As more regulatory agencies develop task forces focused on environmental, social, and governance oversight, the potential for ESG-related enforcement actions is steadily increasing.
For example, the Securities and Exchange Commission recently created a Climate and ESG Task Force. The Southern District of New York launched a civil rights unit in its criminal division, and the Environmental Protection Agency instituted the Office of Environmental Justice and External Civil Rights.
Each newly minted federal regulatory task force will give rise to greater ESG-related enforcement action.
But governmental actions are simply one aspect of the ESG landscape that will be very active this year. For example, we also expect increased shareholder derivative lawsuits, consumer protection litigation, suits by environmental advocacy groups, employment discrimination claims—individual and class—and other private action litigation.
Green marketing, including promotion of environmentally friendly products or services, is under increased scrutiny. Although consumer goods have long been the target of allegations of false or misleading marketing claims, these claims are on the rise in the green marketing space.
As consumers become more interested in the environmental attributes of products and services, they may seek to base purchase decisions on advertised “green” benefits.
Although some marketing jargon may seem benign at first glance, companies should be cautious of overstating, misleading, or providing inaccurate environmentally friendly claims that could give rise to litigation. This is understandably challenging in the evolving ESG landscape.
For example, consumers have an increased expectation of transparency as it relates to carbon emissions reduction, but this can be achieved directly, by reducing emissions from manufacturing, sourcing, and transport.
Or, it can be achieved through the purchase of carbon offsets—carbon reduction credits that represent the impact of beneficial projects somewhere else in the world—which are applied to reduce a company’s net emissions.
Danone Waters is litigating a consumer protection lawsuit alleging that that the “carbon-neutral” claim on the label of Evian water is false and misleading.
The plaintiffs assert that a reasonable consumer would interpret the carbon-neutral label to mean that no carbon dioxide was released in the manufacturing of Evian products—which is most likely unreasonable, given the likelihood that no product production can claim to be totally carbon-free.
Danone Waters achieves carbon neutrality by purchasing carbon offsets. However, the plaintiffs have attacked the carbon-offset verification process as unreliable.
As consumer expectations around carbon neutrality evolve, companies may have to revise their carbon neutrality claims to maintain customer trust and reduce potential litigation risks.
Similarly, words such as “clean,” which were once perceived as innocuous green marketing jargon, are also false advertising claims.
Currently, a utility company is fighting claims that it deceptively advertises natural gas as a “clean” source of energy, when natural gas combustion emits methane—a greenhouse gas that has been linked to climate change.
Because green marketing consumer expectations are evolving, companies should work in concert with legal counsel to remain on par with current market trends.
Companies that pollute continue to be the target of lawsuits brought by environmental advocacy groups and state agencies.
In recent years, states and cities brought several lawsuits against oil and gas companies alleging that these companies knowingly made false and misleading statements regarding the extent their products contribute to pollution.
An environmental advocacy group recently sued a manufacturing company claiming that its production facility was polluting the Merrimack River in violation of the Clean Water Act.
These actions reflect the importance of companies understanding their pollution output and devising a sustainable plan with various stakeholders to reduce that output over time.
Diversity, Equity, and Inclusion
ESG-related employment discrimination and shareholder derivative lawsuits related to DEI missteps are also increasing. Recently, a proposed class action lawsuit alleged that a social media company’s recent layoffs disproportionately affected women.
Layoffs under any circumstance are tough, and ripple effects may not be revealed until months or years later. Yet, it is imperative that companies adopt controls to ensure layoffs do not produce an unintentional, disproportionate impact to protected classes.
Since 2020, over a dozen corporations have faced shareholder derivative lawsuits based on their allegedly misleading statements about their commitment to diversity and equity.
These lawsuits typically allege that the corporation’s directors breached their fiduciary duties by failing to ensure the corporation complied with anti-discrimination laws or by authorizing false statements in public materials regarding the corporation’s commitment to diversity and inclusion.
Although these derivative lawsuits have faced significant legal obstacles and many have been dismissed, shareholders continue to pursue these claims. DEI is no longer solely the responsibility of diversity officers—it is an important ESG risk management function.
DEI missteps or failings can lead to costly private litigation, which can be avoided with proper controls.
These cases emphasize the importance for corporations to appropriately embed ESG principles into their business operations and adequately reflect their commitment to customers, employees, and other stakeholders.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Write for Us: Author Guidelines
Christopher Cole is an intellectual property partner focused on protecting technology and brands and leads the advertising, marketing, and promotions group at Katten.
Johnjerica Hodge is a litigation partner focused on ESG-related issues and is co-chair of the ESG risk and investigations group at Katten.
India Williams is a litigation partner who counsels clients on complex global finance deals among other matters and is co-chair of the ESG risk and investigations group at Katten.
Katten’s Ally Jordan contributed to this article.