General counsel are navigating a widening divide between Republican- and Democrat-led states over environmental, social, and governance issues, with growing concerns about ESG “dispute exposure” from regulators, attorneys general, and others.
Red and blue state polarization—over ESG-related restrictions on carbon emissions standards, diversity, equity and inclusion policies, workers’ rights and other matters— is forcing in-house counsel leaders to have hard discussions with executive teams and boards to clarify company values, adding to their already demanding jobs. Now, legal teams are reacting by scrutinizing company programs, public statements, regulatory filings, and even marketing messaging for statements and phrasing that could trigger lawsuits from either side.
Sonia Galindo, executive vice president and general counsel at KBR, Inc., a Houston-based engineering solutions company with more than 34,000 employees globally said “states have taken very different positions” on ESG-related employment issues like diversity and inclusion programs or protections, non-competes and non-solicits. “Quite frankly it has gotten a little heated in that regard,” she said.
Current and recent in-house lawyers said the conflicts between the states mean they have to worry that companies’ efforts to stay in compliance with one state’s rules on carbon emissions don’t prevent them from doing business in another state that imposes restrictions on businesses that “boycott” the oil and gas industry. Additional complexity comes from the need to comply with evolving federal rules, and for multinational companies, EU and UK ESG regulatory agendas. For example, Galindo said her legal team spends a great deal of time “around collecting and managing the information that we have to report” for various agencies at the state, federal, and international level that are not aligned.
Companies are also facing lawsuits from attorneys general, shareholders, and consumers who feel their corporate ESG efforts are misleading, don’t go far enough, or go too far.
In November 2023, for example, Democratic New York Attorney General Letitia James filed a lawsuit in New York State Supreme Court in Erie County against PepsiCo Inc., alleging the company polluted the Buffalo River with plastic bottles and wrappers, while acknowledging a plastic pollution crisis on its website. James also alleged that the company “misled the public about its efforts” to combat the crisis. The company responded that it is “serious about plastic reduction and effective recycling and has been transparent in our journey to reduce use of plastic and accelerate new packaging innovation.”
A month earlier, Republican Texas Attorney General Ken Paxton said the state would probe financial services companies that were members of the UN-convened Net Zero Banking Alliance to see if they violated a Texas law prohibiting companies from contracting with “businesses that boycott energy companies.”
Taylor Pullins, a partner at White & Case in Houston, who served as managing counsel, director of sustainability, and assistant corporate secretary at oil-and-gas producer Noble Energy until January 2021, said: “What I didn’t see in 2017 through 2020 was formal anti-ESG pushback. In discussions you may have heard opposing views, but you didn’t see state attorneys general bringing claims or taking an anti-ESG stance. The more politicized posture that synonymizes anti-ESG with anti-woke is a creature of the last couple of years.”
Outside counsel at major firms with ESG, governance and asset management practices said they are getting more calls from legal departments requesting help with composing and vetting public statements and regulatory filings with respect to ESG, including Securities and Exchange Commission 10-K filings. They said that is not only because of the tug-of-war between red and blue state regulators in the US, but also the US’s increasing divergence from the EU’s determined ESG rulemaking .
An annual survey by Norton Rose Fulbright of 400 corporate counsel in the US and Canada conducted in September and released on Jan. 17 found that 24% of respondents said their ESG dispute exposure increased in the last year, and 27% expected more exposure in 2024. Pro-ESG regulatory pressures drove the trend (40%) followed by stakeholders with anti-ESG sentiment (37%).
It’s Not Easy Being Green
As an in-house counsel at The Clorox Company from 2015 to 2022, Jon Solorzano helped to establish and head the company’s ESG strategy and stakeholder engagement. He said that what most often kept him up at night was the risk of “greenwashing.”
Solorzano, now counsel at Vinson & Elkins and co-head of the firm’s ESG task force, said the fear stemmed from the idea that “companies have figured out that being green sells with their consumers or employees, and companies have not historically had a robust process for ensuring all their claims are substantiated, or have been properly reviewed by counsel.” He cited a situation where, for instance, a company’s use of carbon credits to achieve net-zero emissions elicited a greenwashing allegation by an environmental advocacy group.
“A well-meaning but injudicious social-media manager, for example, could have made a statement in a post, and now you have to clean up the claim because the company does not have substantiation to support that. Those are issues GCs need to be mindful of,” said Solorzano, former senior director of legal and corporate development at Clorox.
Much of a GC’s ESG-related work in the current fraught political environment involves making sure that corporate statements are supported by data and tied to the company’s financial well-being, the attorneys said.
David Lopez, a corporate, securities, and ESG partner at Cleary Gottlieb, said general counsel “should be sure that the company’s corporate policies can be supported clearly by an economic and business rationale.” He added, “that is the best way to balance the needs of a company to support all the needs of stakeholders while minimizing the risk from unwanted political and cultural commentary that would be distracting to the business.”
The investor relations department can help the executive team and the board by identifying trends in investor inquiries. Some companies also involve their outside counsel in these discussions and trainings, Pullins and Solorzano said.
KBR’s Galindo said: “When I think about our communication, marketing, legal and HR we all work very closely on any public statements, our sustainability report, our other reports, so we are intentional and thoughtful about what we are saying and how we are saying it.”
She said her company’s stakeholders, including its 10 largest shareholders, are aligned in their values and so thus far the main challenges for the legal department come from just staying up-to-date and in compliance with so many different regulatory authorities at the federal, state, and local levels and internationally.
“We are a values-based organization and so our customers, our employees, and our shareholders are very aligned to those programs. And also, we are very intentional about our programs. Any kind of program we roll out we really think about how to make sure we are doing it in the most fair and highest integrity way,” she said.
Galindo said the legal department also analyzes the applicability of new laws and court rulings to company operations. For instance, after the US Supreme Court in June 2023 struck down race-based affirmative action in higher education, 13 attorneys general sent a letter to Fortune 100 companies threatening legal action over race-based employment actions. The department had to determine whether the ruling was applicable to the publicly traded company.
Corporate counsel for asset managers have a different set of ESG concerns from other types of businesses.
“Asset managers are very focused on ensuring that messaging about investment philosophies and ESG won’t inadvertently get them prohibited from, or cause difficulties, doing business in certain states,” said Joshua A. Lichtenstein, a Ropes & Gray partner in New York, who heads the firm’s ERISA fiduciary practice.
Recently some companies have decided to downplay ESG in corporate and shareholder communications, which some critics have dubbed “greenhushing.”
A recent Bloomberg Law analysis found that Standard & Poor’s 500 companies have reduced mentions of ESG in earnings calls 30% since 2021. Similarly, some companies have scrubbed references to DEI in regulatory filings and websites, and altered diversity policies and programs under pressure from conservative activists, and Republican state attorneys general after the US Supreme Court’s ruling on affirmative action.
Daniel F.C. Crowley, a partner in the Washington, D.C. office of K&L Gates, where he leads the firm’s global financial services public policy practice, said that one corporate crisis that calls for highly specialized counsel is when a company official is called to give public testimony in a legislative hearing, especially Congress.
“Hiring a courtroom litigator to represent you before Congress is like asking your psychiatrist to perform open-heart surgery,” said Crowley, who formerly led government relations at the Investment Company Institute.
“The problem is that lawyers who don’t regularly work with Capitol Hill don’t know what they do not know, including the fact that they are navigating a political minefield,” he added.
ESG Support, Then Backlash
In-house counsel leaders said corporate support for ESG goals was relatively uncontroversial for two decades. Shareholder initiatives supporting green policies and sustainable investing funds increased.
But in 2020, after the George Floyd protests, many companies made public attestations in ads and social media supportive of social and environmental justice, often under pressure from their employees and customers.
Then came the backlash, especially in the United States.
For instance, in May 2023, 23 Republican-led states’ attorneys general sent a letter to the Net Zero Insurance Alliance seeking information about insurers’ membership in the group, leading 12 of 28 to drop out.
Additionally, anti-ESG shareholder proposals grew to 79 from 30 from 2021 to 2023, per a 2023 study by the Sustainable Investments Institute, and most were about DEI rather than the environment.
That same month, in Florida, Gov. Ron DeSantis signed legislation “prohibiting the use of ESG factors by state and local governments when issuing bonds” and “prohibiting state and local entities from considering or giving preference to ESG as part of the procurement and contracting process,” among other provisions.
[For a state-by-state map of ESG laws and regulations in the US and other up-to-date information, click here.]
Despite the ESG pushback, Solorzano said sometimes companies must embrace controversy.
“It is incumbent on businesses to understand their stakeholders and do things with some commitment,” Solorzano said. He said businesses need to “be selective and be strategic” when taking a stand.
The most common allegation by shareholder groups and red-state politicians against corporate ESG policies is that ESG factors are non-pecuniary. But, Solorzano argues, “the whole argument is a bit of a red herring.”
“These are pecuniary issues if you broaden what is a reasonable investment timeline. If they hold an asset for 10, 20, 30 years it is in my pecuniary interest to make sure that climate change, DEI are considered,” Solorzano said.
Solorzano said by “seeking not to make anyone angry,” a company could cede market share to a competitor. “It is not necessarily wise for a company to shut up and stay out of it,” he said.
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