Company ESG Initiatives – How Good Intentions May Create Litigation Risks | USA

For a variety of reasons, companies are increasingly thinking about and proudly sharing their Environmental, Social, and Governance (ESG) efforts. Corporate focus on this bundle of issues has skyrocketed during recent years, as has (not coincidentally) the public’s expectation that companies address these matters transparently. Many companies voluntarily display their efforts in the form of social responsibility or corporate sustainability reports, or through statements on websites and social media.

While these statements are largely voluntary, momentum is building for mandatory ESG disclosures. For example, though the SEC does not currently categorically require ESG disclosures, it may soon do so under a proposed rule requiring registrants to disclose climate-related risks, and its Division of Enforcement listed “Greenwashing” in its 2022 Examination Priorities. The trend is the same outside of the US; as of 2024, Canada will require banks and insurance companies to disclose their climate-related risks. Europe is marching to the same beat.

As expected, there are litigation risks associated with corporate ESG activity. This article will briefly explore two of these risks: Greenwashing claims, and lawsuits challenging the implementation (or lack thereof) of diversity, equity and inclusion (DEI) initiatives. 

Keurig marketed coffee pods as “recyclable,” Starkist promised consumers that its tuna products are 100% “dolphin-safe,” and Vital Farms, an egg seller, described its operations as “ethical” and “humane”, posting photos of happy hens grazing in green grass. These companies have all been sued under various consumer protection theories for “greenwashing”, an accusation that a company falsely represents its business practices as more environmentally friendly than they really are.

Greenwashing claims are on the rise, and companies need to cautiously consider whether their actions match their words. Over the past few years, large public companies have been hauled into court by government agencies and investors on allegations of misrepresenting the extent to which their activities are “green”.

For example, in 2021, investors filed a class action against Danimer Scientific, Inc., a plastics company that unveiled a plastic substitute that it claimed to be totally biodegradable, a statement that investors claimed was false. Exxon Mobil is facing a securities fraud class action suit in Texas, with shareholders alleging Exxon made materially false statements regarding its oil and gas reserves; the Attorney General of Massachusetts also has Exxon in her crosshairs, alleging that it fraudulently concealed the risks posed by increasing greenhouse gas emissions from investors and consumers. 

As the public, investors, and consumers become increasingly curious (and demanding) about how companies address environmental issues, greenwashing litigation – which is often motivated by a desire to change conduct or raise public awareness rather than to obtain money damages – will continue to increase. Companies need to be precise and careful in trumpeting their green achievements.

Companies are adopting DEI initiatives to move the diversity needle in the workplace. These initiatives are often well-intentioned but come with litigation risks.

In November 2021, a former AT&T employee sued for age, race, and gender discrimination in the workplace, alleging the company’s DEI efforts included an attempt to make leadership roles “less white” and “less male”. As evidence, he pointed to an internal email from the company’s CEO which included bar graphs showing company race and gender demographics, accompanied by a note that there needed to be more focus on “attracting and retaining diverse employees throughout our organisation, especially at our senior levels”.

In July 2022, Amazon was sued for allegedly discriminating “against whites and Asian-Americans, and in favour of black, Latino, and Native Americans” in selecting its delivery service partners. The plaintiff cited Amazon’s “Commitment to Diversity”, posted on its website, which announced a Diversity Grant of USD1 million “to help reduce the barriers to entry for Black, Latinx, and Native American entrepreneurs”.

In October 2021, a North Carolina jury awarded a white, male former hospital executive USD10 million after he presented evidence that the number of white employees in senior leadership positions decreased by almost 6% over the prior few years, while the percentage of “diverse leaders” increased over that same span.

Not all of the litigation risk comes from “reverse discrimination” claims; it may also come from shareholders attempting to hold boards accountable for failing to implement DEI initiatives. In August 2020, NortonLifeLock was hit with a shareholder derivative lawsuit alleging that, despite public statements about the company’s commitment to diversity and inclusion, it “has made no real efforts to promote diversity on its Board and among its senior executives”. Similarly, OPKO Health, Inc. faced a shareholder derivative suit claiming that the company failed to achieve diversity on its board and executive management, despite publicly patting itself on the back for the diversity of its staff.  

While these cases often face uphill battles for a variety of reasons (eg, because company statements are seen as “aspirational” or “puffery” and no reasonable investor would rely upon them), because the motivation for these claims may be to simply shine a spotlight on company practices rather than to ultimately prevail on the merits, there is no sense that these suits are slowing.

Companies should approach ESG initiatives with eyes wide open. Though it is tempting to eagerly pursue initiatives that are generally viewed as social net-positives, leadership must be attentive to crafting accurate messaging and ensuring that their ESG programs are implemented thoughtfully, while knowingly balancing the risks and rewards.