[Ed. note: In observance of Juneteenth, our office will be closed on Monday and we will not be publishing a blog.]
The SEC’s Climate Taskforce has been ramping up enforcement actions. A recent settlement with BNY Mellon and the news of an investigation into Goldman Sachs indicate that the SEC is looking at financial firms with more scrutiny when it comes to ESG claims. However, regulatory enforcement isn’t the only legal threat on the horizon. A recent entry of The D&O Diary raises the question of whether shareholder litigation against companies will increase based on those companies’ ESG statements.
SEC enforcement is focused on companies making ESG promises that remain unfulfilled. For example, the BNY case centered around the marketing of mutual funds that were supposed to – but allegedly did not – factor ESG into their investment decisions to the extent described by investment marketing claims and prospectuses. This area of unfulfilled promises could be fertile ground for additional shareholder litigation. Additionally, for companies that have publicly set ESG goals, shareholders could potentially argue a breach of fiduciary duty by claiming that the company should have been focused on the bottom line but instead focused on ESG. [Ed. note: Indeed there was some mention of this potential exposure at Day 1 of the Skytop Strategies’ Shareholder Activism ESG Super Summit in NYC for which we are a sponsor.]
What This Means
Both SEC action and potential shareholder lawsuits can arise from the same lack of robust and detailed ESG programs backing up a company’s public statements. For cases arising from unfulfilled ESG promises, the risk is obvious. If you make a claim or set a goal without supporting actions or data, and market your company based on that, it seems increasingly likely you will find yourself in trouble with the SEC or your shareholders for making false statements.
For shareholder lawsuits based on breach of fiduciary duty, a more robust ESG program also offers protection. When companies build ESG programs that are based on data, they should be able to tie ESG goals to financial goals. ESG can provide financial benefits in the forms of cost reduction, risk management, new revenue/market opportunities, etc. When your company can show its ESG decisions are also business decisions, you may be able to claim protection under the Business Judgement Rule. The Business Judgement Rule is intended to protect companies against shareholder lawsuits when the company 1) makes decisions on an informed basis as well as in good faith; and 2) honestly believes their actions are in the corporation’s and shareholder’s best interest.
Looking at how this scenario would play out in the courtroom, a company that sets lofty ESG goals without data or action creates risk for itself and is likely not making informed decisions. Additionally, setting a goal and taking no actions to accomplish it is not likely to be viewed as acting in good faith. However, a company with a robust ESG program that sets goals based on data has an informed basis and a good faith basis, especially if those ESG goals are tied to financial outcomes.
Practical ESG offers tools to its members that can help you build a robust, data-driven, ESG program at your company. For example, our Checklist: Starting a Corporate Climate Program and Goals can help you build out a climate program that goes beyond a “Net-Zero Pledge” and can lead to real, data driven, results. Guidebooks such as Communicating ESG Value and E&S Risk Reduction Concepts and Valuation can also be of substantial assistance in understanding how to connect action and data.