This article is an extract from GTDT Market Intelligence ESG Engagement & Litigation 2024. Click here for the full guide.
1 Which companies have ESG obligations in your jurisdiction, and to whom do they owe these obligations? What is the source and nature of these obligations?
To start, given the broad sweep of issues potentially encompassed under the E, S and G of ‘ESG’, nearly every company may have some facet of its operations touch on ESG. For example, the ‘E’ may encompass climate change, biodiversity, energy and natural resources, emissions to air, pollution prevention and control, waste management, and agriculture and land use. The ‘S’ potentially covers health and safety, labour standards, human rights, product safety, privacy and data protection, diversity and inclusion, and supply chain management. The ‘G’ may include transparency, leadership and corporate governance, business ethics, remuneration and incentives, corporate culture, risk management, and whistle-blowing.
Accordingly, there is a myriad of ESG obligations that may be owed by companies, whether legal and regulatory or imposed by market practice and civil society expectations. Equally, there is a wide range of stakeholders to whom these obligations may be owed depending on the area in question, such as investors, regulators, employees, customers and communities impacted by business operations.
Each of the subject areas potentially encompassed under ESG is subject to current or future regulation, whether at the state or federal level. For example, with respect to climate change disclosures, the US Securities and Exchange Commission (SEC) is expected to imminently finalise a proposed rule requiring extensive climate and greenhouse gas emissions disclosures from regulated entities, aligned with the requirements of the Task Force on Climate-Related Financial Disclosures. At the state level, the Governor of California, Gavin Newsom, signed a pair of landmark climate disclosure rules that will require large corporations that do business in the state to file annual reports disclosing their Scope 1, 2, and 3 greenhouse gas emissions annually and publish climate-related financial risk reports biennially. Also, New York’s financial regulator, the Department of Financial Services, has issued proposed guidance governing the management of climate-related risks by financial institutions.
ESG obligations don’t apply solely to SEC-registered companies or major New York financial institutions, however. With respect to human rights obligations, for example, any company seeking to import goods into the United States may need to consider the Uyghur Forced Labor Prevention Act, which allows the US Customs and Border Protection Agency to seize and detain goods wholly or partly made in the Chinese region of Xinjiang, on the rebuttable presumption that the goods have been made using forced labour. Compliance with this law points to the need for an importer (of whatever size) to adopt an appropriate supply chain due diligence programme in line with guidance from the regulators and international best practices.
Regulators are not the only stakeholders looking to enforce ESG obligations owed by companies. Regarding climate change, for example, employees of companies have brought class action litigation under the Employee Retirement Income Security Act relating to allegedly misleading climate change disclosures pertaining to their employee stock plans. Whistle-blowing and diversity and inclusion are other ‘S’ issues where employees as rights holders may seek to enforce relevant obligations on companies. Corporate scandals relating to business ethics and poor governance will attract scrutiny from investors in the form of derivative actions or securities fraud suits. And consumers may be motivated to scrutinise environmental and social claims made on packaging or websites for signs of greenwashing, and bring class action lawsuits and other non-judicial complaints under consumer protection authorities.
These are just a few examples of the range of obligations and stakeholders that comprise the ESG landscape in the United States, which only promises to become more complex over the coming years, as new laws and regulations come into force, and stakeholders experiment with fresh methods to engage on these issues.
2 Which regulators and other public bodies in your jurisdiction take an interest in ESG and related collective engagement and litigation? What is the extent of their involvement in ESG issues?
The United States federal government under the Biden Administration has adopted a whole-of-government approach to climate and ESG issues. Among the federal agencies, the SEC has been particularly active, issuing a flurry of rule-making including proposals for climate disclosures by public companies; disclosures by investment advisers and registered investment companies as to their ESG strategies; and an upcoming proposal relating to human capital disclosures. The agency recently adopted amendments to rules regarding fund names that expand the types of names that could be considered materially deceptive or misleading if a fund does not invest at least 80 per cent of the fund’s assets in the investment focus its name suggests, specifically noting the increased concern of fund names suggesting ESG characteristics. The SEC has also been active in the litigation and enforcement arena, setting up the Climate and ESG Task Force, which has already commenced a number of greenwashing enforcement actions, including in some cases investigations involving foreign law enforcement agencies (eg, in Germany).
Not to be outdone, the Federal Trade Commission (FTC) is currently considering updates to its regulatory guidance on environmental marketing (the Green Guides), which it last updated in 2012. The FTC is considering a range of updates, including to provisions on climate change, recycling and sustainability, among others, and closed its public comment period on these updates in April 2023. Non-governmental organisations (NGOs) have also used the FTC’s administrative complaints mechanism to submit greenwashing complaints, including against a major energy company.
Other federal agencies have also begun to consider how ESG issues may impact their mandate. For example, the Acting Comptroller of the Currency in 2022 highlighted concerns that the management of climate risks by financial institutions could contribute to ‘climate redlining’ (whereby historical discriminatory lending practices affecting marginalised communities are exacerbated as a result of these communities’ higher exposure to climate risks). The Federal Reserve recently announced a pilot programme whereby six major banks will participate in climate scenario analysis to evaluate the ability of supervisors and firms to measure and manage climate risks. The Department of Labor (DOL) also finalised rulemaking on the consideration of ESG factors in connection with federally-regulated pension plans. The rule recently survived a legal challenge brought in a federal district court in Texas by 26 state attorneys general claiming that the rule was arbitrary, capricious and outside of the DOL’s authority. A similar case is pending in a federal district court in Wisconsin.
Additionally, state governments have also increasingly made strides in the ESG space. Attorneys general in a number of pro-ESG states have aggressively pursued climate change and greenwashing litigation. Over 40 states and municipalities have brought suits against energy companies seeking damages for the impacts of climate change under various state tort and statutory theories (including public nuisance, deceptive marketing, and even Racketeer Influenced and Corrupt Organizations Act claims), with a handful of these cases reaching the Supreme Court on procedural issues. State attorneys general have also been active in pursuing greenwashing litigation, including plastics pollution and recyclability claims, where California has been especially active.
A separate contingent of states is increasingly experimenting with a variety of anti-ESG approaches. A number of these states have passed energy discrimination laws prohibiting boycotts of the fossil fuel industry, interpreted broadly enough to encompass many net zero and ESG strategies. Some states have launched antitrust investigations into major ESG groups such as the Net-Zero Banking Alliance, with the theory that such initiatives amount to a group boycott in violation of relevant antitrust laws and constitute unlawful discrimination in violation of state consumer protection statutes. Others have issued regulatory guidance and opinions to the effect that the consideration of ESG factors in state pension investments violates applicable state fiduciary duties.
The complex interplay between state and federal policy in relation to ESG issues is likely to continue over the next few years, particularly in an increasingly politicised environment.
3 How do minority shareholders engage with public companies to ensure that they comply with their ESG obligations?
Minority shareholders have begun to experiment with a number of avenues to engage with public companies on ESG issues. According to the United Nations Principles for Responsible Investment (PRI), common engagement strategies may include: holding direct conversations with portfolio companies, regulators and issue experts; conducting educational outreach with the marketplace; collaborating with other investors, companies and advocates (subject to any regulatory considerations); convening summits to identify and reach tipping points; soliciting shareholder proposals; and sponsoring academic and other analysis on the issues to increase market participant awareness.
In particular, many activist investors are increasingly turning to shareholder resolutions on ESG issues, with estimates suggesting that over 470 environmental and social resolutions were submitted by shareholders of the Russell 3000 companies in 2022. A significant proportion of these focused on climate-related disclosure but emerging areas of focus also include human rights and racial equity, lobbying activities, and tax issues. Strikingly, a successful activist campaign led by a minority shareholder in 2021 attracted enough support to result in the nomination of new directors to the board of a major oil company. These ESG shareholder proposals have often attracted significant press attention, although many have ultimately been unsuccessful when put to the ballot. Still, the pressures exerted by such campaigns can often result in public companies taking action to resolve the underlying ESG issues that prompted the proposals, resulting in their withdrawal.
The SEC has also waded into the arena through policy updates that may have the effect of increasing the success of ESG shareholder proposals. Specifically, the SEC has proposed updates to Rule 14a-8 that impose a higher burden on companies seeking to exclude shareholder proposals (including on ESG topics) as already substantially implemented or substantially duplicative of another past or current proposal. The proposed update builds on an earlier SEC staff bulletin clarifying the bases under which agency staff may consider companies’ requests to exclude environmental and social proposals, and imposing higher burdens for exclusion – the net effect of which may be to have more proposals come through to a vote.
Investors have also sought to engage with companies on ESG issues through stewardship initiatives such as the Climate Action 100+ and United Nations PRI. Members of the Climate Action 100+ make a commitment to engage with major companies on the net zero transition, and in particular around the themes of disclosure, governance and emissions reductions. In the human rights realm, investors signed up to the United Nations’ PRI have agreed to work together to take action through the new ‘Advance’ initiative, which contemplates collaborative engagement with companies (with further escalation as needed) and engagement with policymakers and other stakeholders to make progress on the overall goal of furthering human rights.
Many of these stewardship initiatives also serve as forums for sharing best practices and developing guidance around effective ESG engagement strategies. However, as noted above, certain ESG initiatives have come under increasing antitrust scrutiny by certain state agencies – for example, the Arizona attorney general singled out Climate Action 100+ in his public announcement regarding his antitrust investigation into ESG, and in March 2023, a group of Republican state attorneys general sent a letter to large asset managers warning that participation in groups such as Climate Action 100+ raised concerns about the investors’ adherence to fiduciary duties and compliance with anti-trust rules. Investors should take all regulatory considerations into account when devising their engagement strategies.
4 When significant breakdowns in ESG cause loss to a company’s investors, what regulatory, litigation and other mechanisms are available to the investors to hold the company to account?
Investors seeking to hold companies accountable in regard to ESG issues have a number of tools at their disposal, above and beyond the engagement strategies canvassed above.
For example, there has been a marked uptick in shareholders filing private securities fraud class actions in US federal courts, challenging public disclosures relating to ESG issues. High-profile, recent class actions have been filed, for example, against a major financial institution over its diverse hiring practices; against a major coffee beverage company for its diversity hiring policies; against a plant milk manufacturer in relation to its claimed environmental impacts; against a biopolymer manufacturer in connection with claims over the biodegradability of its plastics products; and against a renewable energy company over claims that its product (wood pellets) is not in fact sustainable. In many instances, the suits have been preceded by short-sellers’ reports discussing the purported ESG failures of listed companies. The very active plaintiffs’ bar in the United States has also contributed to the explosion in these types of cases over the past few years, although many claims filed do not make it past a motion to dismiss.
Other remedies may also be available, depending on the law of the state of incorporation of the company in question. In Delaware, for example, Caremark claims flow from directors’ fiduciary responsibilities to exercise oversight over the company’s operations – including, potentially, in relation to ESG issues. Recent examples of successful Caremark claims involve food safety issues at a popular ice cream manufacturer and a culture of sexual harassment and misconduct at a major fast food chain. It is expected that similar suits may be devised to address issues such as climate change and diversity in the future.
Additionally, the SEC is charged with protecting investors and the integrity of the capital markets and has paid particular interest to greenwashing issues. The SEC’s Climate and ESG Task Force is tasked with identifying material gaps or misstatements in issuers’ disclosures of climate risks under existing rules; analysing disclosure and compliance issues related to investment advisers’ and funds’ ESG strategies; and evaluating tips, referrals and whistle-blower complaints on ESG-related issues. Since its launch in 2021, it has opened numerous investigations into misleading ESG disclosures made to investors and has recently assessed fines against two investment firms over failures in their ESG policies and procedures. The Task Force also recently settled a claim against a major mining company relating to its dam safety disclosures in the wake of a tragic dam collapse. The Task Force also charged the investment arm of a major German bank in two separate enforcement actions, one of which concerned misstatements regarding its ESG investment process, leading to a US$25 million settlement.
The SEC has undertaken these enforcement actions under pre-existing anti-fraud authorities, and has made clear that it interprets existing rules – for example, the Marketing Rule – as prohibiting deceptive or inflated claims to investors in relation to ESG matters. However, with the SEC and other regulators putting out new, significant proposals concerning ESG disclosures, it is foreseeable that the number of greenwashing claims will rise, as investors and regulators both benefit from increased access to information regarding companies’ ESG risks and performance.
5 When significant breakdowns in ESG cause loss to a company’s customers, what regulatory, litigation and other mechanisms are available to the customers to hold the company to account?
Similar to the rise in investor class actions relating to ESG issues, the past few years have also seen a marked spike in consumer class actions on ESG issues, particularly greenwashing actions challenging inflated or misleading environmental or sustainability-related claims – again likely spurred by the active plaintiffs’ bar in the United States. These suits generally invoke state consumer protection statutes and have been initiated in both state and federal courts.
Recent proposed class action suits have been filed against: a major clothing retailer in relation to its sustainable clothing collection; a popular footwear brand in relation to the environmental impacts of its product and its animal welfare certification; a large retailer in relation to a sustainability certification on the packaging for its seafood products; chocolate manufacturers in relation to sustainability claims in light of alleged forced labour in the supply chain for cocoa; major airlines in relation to claims of carbon neutrality in light of the use of offsetting; a major manufacturer of garbage bags in relation to its recyclability labels; and many more. Many of these suits have been tossed out at the motion to dismiss stage, but several courts have allowed such claims to proceed after a highly fact-specific analysis of the claims in question and applying a ‘reasonable consumer’ standard.
State authorities have also been active in enforcing consumer protection statutes. From 2017 to 2018, California prosecutors entered into settlements totalling over US$3 million with several major US companies relating to packaging labelled as ’biodegradable’ or ‘compostable’. The Connecticut attorney general recently filed a greenwashing suit against a manufacturer of garbage bags over the company’s recyclability claims. Cities and states like New York City, Vermont and California have also invoked consumer protection statutes against major energy companies relating to allegedly deceptive marketing and lobbying for fossil fuel products.
As noted above, the FTC is currently revising the Green Guides, which provide guidance on environmental marketing claims, and which have been incorporated into the laws of several states. The FTC also has the ability to accept non-judicial complaints from consumers (or NGOs representing consumers) under the Green Guides and has recently accepted one such greenwashing complaint against a major energy company. As more regulatory clarity is provided as to the meaning of various ESG terms, we would expect to see an uptick in greenwashing suits and complaints being filed, but potentially fewer making it past a motion to dismiss.
At the same time, several states are experimenting with anti-ESG approaches premised on consumer protection arguments. For example, in May 2023, Florida Governor Ron DeSantis signed into law legislation that amends Florida’s Deceptive and Unfair Trade Practices statute to prohibit financial institutions from discriminating against customers based on ESG-related ‘social credit score’ metrics, and several state attorneys general have launched an investigation into a major rating agency and its subsidiary alleging violations of consumer protection laws in connection with an ESG risk rating product due to an alleged anti-Israel bias. As these investigations and legislative mechanisms progress, we would expect to see follow-on private litigation from consumers aligned with the approaches of these states, contrasting sharply with the trend of rising greenwashing litigation.
Consumers (including activists and NGOs) can also direct complaints to voluntary non-judicial grievance mechanisms such as under the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises. These Guidelines provide, among other things, guidance on due diligence practices for climate change, biodiversity and human rights. For example, in May 2023, an NGO filed an OECD complaint against a large US-based grain manufacturer alleging failures in environmental due diligence policies and procedures and seeking resolution via mediation. Although complaints under the OECD Guidelines do not result in traditional binding or enforceable decisions, they can still result in significant scrutiny by the wider public and, potentially, result in further regulatory or legal action.
6 What developments are there likely to be in ESG collective engagement and litigation in your jurisdiction in the next five years?
The United States is a particularly interesting jurisdiction in regard to ESG collective engagement and litigation for a number of reasons. First, it is the jurisdiction where the largest number of ESG lawsuits are being filed, by far. Indeed, data from the Sabin Center for Climate Change Law suggests that the United States alone accounts for more than half of all climate change litigation filed around the world. Given the trends discussed above, it is likely that the United States will continue to be a hub for the filing of ESG litigation – and in particular, ESG class actions, given the active and experienced plaintiffs’ bar, and the well-developed judicial mechanisms around such claims.
Additionally, as claimants in various jurisdictions experiment with novel legal approaches in relation to greenwashing and ESG claims, we would expect to see new theories of liability and legal approaches being tested in the United States and potentially exported to other jurisdictions (and vice versa). We may also see new areas of focus crop up in future litigation, aimed at specific areas of ESG that are perceived as requiring public attention.
Further, even as more new cases are filed, we would expect to see more existing cases reach the merits stage – whether we’re looking at consumer protection lawsuits challenging environmental marketing claims, or the wave of state- and municipal-led lawsuits against energy companies. Any judgments on the merits will then work as a feedback loop to incentivise further claims, including with a focus on high-emitting sectors. These disputes are also likely to generate spin-off disputes and arbitrations, including in regard to insurance coverage and indemnification for legal costs.
We would also expect to see intensified regulatory and enforcement action from both federal and state regulators. In particular, we would expect to see the SEC’s Climate and ESG Task Force continuing to bring high-profile enforcement actions concerning climate and ESG issues, and for the SEC to press forward with its ambitious rule-making agenda on climate change, ESG investing and human capital disclosures – even in the face of stiff resistance from a variety of constituencies. Federal law enforcement agencies, such as the SEC and the Department of Justice, will likely continue to work with their counterpart agencies around the globe to bring multi-jurisdictional investigations.
At the same time, the states experimenting with anti-ESG approaches will also likely seek to make progress with their investigations and legislative agendas. Against this politicised backdrop, we may likely see a variety of private claims being asserted by litigants with competing agendas, significantly complicating the ESG landscape for companies. For instance, likely emboldened by the US Supreme Court’s decision to strike down race-conscious admission programmes at Harvard College and the University of North Carolina, private plaintiffs are increasingly bringing anti-diversity, equity and inclusion lawsuits to challenge employment and corporate diversity policies, including recently against two national law firms and a venture capital fund.
ESG engagement strategies will also continue to develop, as investors focus on additional areas of interest including biodiversity disclosures in the wake of the 2022 UN Biodiversity Conference in Montreal (COP15). We would expect to see more shareholder proposals being filed on this and other important ESG issues (particularly climate change and human rights) each year, and fewer proposals being successfully excluded by companies. At the same time, given certain states’ focus on collective ESG engagement strategies from an antitrust lens, we would expect to see heightened attention to such regulatory issues from investors and companies alike.
The Inside Track
How has your work in relation to ESG, collective engagement and litigation developed over the past five years?
While many of the ESG trends we’re discussing pre-date even the coinage of the term ‘ESG’ in the market, the sheer number and range of claims being filed and issues being raised have increased significantly over the past five years. Many companies are waking up to the fact that issues that they may have thought of as part of ‘corporate social responsibility’ or public policy are now squarely in the wheelhouse of legal and compliance – and indeed, all business operations. It has been exciting to see this landscape develop and to help guide clients through the ever-changing ecosystem of ESG regulations, claims and campaigns.
What was the most noteworthy ESG matter that you have worked on recently and what features were of key interest?
We advise a major multinational financial institution on a range of ESG issues, including tracking key ESG regulatory and litigation developments across a number of jurisdictions. It has been fascinating to see how trends in one jurisdiction then pop up in others, and specifically in the United States, it has also been very interesting to see how the pro-ESG approach of the federal and certain state governments contrasts so sharply with the anti-ESG approach of other states.