Shareholders requesting information about climate lobbying: Volkswagen is facing new kind of ESG-related claims

Volkswagen AG (VW) is facing legal action by institutional shareholders concerning information on its corporate climate lobbying. The shareholders tried to include climate lobbying as an agenda item at VW’s annual general meeting 2022. VW vetoed this agenda item whereupon the shareholders have sued VW to force the item onto the agenda for the 2023 annual general meeting. The legal dispute is initially about questions of corporate law. Behind it, however, are investor efforts to force companies to be more transparent about ESG issues.

Background

The claimants are different Swedish public pension funds (AP7, AP2, AP3 and AP4), the Danish AkademikerPension and the Church of England Pensions Board. They are supported by the NGO ClientEarth.

Earlier in 2022, the shareholders had tabled an amendment to the company’s Articles of Association (AoA) intended to ensure that future sustainability reporting includes an assessment of VW’s lobbying impact and alignment with its climate goals. The shareholders argued that VW lacked comprehensive disclosure on how its lobbying goals and activities align with its climate goals. Without that assessment VW risked impeding progress on its climate transition strategy and reputational damage. By embedding this commitment within its AoA, the shareholders argued VW could position itself as a true leader on the path to a low-carbon transition. The shareholders were also claiming that many other European companies had published at least one climate lobbying review and had committed to repeat this disclosure annually.

VW rejected the shareholders’ motion in April 2022 saying it would go beyond the competence of the general meeting. According to VW, the management board alone would be responsible for deciding on the content of the non-financial report in accordance with the interests of the company.

Legal action

In October 2022, the shareholders filed a lawsuit against VW before the Braunschweig local court, requesting a motion be put on the agenda for the 2023 annual general meeting. The aim of the motion: to change VW's AoA in such a way that the management board must provide more extensive information about the group's lobbying activities. The motion is based on a provision in the German Stock Corporation Act (AktG), which stipulates, that shareholders holding at least 5% or EUR 500,000 of the share capital can request items to be put on the agenda of the general meeting.

The shareholders’ goal is for VW to reveal direct or indirect lobbying activities of group companies directed at climate change at the annual general meeting. They are claiming that while VW is publicly presenting its green transition, it may be undertaking lobbying activities that run counter to its stated climate ambitions e.g. via its membership of automotive and business associations. This potential contradiction, the claimants say, exposes the company to reputational and operational damage and puts the security of their investments in question.

VW argues that the claimants’ motion is inadmissible as it encroaches on the powers of the management board. According to VW, it is not permissible for the AoA to put such obligation on the management board, since it is by law free to decide on how it fulfils its reporting obligations on non-financial issues. Further, the company would already voluntarily report on its public affairs and climate-related issues are part of various publications. All activities would serve to pursue the company's strategic goals, which would include supporting the Paris climate agreement and the European Green Deal.

Now it’s with the Braunschweig local court to decide.

Comment and Outlook

The present case is a good example of the trend of shareholders becoming increasingly active at AGMs on ESG matters in Europe, e.g., by seeking resolutions in relation to climate change reporting and commitments or looking for commitments on stronger action plans to reduce climate change impacts.

In the past ClientEarth has taken a different approach to putting pressure directly on board members:

• Back in 2018 ClientEarth has sued the Polish Enea SA as shareholder, seeking the annulment of a resolution consenting to construction of a coal-fired power plant. The claim was brought under the Polish Commercial Companies Code. In August 2019, the court found the company resolution authorising construction of the power plant to be legally invalid.
• In March 2022, ClientEarth announced that they were taking a claim against the board of directors of Shell under the UK Companies Act, sections 172 and 174. ClientEarth argues the Shell board has failed to implement a climate strategy that is in-keeping with the Paris Agreement goals. According to ClientEarth it would be the first derivate action against a board of directors for failing to consider efforts towards achieving net zero in the UK.

Coupled with increasing regulation of supply chains across Europe, the liability of directors and officers for violations of regulatory duties has also quickly come into focus (see our blog post here).

In the United States, environmentally driven activist campaigns already received the support from ISS and large asset managers. Active stewardship might further strengthen the ESG movement.

This growing shareholder activism is increasingly reflected in litigation. The lawsuit against VW is one of the first actions in Europe whereby investors turn to the courts on climate-related matters. If the action is upheld, it may serve as a blueprint for similar motions in other European jurisdictions.

Although the shareholders in the present case collectively own only roughly 0.1 % of VW’s shares, a ruling could likely set a precedent for other investors, acting as strategic shareholders. This could create a further avenue to put pressure on a company’s behaviour and enforce climate protection goals in addition to “traditional” lawsuits, like the ones already filed by environmental associations against German car manufacturers (see our blog post here).

As a question concerning the distribution of competences between the shareholders and the management board in a German stock corporation, it can be assumed that this procedure will ultimately have to be decided by the Federal Supreme Court (Bundesgerichtshof).