The scope of environmental compliance/management issues has changed substantially from what was relatively predictable local, state, and federal environmental regulations. This relative predictability is no longer the rule. The PFAS issue alone is a significant cause for concern. However, increasingly, the wild card in environmental issues is regulation and litigation surrounding Environmental, Social, and Governance (ESG). This is becoming a concern to more and more people and companies as a potential liability due to its far-reaching scope.
Increasing ESG Lawsuits
In an August 10, 2023, article by Harvard Law School Forum on Corporate Governance, they stated that litigation and regulatory enforcement actions and threats related to ESG company policies, practices, and disclosures have been a point of focus. According to that article, “The topics encompassed by ESG, such as corporate diversity policies, workplace sexual harassment, and climate change-related issues, are not new areas for litigation.” However, the increased focus by companies on ESG issues has engendered more litigation by private litigants and heightened scrutiny by governmental and regulatory agencies.
According to an article by Harvard Law, the increased focus by companies on ESG issues has engendered more litigation by private litigants and heightened scrutiny by governmental and regulatory agencies (Photo by Manu Ros on Unsplash).
At the state level, attorneys general have brought actions challenging companies’ ESG-related disclosures. In People v. ExxonMobil Corp., the New York State Attorney General brought an action against ExxonMobil under state securities fraud laws. The claim was that Exxon made false and misleading disclosures about how climate change regulations could impact its operations and value. Their argument was that ExxonMobil’s vulnerability was significantly greater than its disclosures indicated. While the court held that the State failed to prove its securities fraud, the litigation lasted for years including a 12-day trial (Source: Harvard).
Lenders, Investment Advisors, and Management Firms Pressured
In a blog last year, we included news that the Securities and Exchange Commission (SEC) charged BNY Mellon Investment Adviser, Inc. for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that it managed. To settle the charges, BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty.
Earlier this year, Reuters reported that Oxfam, Friends of the Earth, and Notre Affaire à Tous sued BNP Paribas (a French multi-national bank) stating that “loans to oil and gas firms breach a legally binding duty in France to ensure its activities do not harm the environment.” BNP Paribas announced in May that it will stop its direct financing of new gas field projects.
The Global Management Consulting Firm, McKinsey, was named in a $51 billion lawsuit filed by Multnomah County in Oregon against the fossil fuel industry for its role in the deadly June 2021 heat wave that killed 69 people.
Also see the activist group, “Banking on Climate Chaos,” whose website castigates banks for lending to fossil fuel companies.
One of the more recent high-profile cases involved children suing the State of Montana over Montana’s State Energy Policy Act. A provision in the Act forbids the state and its agents from considering the impacts of greenhouse gas emissions or climate change in their environmental reviews. In ruling in favor of the plaintiffs, Judge Kathy Seeley states that “Plaintiffs have proven that as children and youth, they are disproportionately harmed by fossil fuel pollution and climate impacts.”
SEC Disclosure Rule “Impactful”
Quoting again from the Harvard article: “The volume of securities fraud class actions and shareholder derivative litigation will likely increase if the SEC finalizes the new climate-related disclosure rules as expected and proposes more detailed disclosures for human capital management issues.” That SEC disclosure rule, which will include Scope 1, Scope 2, and Scope 3 emission reporting requirements, is expected to be finalized this fall.
Lawyer, Taylor Pullins (White Case), said of the pending SEC Rule, “The SEC has proposed transformational rules regarding the disclosure of climate risks to public companies. When final rules are issued later this year, I predict they will be one of the more impactful rule changes of our lifetime.”
“Red States” Counter
At the other end of the political spectrum, conservative state attorneys general have countered the SEC ESG push. In March 2023, attorneys general from 21 states sent an open letter to 51 asset managers stating, “We are writing this open letter to asset manager industry participants to raise our concerns about the ongoing agreements between asset managers to use Americans’ savings to push political goals during the upcoming proxy season.”
In our August 23, 2022, blog, “Conflicting Views of ESG and Financial Institutions,” we covered some of these conflicts.
Commentary
Once viewed by some as a way to encourage more responsible environmental stewardship, ESG has morphed into a blunt instrument to force companies to commit to actions that ultimately can be destructive to the company.
As we shared previously, SEC Commissioner, Hester Peirce has been very vocal in her opposition to the current ESG efforts saying in part, “This commandeering of private capital in the name of ESG causes me grave concerns.”
Forcing disinvestment from fossil fuel development and refining will most certainly have consequences. From our read of the current and proposed ESG regulations, the use or investment of fossil fuels is strictly a negative accounting. There is no room for a company to add a positive to the balance sheet even if their use of fossil fuels clearly shows a positive impact to society.
Currently, 80% of the world’s energy is derived from fossil fuels, primarily because of their energy density, the ability to provide needed energy on demand, and its relatively inexpensive cost. Further, our society is energy intensive and leans heavily on energy for everything from our food systems to feed a growing global population and our modern, personal conveniences (computers, phones, entertainment, etc.).
By nearly every measure, we are not doing just better as a society, we are doing better to an astounding degree: feeding more people on less land, living longer, enjoying more scientific advancements, and as has been documented numerous times – climate related deaths have plummeted, dropping an astonishing 99% since 1920.
None of this is to say we should stop developing other sources of energy (including nuclear). However, the increase in litigation and burdensome regulations intended to rapidly end the use of fossil fuels and to force banks and fund managers to remove fossil fuels from their portfolios will likely have devastating consequences on the entirety of society.
We need well-reasoned plans to protect our environment without sacrificing human flourishing. Just as we have tackled numerous environmental challenges in the past, we can address energy needs effectively via logical application of human ingenuity.
For more information or for assistance with an environmental issue, contact Jeffrey Bolin, M.S. at 248-932-0228, Ext. 125.
Dragun Corporation does not use artificial intelligence in drafting our blogs or any other material.
This blog was drafted by Alan Hahn. Alan has an undergraduate degree in Environmental Studies and completed a graduate program in Environmental Management. He has worked in environmental management for 45 years. He has written hundreds of blogs and articles. His published work includes Michigan Lawyers Weekly, Detroiter, Michigan Forward, GreenStone Partners, Manure Manager Magazine, Progressive Dairy, and HazMat Magazine.
The blog was reviewed by Jeffrey Bolin, M.S. Jeff is a partner and senior scientist at Dragun Corporation. He is a published author, frequent speaker, and expert witness. His expertise in environmental due diligence, PFAS, vapor intrusion, and site assessments has led to projects in the US, Canada, and overseas. See Jeff’s Bio.
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