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Skadden Discusses Increasing Scrutiny of Companies’ ESG Disclosures — Including by ESG Critics

As public interest and scrutiny into environmental, social and governance (ESG) issues continue to rise, companies face an ever-evolving landscape relating to their ESG disclosures. The Securities and Exchange Commission (SEC) has proposed rules that could require increased ESG disclosures. Although those rules are still pending, the agency has brought enforcement actions challenging ESG disclosures under the existing regime.

Additionally, shareholders have continued to file securities and derivative actions challenging ESG disclosures and are using books and records requests to obtain information to support their claims. Accordingly, companies should carefully manage how they implement and disclose their ESG initiatives.

Environmental Disclosures

Regulatory actions. On March 21, 2022, the SEC issued a press release announcing proposed rule changes that would require registrants to include disclosures in their registration statements and periodic reports regarding climate-related risks and the company’s greenhouse gas emissions. Although these proposals have not yet been adopted, the SEC has already brought enforcement actions under existing law. For example:

Shareholder actions. In addition to the SEC, shareholders are filing actions to hold companies accountable for their environmental-related disclosures. For example:

Although these lawsuits remain pending, earlier ones provide insight into how courts have addressed similar claims. In September 2020, for example, an investor filed a securities lawsuit against Peabody Energy, the world’s largest coal mining company, challenging the company’s disclosures on its commitment to safety after a fire at a mine in Australia halted coal production at the mine for over a year. In re Peabody Energy Corp. Sec. Litig., 2022 WL 671222 (S.D.N.Y. Mar. 7, 2022).

The court granted a motion to dismiss in part, finding many of the challenged statements — including statements that Peabody “maintains constant vigilance toward safety,” “commits to safety and health as a way of life” and “achieved record safety this past year” — to be nonactionable puffery. But the court denied the motion to dismiss as to other claims, holding that, once the company disclosed the detection of elevated gas levels at the mine at issue, it had a “duty to disclose the whole truth about the situation,” which would have allegedly included disclosure of the sighting of smoke — details that could constitute material omissions.

Similarly, in December 2022, the U.S. Court of Appeals for the Second Circuit vacated the dismissal of a securities suit, finding that the complaint adequately pled a duty to disclose the impact of an impending environmental regulation that threatened sales of a significant fuel product. The Second Circuit agreed with the district court that most of the challenged statements were nonactionable, including several that were considered puffery and corporate optimism.

But the court found that omissions regarding the impact of an impending regulation that would restrict fuel oil use and that was allegedly known to defendants would likely have a material effect on the company’s financial condition or operations, creating a duty to disclose under Item 303 of SEC Regulation S-K. Moab Partners, L.P. v. Macquarie Infrastructure Corp., 2022 WL 17815767 (2d Cir. Dec. 20, 2022).

Board and Workforce Diversity Disclosures

Regulatory initiatives. On the diversity front, the SEC approved a Nasdaq Board Diversity Rule requiring Nasdaq-listed companies to disclose board diversity data and comply with board diversity requirements, or explain their reasons for noncompliance. The rule, which is the subject of an appeal before the U.S. Court of Appeals for the Fifth Circuit, is emblematic of the broader corporate movement toward promoting inclusion and underscores the importance of considering boardroom diversity and related disclosures.

Shareholder actions. In the last three years, shareholders have filed more than a dozen lawsuits challenging the accuracy of public companies’ stated commitments to diversity. These lawsuits have generally been dismissed, frequently because the challenged statements were deemed nonactionable puffery or plaintiffs failed to plead specific facts demonstrating that the statements at issue were false. (See our June 2022 Insights article, “ESG in Focus: An Overview of Recent Litigation and Regulatory Developments.”) Many plaintiffs have thus resorted to requesting access to corporate books and records, including board materials, under Section 220 of the Delaware General Corporation Law (220 Demands), in hopes of supporting more specific allegations of falsity.

Anti-ESG Efforts

As companies grapple with the demands of regulators and shareholders that they improve their commitment to ESG initiatives, they should also be aware of anti-ESG efforts challenging such initiatives. For example, the U.S. Senate passed legislation in March 2023 to nullify a Department of Labor (DOL) rule allowing retirement plan managers to formally consider ESG factors in investment decisions. And earlier in the year, a group of 25 Republican attorneys general brought an action against the DOL, alleging that the rule violates the Employee Retirement Income Security Act (ERISA) and undermines protection for retirement savings. That case is currently pending.

Although President Joe Biden vetoed the Senate bill, many states are passing their own anti-ESG bills. Florida, for instance, recently adopted a law barring state officials from investing public money based on ESG standards.

Growing anti-ESG sentiment has also led a number of state attorneys general to investigate whether collaborative ESG initiatives in the financial sector violate antitrust laws by restricting financing and investments in carbon-intensive industries. Recently, state attorneys general have also begun inquiring about ESG efforts in the insurance industry, raising similar concerns that collaborative efforts may be restricting the supply of underwriting services to high-emission sectors.

Growing anti-ESG scrutiny has already impacted participation in these collaborations, with The Vanguard Group, Inc. recently exiting the Net Zero Asset Managers initiative and major insurance companies leaving the Net-Zero Insurance Alliance.

Further, shareholders have recently started challenging diversity-based initiatives and seeking more information about them via Section 220 Demands. For instance, they have claimed that such efforts violate Title VII of the Civil Rights Act and corporate anti-discrimination policies while also failing to further corporate profits or maximize shareholder interest.

Given this constantly evolving landscape surrounding ESG-related issues and their controversial nature, it will be important for companies to monitor further developments closely and to carefully manage their ESG-related initiatives and disclosures to help reduce the risk of litigation.

This post comes to us from Skadden, Arps, Slate, Meagher & Flom LLP. It is based on the firm’s memorandum, “Companies Face Increasing Scrutiny Over Their ESG Disclosures — Including by ESG Critics,” dated June 2023, and available here. 

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