The battle against ESG moves to US courts

The theater of battle in America’s ESG war is moving quickly into the country’s courts.

The Fifth US Circuit Court of Appeals has already stayed the Securities and Exchange Commission’s public company reporting rules, adopted March 6. There are challenges to those rules from either side of the ESG question in at least six other federal courts. In California, the US Chamber of Commerce and other groups are suing to block the Golden State’s new carbon disclosure laws. In New York, workers backed by right-wing groups have filed suit against New York City’s pension plans accusing them of breaching their fiduciary duty for divesting from fossil fuel companies.

“The central question is: Are you breaching your fiduciary by focusing on these ‘political’ questions or are you actually upholding your fiduciary by upholding value for your investors?” says Giovanna Ferrari, a partner at, and co-founder of, Seyfarth Shaw’s impact and ESG group.

Earlier this year, Ferrari and her colleagues released Seyfarth’s annual analysis of corporate America’s litigation risks. ESG was one of the top threats. ESG “exposures,” Ferrari and her colleagues warned, mean that corporate counsel “will have to crawl up some entirely new learning curves” as courts assess what it means to do well by doing good.

“With increasing and sprawling rulemaking and private plaintiff actions, we see ESG issues touching every aspect of most businesses,” Ferrari and her colleagues wrote. “Protecting the organization will require significant monitoring, proactive engagement, integration of organizational interests and resources, and creative and knowledgeable partners to help navigate these particularly choppy waters.”

Ferrari is one who thinks the right-wing crusade against “woke” investing is “window-dressing.”

“If your company is losing money because it’s inefficient in the way it uses energy, that hits the bottom line,” she says. “That’s a pure profit question.”

Raising the bar for plaintiffs

The New York City pension case is one to watch, Ferrari says. Wayne Wong, a subway train operator, and other city employees claim that the city’s pension managers breached their fiduciary duty by divesting from fossil fuels, hurting workers’ retirement funds. The pension funds have asked New York’s Supreme Court to dismiss the claims. Among other things, the city is claiming they’ve made more money for pensioners by avoiding fossil fuels. That’s a traditional defense in a breach-of-duty claim, Ferrari says.

“If that case is dismissed, it’s not going to stop conservative political activists and lawyers that are bringing these cases,” she says. “They’re going to keep trying. We actually have the Fifth Circuit taking up the NASDAQ board diversity rules. That said, I think we can start to predict the arguments that private plaintiffs are going to claim. We’ll likely get some rulings that will help the defense bar.”

If they’re allowed to stand, the new SEC public company rules – and the reams of data they’re likely to generate – may also give private fund managers some clarity, and even a defense against plaintiffs’ suits from either side of the aisle, Ferrari says.

“The more conservative Republicans will tell you that you’re only investing for political reasons. And private investment advisers are going to say, ‘No, we actually spent some time looking at the portfolio,’” Ferrari says.

‘Don’t call it ESG’

Among the problems anti-ESG activists face is that even if they win in court, the regulatory pressures to come up with meaningful (and enforceable) ESG metrics won’t go away, because they’re driven by investor demand, Ferrari and others say.

“I do think we have a younger generation of workers and consumers who feel very, very strongly about the way companies behave. It’s not going away,” Ferrari says. “We’re not going to stop worrying about human rights violations in the supply chain. And it’s not about climate change or human rights in the abstract. It’s about how it affects our people, our products, our planet, our performance and our profit. Don’t call it ‘ESG.’ Each of those things are traditional matters that you’d be concerned about in traditional investing. It’s not new.”

A company’s reputation and brand value is much more brittle in the social media age than previously.

“What’s different today is that there are more stakeholders making more claims on companies, and they can move the needle because the barriers to entry are lower,” she says. “Anybody can get on social media and make their complaints very public worldwide, almost immediately. If you’re a CFO and you’re looking at the type of risk that might hurt your reputation, that’s got a monetary quotient to it as well. You could lose market share overnight from a boycott on social media.”

‘The trend is very clear’

Whatever American courts decide, the UK and European Union have committed to robust ESG disclosure standards, says Jagmeet Lamba, founder and CEO of Certa, a compliance and procurement software platform with backing from several private funds, including Steve Cohen’s Point72 Ventures and Fin Capital.

“The [EU Sustainable Finance Disclosure Regulation] rules in the UK are driving a lot of business,” Lamba says. “Anyone who is not already working on getting their company ready for climate-related disclosures is behind.”

For Lamba, the “first thing” private fund CFOs ought to worry about is whether their firm or its portfolio companies are making ESG-related marketing claims that they can’t substantiate. It may be time to decide whether your firm can (or will) make any ESG claims for itself.

“You can just say, ‘We don’t care, we’re not doing anything with ESG.’ That’s fine,” Lamba says. But “you could get a competitive advantage by being proactive on ESG reporting. Any funds have to do this to stay competitive. Otherwise, the scope of where they can raise money will reduce and keep reducing. The trend is very clear.”

ESG threat is at the board level, Seyfarth attorneys claim

Plaintiff’s bar, regulators scanning disclosures carefully, lawyers warn in fourth annual Commercial Litigation Outlook

The threat of litigation makes ESG a board-level worry for corporate America, lawyers at Seyfarth Shaw said in their firms’ latest Commercial Litigation Outlook.

Regulators are a first-order concern. The SEC has already formed its own ESG enforcement task-force, and the Federal Trade Commission’s annual “Green Guide” – a guidance document on how antitrust regulators’ view “unfair” or “deceptive” marketing claims – “will reflect more stringent guidance on environmental claims (eg, ‘zero-emissions’ promises) or social claims (eg, human rights in the supply chain). In some jurisdictions, failure to follow Green Guide standards may be evidence of false advertising,” Seyfarth’s team says.

Plaintiff’s lawyers are also reading firms’ disclosures (and federal rules) closely, Seyfarth attorneys warn, “with putative investor class actions filed alleging a variety of ESG-related misstatements or omissions, such as carbon net-zero claims, sustainability efforts or commitments to DEI, as well as breach of fiduciary duty claims.

“In derivative actions,” the Seyfarth lawyers claim, “plaintiffs have successfully extended the duty of oversight to officers focused on improving corporate culture and other DEI initiatives. So far, traditional securities, derivative and fiduciary duty defenses have served corporations well in defeating these claims. Regardless, it continues to be important for boards to adequately exercise their duty of oversight over climate and social initiatives to the extent it is important to the business.”

Put the ‘G’ in ‘ESG’

The answer can be simply put, but is much harder to execute, the Seyfarth attorneys say. “While litigation risks in the ‘E’ and ‘S’ of ESG abound, they can be mitigated with effective ‘G,’ that is, governance,” they say. “Companies should not only implement effective governance both at the board level and through cross-functional teams across an organization, but also pressure test the systems put in place as the space continues to evolve.”

The Seyfarth team offers six tips for companies worried about their ESG exposure:

⋅ Be proactive. “Key decision-making to the organization’s purpose and values, and consider the organization’s ability to integrate climate and social objectives into overall corporate strategy through effective governance,” the lawyers suggest.

⋅ “Know the ‘why,’ challenge the ‘how.’” Firms must know why they’re making the ESG claims they’re making, the Seyfarth team says. “Vet any statements that are keyed to the organization’s corporate strategy, purpose and values with the board. Adopt procedures to ensure consistent implementation of ESG endeavors across operations and entities along with understanding human rights risks and opportunities associated with environmental endeavors,” the lawyers say.

⋅ Know the trade-offs. “Understand the trade-offs made in the sustainability endeavors and to the extent able or if asked, explain the choices,” the lawyers say.

⋅ Know the disclosure rules. American states have conflicting ESG rules, and the SEC’s public company rules are being challenged in multiple courts. “This raises questions of interoperability between different disclosure frameworks and requirements,” the Seyfarth team claims. “Additionally, even if an organization is not directly subject to a disclosure requirement, they may be indirectly subject to the requirements where business partners require such information in vendor codes of conduct and supply chain verifications.”

⋅ Break down silos. “Reduce inconsistencies between separate business areas’ different or overlapping ESG initiatives,” the lawyers say.

⋅ Lawyer up. “ESG is complex and dynamic, and an organization should consider seeking assistance at any stage of its ESG journey, whether at policy design, implementation or refinement, or to asses new rules and regulations,” the team writes. “Retaining counsel experienced in both ESG consulting and litigation is essential to defeating private claims early in litigation and for negotiating favorable resolutions with regulators.”

Start now

The SEC’s embattled public company rules don’t require Scope 3 disclosures – that is, the carbon emissions from along a company’s supply chain. But Californian, and European and the UK rules, do. “It’s painful,” Lamba says.

“The biggest pain is basically gathering data from hundreds of portfolio companies,” he says. Firms that are already disclosing Scope 3 emissions “are very worried about accuracy of the data – data validation, standard deviation, etcetera,” Lamba adds.

While American courts wrestle with the legal implications of ESG rules, it might be a good time for fund managers to build up their reporting infrastructure, Lamba says.

“They should act now,” he says. ESG metrics still “is a nascent industry. In about five to 10 years, the fund administrators will be able to do this, but for now fund managers will need to do it themselves.”

Lamba says there are two things firms can do to get started.

“An effective organizational strategy I’ve observed is appointing a dedicated ESG champion. This person should be deeply passionate about sustainability and possess the ability to drive impactful change within the company,” Lamba says.

“Number two,” he adds, “make sure the software you’re using is flexible enough to adapt and grow with your firm. The architecture of the software may not be dynamic enough. I think it’s critical that companies highly weigh the flexibility and the adaptability of any system that they use, including the ability, eventually, to hand it over a fund administrator.”