We’ll soon publish our compendium of SEC 10-K Item 1A risk factor disclosures relating to ESG/sustainability matters from the Fortune 25, and here is timely news about those disclosures. Matt Levine reported that retailer Target was sued last year for securities fraud because “in 2023, Target Corp. did a Pride Month marketing event that led to a conservative backlash and boycott. Target’s stock went down.” The suit claims that Target lost $10 billion in market value between May 18 and 28, 2023 but did not disclose to investors the potential material business risk posed by the 2023 event and therefore misled investors.
Levine writes:
“Target never hid its Pride Month event, and its 2021 annual report included a risk factor that pretty clearly warned investors about this sort of risk… that the Pride Month campaign might lead to boycotts.
Target asked a judge to dismiss the case because it didn’t say anything misleading, and last week the judge declined in kind of a wild opinion saying that, sure, Target warned investors that its DEI policies might lead to boycotts, but it didn’t warn them specifically that this campaign would lead to boycotts…”
Excepts from the ruling include:
“the Court disagrees with Defendants’ argument that this case should be dismissed because Target made a general disclosure that reputational incidents could affect its business. Target’s 2021 disclosure, for the most part, focuses on its general reputation and how negative publicity could result in harm to the business…
The disclosure neither mentions Target’s upcoming 2023 Pride Month Campaign nor Target’s plan to avoid any potential reputational damage or control negative publicity associated with the campaign…
The Court also disagreed with Target’s argument that shareholders understood the risk that it could be boycotted for pride campaigns because it had been boycotted for pride campaigns before…”
I’m no securities lawyer and I didn’t stay in a Holiday Inn Express last night (for those who remember those commercials), but I see two outcomes of this ruling: (1) it gets appealed, and (2) companies take a fresh look at their risk disclosure language, especially for ESG and climate matters that are generalized, inherently ambiguous or potentially hypothetical.
Applying the court’s logic to climate physical risks, companies would have to accurately predict each specific climate event location and damage potential before storms even form. That obviously isn’t possible, but tightening up overly-generic risk disclosure language on ESG, sustainability and climate matters is still prudent.
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