are a type of climate litigation claims, cases are expected to emerge in Latin America.
Furthermore, there have been numerous recent regulatory changes in Latin America, which intend to promote ESG practices in corporations and which, consequently, reinforce the possibility of further ESG litigation (including shareholder claims). For example, in Chile, Colombia, and Peru, regulations have been issued to make it mandatory for listed corporations to include environmental, social, and governance information in their disclosure reports to the market. This regulatory shift may increase the possibility of shareholder filing claims, as it enhances ESG disclosures and makes it easy for shareholders to find inaccurate, or misleading information; it should also reveal when an ESG strategy is lacking.
But how would these claims land in Latin America? Taking Peru as an example, directors generally have the duty of diligence of an organized trader and a loyal representative. However, under the regime of the Law of Collective Interest and Benefit Companies (Law No. 31072) and its regulations, directors have additional duties, as the aim of this regime is prioritizing certain social and environmental objectives included in the company’s . Among said duties are (a) to ensure the achievement of social and environmental benefit as defined in its bylaws, and (b) to introduce practices of organizational transparency.
In the event of a breach of these duties, shareholders may file a liability claim on behalf of the company against the directors for damages caused to the company. A requisite for this purpose is that such action This is independent of shareholder actions initiated in their personal capacity for damages caused directly to them.
Although damage shall have been caused to initiate an action, following the example of other jurisdictions, the main reason for shareholders to file claims is the disclosure of false or misleading information regarding the company’s ESG standards, particularly when such disclosures are used to attract investors or to comply with regulatory requirements.
Directors might also face claims for negligent corporate governance for failing to implement ESG considerations into company operations or ignoring climate-related financial risks. This is particularly where omissions result in regulatory sanctions or significant losses for the company. As the expectations around ESG standards continue to rise, the legal exposure of directors for ESG inaction or misrepresentation is likely to increase.
At the same time, directors may also be exposed to claims where ESG priorities are pursued at the expense of the company’s financial performance. Shareholders might argue that, in their enthusiasm to meet ESG expectations, directors fail to reach the necessary balance between sustainability and profitability. In Florida, United States, the Board of Directors of Target Corporation was sued after its DEI campaign caused Target’s stock price to drop. Shareholders alleged that they were not warned of the financial risks of implementing DEI policies and that funds were misused to serve political and social goals.
Comment
Finding the right balance between ESG ambition and shareholder interests remains a complex challenge for directors. Claims may arise either for failing to implement adequate ESG practices, or for prioritizing ESG at the cost of profitability. Sooner or later this will be a reality in Latin America. Therefore, corporations in the region should start seeking a way to resolve these tensions, in a sustainable manner, of course.