Following ESG and sustainability stories daily is an exercise in emotional management. The highs and lows around this topic intersect with nothing less serious than our foundational social contracts for civil society through to our very survival.
These issues go back and forth from progress to reversion everywhere you look in a never-ending cycle of perspective, nuance, and context. For those who understand ESG, the value of transitioning, and supporting our planet and its people, the challenges against progress can range from the ridiculous to the concerning.
Amid the removal of ESG from some corporate websites and the shutdown of unproductive DEI programs, a new trend has emerged over the past few months. ESG has moved into litigation. As it turns out, the courts may be where progress gets made. But before we get into progress around sustainability, Governance, and transition risk, it is essential to recognize that the legal door swings both ways.
Letâs start with an anti-ESG and genuine head-scratching case.
Caveat emptor
One of the conservatives' favorite chants over the summer was âGo woke, go broke,â in response to Bud Light and Targetâs woes around woke marketing campaigns and products. These examples seem like they might become conservative case studies and cautionary tales in, ironically, stakeholder management. I say ironically because both companies are victims of stakeholder capitalism, a key âwokeâ tenant, but it isnât so simple.
While the âanti-wokeâ criticisms have died down in the past few months, Targetâs stock has been down since Pride Month, when the retailer faced threats from conservative consumers for its Pride campaign and products. Worker safety was a primary concern.
However, many reasons a companyâs stock goes up and down have little to nothing to do with its wokeness. For example, Targetâs profits were reportedly down 54% in the third quarter of 2022, with the company warning of a sluggish holiday season, months before Pride Month, due to inflationary pressures. In the chart above, you can see what appears to be a significant bump right around the time of COVID and an adjustment to right around pre-COVID levels. The Motley Fool warned about this exact scenario in July 2021.
Yet, America First Legal Foundation, a nonprofit led by former Trump adviser Stephen Miller, launched a lawsuit against the company. The issue is whether or not the company deceived investors about the risk of its DEI policies. Stated another way, a conservative group is suing a company over a conservative reaction that they believe adversely affected the stock price.
I read a lot of CSR reports, and Iâm hard-pressed to remember a company that lists its DEI efforts as a risk. The CEO of Target touted its DEI efforts and community engagement for its growth over nine years. Further, an investor who spends a fraction of time researching can quickly find Targetâs DEI page, which makes this claim:
We want to create environments where all guests feel welcome and see themselves represented throughout their experience with Target, including our marketing and with the products we sell in our stores and online.
Targetâs Pride campaign during Pride Month shouldnât have surprised any reasonable investor based on this inclusion statement. With every Fortune 100 company committing to DEI, the pool of defendants is now vast, and any misstep or backlash might find a foothold in that focus.
However, for those on the pro-ESG side, a comparable lawsuit has been filed against Fox Corporation. New York Cityâs pension funds and the State of Oregon have filed a lawsuit against the company for the risk of exposing itself to defamation claims tied to its false narrative of the 2020 election outcome. ICYMI: Fox settled a defamation claim for $787.5M with Dominion Voting Systems. Dominion isnât the only voting system case, as Smartmatic also sued the company.
Like the Target litigation, any pension fund with a long-term view should probably have known what they were getting into with Fox and recognized their editorial oversight approach, a shared practice across media companies (per the link above).
There are a few critical differences in the cases. While both represent a Governance oversight claim, the Target lawsuit has pushed a Social opportunity (capturing the Pride market) into a Governance risk, primarily through its stakeholder reaction. Overall, I believe this will be a difficult case to prove. The Fox Corporation claim, however, is based on a renewing choice that Fox makes daily and appears to be perpetuating.
Meanwhile, climate litigation is doing a thing
So, outside of Social and Governance lawsuits, Environmental litigation is hitting its stride. The question people appear to be asking lately centers around the responsibility of the hardest-to-abate sectors for our current and future climate crisis.
In other words, should oil and gas/energy companies be held accountable?
Letâs start with the future. Last month, a judge in Montana sided with young activists around new fossil fuel projects. The central issue was that permitting for development projects was not required to consider the effects on the climate. The activists believe it should, and the judge agreed. While the ruling is not legally binding, it is a big win for future cases. Unfortunately, the verdict now heads to the conservative-controlled State Legislature for action, but a win is a win.
However, letâs rewind the clock regarding the current state of affairs to one of the most interesting (and logical) lawsuits to emerge in this space. In 2015, a Peruvian farmer, SaĂşl Luciano Lliuya, launched a lawsuit against Germanyâs largest utility, RWE. The basis of the claim is that climate change is causing the glaciers around a local lake to become unstable, leading to potentially catastrophic flooding.
Hereâs the logic:
Every company contributes to climate change, but some significantly more than others.
Emissions are not localized, but there are localized effects, as emissions impact climate change.
A 2014 study deconstructed the energy sectorâs contribution to global emissions. RWE was determined to have contributed to .47% of global emissions.
Therefore, the farmer is seeking .47% of the cost to protect his local area in Peru.
In effect, this lawsuit is a forcing function of loss and damage, which has been a financial mechanism for the Global North to pay for adaptation measures in the Global South for years but remains wildly underfunded.
Now, keep in mind this logic becauseâŚ
The lawsuits get bigger
Last week, the WSJ dropped a bomb, which frankly should have surprised no one, that Exxon Mobil had an internal strategy to combat the narrative of climate change. There are already several lawsuits against Exxon and others about their contribution to climate change related to localized effects, including recently, the Maui wildfires.
But then, on Friday, California dropped an even bigger bomb. The governorâs office announced that the state is suing five energy companies: Exxon, Shell, Chevron, ConocoPhillips, and BP, including the American Petroleum Institute.
NOTE: I spot-checked a few of their 10Kâs and found that many recognize climate and litigation risk as a concern, but nothing specific around anything of this scale. If you are interested in an industry that understands litigation well, read a tobacco companyâs 10K.
Like Lliuya, this lawsuit seeks to have energy companies pay for their share of damages from climate change but also aims to stop these companies from polluting, levy fines, and collect punitive damages.
Stopping companies from polluting is an all-encompassing ESG risk. While Iâve maintained that we canât simply shut fossil fuels off due to emerging economies, energy companies need to hasten their transition more than they are.
If either lawsuit is successful, it will set an unbelievable precedent on a companyâs externalities and accountability, opening the door for litigation everywhere, wherever extractive value is taken from our planet or its people. It isnât just energy companies that need to pay attention, but any company does for three reasons at least:
Capitalism is largely extractive, which means new circular models may develop.
These lawsuits represent an opportunity for every company to pivot around Governance to embrace a responsible transition.
No company wants to be on the receiving end of global litigation for its negative contributions and needs to act now to account for its impact.
Companies need to be working on their transitions. While it is unlikely every company of every size will be sued, there is the potential for Environmental considerations to become priced in. These things are much easier said than done, yet appear to be new costs of doing business. In the meantime, it seems the global legal systems will have a few years to hash this out.
A note to readers
Thanks for sticking with me over the past few months, as the volume here has waned. Iâm writing an ESG book for corporates with Kogan Page and just finished the first draft, so Iâm hoping to recover some time for the newsletter again, although Iâm not sure I can commit to weekly until the edits are done.
In the meantime, Iâve also started writing commentary pieces for ESGNews.com, which typically come out Sunday. Those âHow I See Itâ segments are concise compared to these, and I plan to continue doing both as time permits. Hereâs a sampling!
How I see it (first post about the Maui wildfires)
Barbie Movie Spotlights Brand Challenges, Profitability Amid Controversy, and Stakeholder Resilience
No Joy in Mudville. (about âElon Modeâ at the corporate level)