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Can ESG disclosures get you sued?

The good news: Historically, lawsuits brought against companies that have made vague or aspirational statements typically have failed in the courts

green lawsuit


Reprinted from GreenFin Weekly, a free weekly newsletter. Subscribe here.

Last month, a cabal of tech companies asked the U.S. Securities and Exchange Commission to keep mandatory ESG disclosures out of official public filings.

Everyone expects the SEC to make climate change and other ESG reporting mandatory, and those tech giants  —  Amazon, Alphabet, Autodesk, eBay, Facebook, Intel and Salesforce  —  said in a joint letter they support this. What they don’t support is including the information in filings such as annual 10-Ks and quarterly 10-Qs because, they say, it could open them up to costly lawsuits.

"Given that climate disclosures rely on estimates and assumptions that involve inherent uncertainty, it is important not to subject companies to undue liability, including from private parties," they wrote in the letter. It was one of more than 400 comments submitted during the SEC’s 90-day public comment period on mandatory ESG disclosures that ended June 14.

I’m not an attorney or even a legal journalist, so anyone looking for that sort of expertise on ESG litigation risk might want to consult the abundance of lawyerly articles and reports that are just a click away — including the ones hereherehere and here — rather than read my ramblings.

What I can offer on the subject is a bit of totally unlawyerly tough love. In other words, guys, suck it up.

Yes, estimates and assumptions involve inherent uncertainty. Yes, filed disclosures are held to a higher regulatory standard than information simply "furnished" to the SEC or posted on a company’s website. And yes, that could mean increased litigation risk.

Historically, lawsuits brought against companies that have made vague or aspirational statements typically have failed in the courts.

But here’s the thing: We long ago steamrolled past the point when companies could justify treating the climate and biodiversity crises as some distant abstraction, distinct from corporate financial performance. In fact, our arrogant tendency to consider the planet’s natural resources an endlessly exploitable gift is what got us into this mess in the first place. 

I’m not an accountant either, so I’ll let one explain further. "The assumption that underpins the logic [for separating financial reporting and climate change reporting] suggests there are ‘free gifts of nature’ that a [company] is entitled to use without making compensation payment for the cost imposed upon society as a result," Richard Murphy, a professor of accounting at Sheffield University Management School and director of the Corporate Accountability Network, wrote last month in Financial News. "In accounting terms, the assumption appears to be that the costs of climate change do not need to be reflected in the financial statements that report profit or loss for a period, or upon a corporation’s balance sheet."

He calls this assumption "a mistake."

Murphy wrote the piece to comment on the International Financial Reporting Standards Foundation’s proposal to create a new organization — the International Sustainability Standards Board — to establish global climate reporting standards for multinational corporations. Proposing to separate sustainability reporting from the foundation’s core work clearly indicates "they do not understand the problem that climate change is really posing for financial reporting," Murphy argues.

Right to know

While the piece doesn’t mention the SEC, his argument certainly applies to the decisions the U..S. agency faces as it sorts out the details of how it will handle mandatory ESG disclosures. No matter the oversight body’s acronym, consumers and investors have the right to know the negative climate impacts and risks of the companies they support with their dollars — for a lot of reasons, including the fact that these impacts and risks have become quite relevant to a company’s financial performance.

Beyond this, I’m not quite sure the tech giants’ litigation argument holds up as much as one might believe. Here’s why:

First, given the level of influence corporations have in Washington, I find it hard to believe these regulations will be written without some sort of legal safety net for companies attempting to disclose forward-looking ESG information based on, as the tech companies put it, estimates and assumptions. There’s no shortage of corporate allies in D.C., and SEC Commissioner Elad Roisman already has publicly supported including a safe harbor provision in ESG disclosure rules overseen by the agency.

Second, historically, lawsuits brought against companies that have made vague or aspirational statements typically have failed in the courts, which have concluded that such statements cannot be false, misleading or material to a reasonable investor, and therefore are not actionable. (In fact, despite their warnings about increased ESG litigation risk, the lawyerly folks repeatedly note that most lawsuits related to false advertising, greenwashing, climate reporting, etc., go nowhere.)

So as long as any forward-looking estimates, projections and targets are carefully worded and include appropriate disclosures, which we all know corporate lawyers are perfectly capable of crafting, it’s also difficult to believe the courts will be overflowing with frivolous ESG disclosure lawsuits, and even less believable that we’ll see such lawsuits succeed.

The recent Latham & Watkins ESG Litigation Roadmap does include a few examples of successful litigation — against British Petroleum, American coal producer Massey Energy and Brazilian mining company Vale SA — related to false statements under U.S. securities laws. In each case, the companies had claimed in reports to the SEC and elsewhere that, following various accidents (some lethal), they were committed to safety and were implementing safety improvement measures. When subsequent accidents happened — the Deepwater Horizon oil spill that killed 11 workers, an explosion that killed 29 West Virginia coal miners and a dam breach at a Brazilian mine that killed 270 people, respectively — plaintiffs were able to show the companies’ statements on safety did not reflect their actions. In other words, they were lying.

The fact that L&W’s examples are egregious cases of neglect that resulted in horrible tragedies, not weightless lawsuits brought by disgruntled employees or vindictive investors, indicates that even with the heightened regulatory scrutiny that comes with U.S. securities law, companies rarely lose court cases related to public ESG statements. Unless, that is, they blatantly lie about how much they care about their employees and the environment and then fiddle while everything burns.

Of course, lawsuits can be costly even if you win or settle, but you know what else is increasingly costly? Looking like a disingenuous greenwasher. Which, regardless whether true, is exactly the impression companies give the public and their investors when they object to ESG transparency.

You can claim all you want that your ESG disclosure information is on your website, but the headline "Top tech groups try to dilute ESG disclosure rules" is still out there.

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