In previous blogs, we’ve discussed the importance of businesses taking the time to evaluate how ESG can help spur growth. In this week’s blog, we invited commercial litigator and ESG expert, Richik Sarkar, to share his perspective on rising trends in ESG litigation and his ideas to mitigate risk. 

 

Many authors have predicted the downfall of Environmental, Social, and Governance (ESG) investing to minimize investor fears. These accounts point to political and corporate pushback on recent Securities and Exchange Commission (SEC) climate rules, investigations of ESG funds, and hedge fund statements tempering governance expectations. Focusing on these issues risks missing the point. At its core, ESG is a stakeholder initiative – including shareholders, consumers, employees, communities, etc. - and these groups will not abandon their values after the Business Roundtable utilized their perspective to define corporate purpose. 

 

Two-Part Theorem

As a commercial litigator, I have a two-part theorem: (1) Business trends – especially those led by consumers and shareholders -- attract regulatory attention; and (2) Increased regulation triggers increased litigation. ESG is following these rules. (1) Tracking the massive growth of ESG investments and corporate proclamations exalting commitment to ESG, (2) Increased regulation triggers expanded litigation. For example: 

  • The SEC formed a Climate and ESG Task Force and has begun promulgating proposed rules.  
  • BlackRock has clarified that it will use the power of institutional “votes” against boards of directors not aligned with its ESG imperatives. 
  • ESG-focused hedge funds have forced board turnover through the proxy process. 

Consequently, enforcement and stakeholder litigation based upon regulatory, guideline, and rating failures, is increasing.  

 

These actions and suits focus on (a) false information material to investment decisions or (b) a company’s failure to act per their rhetoric adversely affecting a stock’s value. For example: 

  • Attorneys General have sued companies for allegedly misleading shareholders by not appropriately disclosing the companies’ understanding of climate change risks.  
  • The Federal Trade Commission challenges misleading green statements about products being biodegradable or otherwise sustainable.  
  • Greenwashing claims also trigger state laws and the federal Lanham Act, which prohibits companies from using advertising that misrepresents “the nature, characteristics, qualities or geographic origin” of goods and services sold. 
  • At least ten suits have been filed against public companies for failing to maintain diverse boards; despite their proclaimed commitment to diversity.  

Recommendations For Action 

Shoppers and investors spurred the desire for socially and environmentally positive products, feeding the inherent profit motive in “doing well by doing good.” Despite this, ESG has its business enemies. And while regulators may lose their political will to impose broad rule, once a litigation cycle begins, and checks are written, it will not end absent significant defense victories or governmental protections – both of which will take time to emerge. In the meantime, companies should: 

  • Monitor ESG disclosures and commitments in filings, reports, communications to employees, social media posts, media interviews, and website postings.  
  • Vet ESG statements for factual accuracy, context, and consistency. 
  • Qualify forward-looking commitments; they should be subjected to the controls and procedures process for SEC filings. 

Economic analysis of ESG issues will be largely academic, but managing shareholder ESG expectations to mitigate actual litigation risk will ultimately drive ESG’s impact on the corporate community.  

 

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About Our Guest Writer

A litigation, data privacy, and ESG partner at Dinsmore & Shohl, Richik Sarkar, is a courtroom advocate, boardroom strategist, and collaborative leader. Richik advises owners, executives, and boards in the retail, financial services, and industrial sectors concerning business litigation and disputes, ESG, data privacy, corporate governance, and regulatory investigations. He also helps lead Dinsmore’s national ESG practice and translates ESG guidance into legal and practical implications for clients. Richik’s diverse background brings a unique perspective to situations, as he quickly identifies business and vision gaps and deploys creative and pragmatic ideas and leverage to ensure success. The former Chief Privacy Officer of a private company, Richik, is a data privacy expert. 

 

Bonus Video!

You can also learn more by watching our video on this subject, What is a Fractional Sustainability Officer? Companies across America both big and small are formalizing their sustainability initiatives and E-S-G – environmental, social, and governance programs. To achieve results, companies often invest in new positions – the ESG Sustainability Manager or Coordinator to manage the process of creating and implementing strategy, ongoing communications and reporting, and stakeholder engagement. The truth is that one person probably doesn’t have all the skills needed for success. That’s why we developed Fractional Sustainability Officer services.