In the U.S., we’re used to a decentralized and chaotic approach to sustainability legislation and regulation. Between the current politicization of ESG, individual state laws, various federal agency rules and a myriad of industry programs, some officials are reaching for progress but are bound by the political realities of the U.S. Compared to other countries’ approaches to ESG management, the U.S. is – well … unorganized, confused and fertile soil for legal risk.
Consider the uniformity and top-down approach of the EU’s Green deal legislation, or the fact that even the conservative government of the UK is making national progress on climate mandates. To illustrate this let’s examine the UK’s recent guidance on ESG and anti-trust against the coming legal battles in the U.S.
(An absence of) Anarchy in the UK
While climate legislation is far from being built on pure consensus in the UK, the government has advanced climate policy. Most recently the UK’s Competition & Markets Authority (CMA) released draft guidance regarding how the UK’s anti-trust laws should be applied to environmental sustainability agreements. The guidance appears reasonable. It acknowledges collective action problems associated with tackling climate change (which we’ve discussed here) and establishes a limited exemption for ESG pacts that would normally violate antitrust laws. At the same time, ESG isn’t a “get-out-of-jail-free card”, and the exemption is based on a four-factor test:
- “The agreement must contribute certain benefits, namely improving production or distribution or
promoting technical or economic progress; - The agreement and any restrictions on competition within the agreement must be indispensable
to the achievement of those benefits; - Consumers must receive a fair share of the benefits; and
- The agreement must not eliminate competition in respect to a substantial part of the products
concerned.”
CMA’s guidance allows antitrust laws to continue protecting markets while simultaneously allowing wiggle room for cooperation to accomplish sustainability-related goals that benefit society at large.
Outside of the UK, Japan has also published draft guidelines on how antitrust laws should consider ESG. The European Commission has announced that they will be providing guidance on this issue as well. However, in the United States there is no exception for ESG, nor is one being considered as we wrote about here.
The American Experiment
While other countries move forward with legislation and guidance designed to prevent unnecessary and costly litigation, the U.S. heads in the opposite direction. Responsible Investor ran a piece earlier this month discussing a potential ‘rush’ of litigation stemming from the U.S. anti-ESG movement. As pointed out in the piece and discussed by us here, litigation is expected to come from both the pro and anti-ESG camps.
Anti-ESG shareholders and investors are expected to bring lawsuits arguing that companies and portfolio managers put too much emphasis on ESG and therefore neglect fiduciary duties. On the other side, pro-ESG shareholders and investors are expected to bring litigation arguing that companies and portfolio managers have failed to manage ESG risks effectively and are neglecting their fiduciary duty by ignoring material risks.
Litigation is also expected from and against state attorneys general tasked with enforcing anti-ESG investing laws. AGs may bring litigation against public retirement funds for failing to divest with certain financial institutions they’ve deemed to be “pro-ESG.” Public retirement funds may sue for injunctive relief, believing that they cannot comply with anti-ESG laws and fulfill their fiduciary duties.
The lack of cohesion regarding ESG in the U.S. is evident. President Biden issued his first ever veto to prevent Congress from blocking the Department of Labor’s ESG investing rule, earning a rebuke form the Governor of Texas. Florida Governor Ron DeSantis last week announced an 18-state alliance against federal ESG mandates. SEC Commissioner Mark T. Uyeda gave remarks to the Investment Company Institute indicating that he disagrees with the direction the SEC was taking in regard to critical ESG rulemaking including climate-related disclosures and fund name rules.
Commissioner Uyeda also ironically used the EU as a cautionary tale, urging the SEC should consider the undue burden that Green Deal laws are having on financial services firms. While the EU has experienced its share of growing pains in this area, I believe that U.S. officials should consider the undue burden placed on companies due to the current lack of guidance and inform/consistent regulation. This burden reflects not only regulatory compliance activities/expenses but also potentially much larger third party litigation costs. While compliance costs in the EU may be high, at least EU companies generally know what their guardrails are and the EU is far less litigious than the U.S.
What this Means
Things are likely to get worse before they get better. Instead of pro-active legislation, the U.S. has defaulted to reactive common law for deciding how ESG issues will be handled. That common law is likely to differ geographically, leading to circuit splits and inevitable SCOTUS intervention. All of this, from the initial litigation to the appeals to the SCOTUS decisions, will take years to sort out.
This leaves companies in a state of limbo, unsure of how to proceed and avoid legal risk. A recent GreenBiz article argued that avoiding the term “ESG” may be useful in keeping sustainability under the radar and avoiding the ire of the anti-ESG movement. Observers point to last week’s annual letter from BlackRock CEO Larry Fink – which omits the term “ESG” – as evidence. I believe this is an interesting perspective, but if ESG switches to another label, the anti-ESG movement won’t be far behind. As Lawrence suggested earlier this week, it may be time to re-examine how your company talks about ESG internally and externally as a part of managing your risk.
Companies should recognize the uncertainty of the moment and understand that litigation risk can come from any direction. With that in mind, companies should expect issues will arise regardless of the course of action. Therefore, implement ESG programs in a way that makes the most financial and strategic sense. Materiality determinations of ESG issues and associated actions taken are likely to fall under more scrutiny, so it important to back up your decision-making with data and be prepared to show your work.
For those looking to keep up with the latest in developments on Anti-ESG and changes outside the U.S., check out PracticalESG.com’s additional resources:
- Subject Areas on Anti-ESG and Compliance/Enforcement/Litigation;
- Guidebooks on ESG materiality and ESG risk reduction;
- checklists on ESG materiality, assessing your approach to ESG and identifying ESG stakeholders; and
- Hot Topics section for more information and updates.
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