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  • Pedro Arango

Climate Change and Fiduciary Duties in the context of Fossil-Fuel Companies

Aware of the risks that climate change poses to humankind, hundreds of countries around the world signed in 2015 the so-called Paris Agreement, which sets forth the main goals and measures aimed to revert global warming, including reducing the worldwide emissions of greenhouse gases to net-zero by 2050 by undertaking in the long term a transition from fossil-fuel energies (such as coal, oil and natural gas) to renewable energies (such as solar and wind energy) (the “GW Goals”).

That said, governments have failed to enact and issue the ambitious laws and regulations required to achieve the GW Goals. As a result of such governmental failure, many sectors of the international community have shifted their attention to the so-called carbon-major or fossil-fuel companies (e.g., oil, gas and carbon companies) and have urged them to (voluntarily?) align their business models with the GW Goals.

The absence of specific regulations requiring fossil-fuel companies to pursue the GW Goals, such as those mandating the reduction of greenhouse gases emissions, has triggered several corporate governance debates. In this article, I will focus on one: are the board of directors and officers (“Managers”) of fossil-fuel companies entitled to voluntarily pursue GW Goals without breaching their fiduciary duties?

Shareholder Primacy v. Stakeholderism

One of the most heated debates in corporate law has been whether, when discharging their fiduciary duties, the Managers’ sole purpose is to maximize the profits of shareholders (within the limits of law) (the shareholder-primacy theory), or if they can also consider the interests of other stakeholders of the firm, such as employees, creditors, customers and the community (stakeholderism).

Nowadays, it is widely accepted that climate change and the GW Goals can be framed under both the shareholder primacy and the stakeholderism theories. From a shareholder-primacy perspective (which is the dominant view in Delaware), there is abundant evidence of the material impact that climate change may have in the economy and markets. Hence, decisions aimed at mitigating such phenomenon are justifiable as a means to maximize shareholders’ profits in the long-term, even if such decisions reduce profits in the short-term (i.e. the shareholder primacy theory does not prioritize short-term profits over long-term ones). Similarly, under the stakeholderism approach, pursuing the GW Goals is a legitimate decision, as such goals will provide an overall benefit to the community.

This clearly holds where companies’ business models do not directly conflict with the GW Goals and thus, remain feasible in a net-zero carbon economy. The benefits that those firms and their stakeholders will obtain from pursuing the GW Goals should outweigh the additional burdens they will have to bear in achieving such goals.

But the analysis becomes much more complex for fossil-fuel companies, since their current business models directly conflict with the GW Goals and are not feasible in a net-zero carbon economy. To put it simply, the products and services fossil-fuel companies offer (oil, gas, carbon) must disappear in order to achieve the GW Goals. Hence, in the long term, such companies will face two dramatic alternatives: either to disappear or to drastically transform their business model by shifting to the production of renewable energy. Thus, for a fossil-fuel company, deciding to voluntarily pursue GW Goals (let’s say, by refraining from exploiting oil reserves) could not just mean sacrificing short-term profits; such a decision may also accelerate the liquidation of that company.

As hinted above, whether the Managers of a fossil-fuel company may voluntarily pursue GW Goals without breaching their fiduciary duties largely depends on whether the expected long-term benefits of its shareholders (or stakeholders) derived from such a decision outweigh the expected long-term losses that such shareholders (or stakeholders) will suffer. This equation triggers the following challenges:

Which interests are to be considered? Multi-firm v. Single-firm focus

Shareholders, employees and other stakeholders of a company are not just that. In the real world, they are also shareholders and customers of other companies, as well as members of a community. In many occasions, the interests they have inside a specific company may conflict with the interests they have outside of such company. The question is then whether Managers of a fossil-fuel company should take into account the overall benefits and losses that their shareholders (or stakeholders) will accrue as a result of pursuing GW Goals (including those that are external), or just those interests inside the company.

One alternative is the so-called multi-firm focus, under which Managers of a company must consider the overall interests of shareholders (or stakeholders), including the external ones. Based on this multi-firm approach, some authors have suggested that a fossil-fuel company’s decision to pursue GW Goals could be justified under a shareholder-primacy theory, if the overall profits of the shareholders’ portfolio resulting from such decision outweigh the losses suffered by the company. Madison Condon gives an interesting hypothetical of how such a multi-focus focus could happen in companies like Exxon and Chevron. A fun fact: this may have already happened in Exxon which, after being subject to a successful proxy contest launched by the environmental activist Engine No. 1, has taken several measures aligned with the GW Goals. Other commentators have reached a similar conclusion under the stakeholderism approach, suggesting that Managers should have a fiduciary duty to advance the interests of the society, as a whole.

In a recent article, NYU Professors Kahan and Rock oppose the multi-firm approach, arguing that current corporate law applies a single-firm focus, by which Managers must consider only the interests of such shareholders (or of the stakeholders as stakeholders of the firm) inside the firm, and not any external interests they may have as shareholders (or stakeholders) of other firms. Under a single-firm focus, the Managers of a fossil-fuel company will breach their fiduciary duties if their decision to pursue GW Goals has a negative impact on the long-term benefits of its shareholders (or stakeholders) inside the firm, regardless of its net effect on such shareholders’ portfolio (or stakeholders’ overall wellbeing).

How long is the long term?

Nevertheless, there are also circumstances under which a fossil-fuel company’s decision to pursue the GW Goals could be justifiable under a single-firm approach. For example, the decision of a fossil-fuel company to reduce carbon emissions may be part of a broader plan to shift the company’s business to the renewable-energy industry and, hence, increase the company’s chances of surviving in a net-zero carbon economy. The Managers should be able to justify the decision as a path to advancing the long-term interests of the (current or future?) shareholders, employees and other stakeholders inside the company, in which case they would be in compliance with their fiduciary duties.

The next challenge then is to define what maximum long term the Managers could legitimately conceive when deciding to sacrifice short-term benefits. Are Managers entitled to sacrifice short-term profits in order to maximize profits in 10 years? Does the answer change if such term is 20 years or 50 years? Firms are potentially perpetual and, hence, the hypothetical long term could go as far as forever.

Corporate law does not define a fixed and precise time-frame, and it could hardly do so due to the open-ended scope of fiduciary duties. Moreover, investment time-horizons vary significantly depending on the industries, investors and many other factors. That said, while Managers could easily justify sacrificing profits now for more profits in three years, they may struggle to defend such sacrifice for the hope of more profits in 100 years.

Of course, those are both extreme cases of what long term could mean. In the context of climate-change decisions, realistic time frames could range from 15 years (if renewable energies displace fossil fuels by 2035, as estimated by some studies) to 30 years (if the net-zero-carbon target is achieved by 2050, as initially expected). These time frames are consistent with the definition that Future researchers usually assign to long-term futures (terms from 20 to 50 years, defining as far-term futures, those beyond such range).

If, based on the foregoing, one concludes that Managers of a fossil-fuel company are entitled to consider the expected benefits of the firm within the next 30 to 50 years when entertaining the long-term interests of its shareholders (or stakeholders), any business plan to shift from fossil fuels to renewable energies could be justified under the single-firm focus, regardless of its impact on the current stock price.

This is not to say that Managers should be forbidden from considering longer time frames when building a business plan, much less, that they should always be entitled to consider time frames within the 50-year limit. The takeaway is that more thoughtful analysis may be required in determining how long is the long term Managers of fossil-fuel companies can take into account when weighing the benefits and losses of future voluntary decisions regarding climate change and GW Goals.

Pedro Arango is a Corporations LLM candidate at NYU and serves as Graduate Editor at the NYU Journal of Law & Business. Pedro is licensed to practice law in Colombia and, before attending NYU, he practiced for almost six years at two prestigious law firm in Colombia. His practice is focused on Banking & Finance, Mergers & Acquisitions and Corporate Law.


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