6 minute read
Between a rock and a hard place: The chilling effect of “anti-ESG” litigation
Between a rock and a hard place:
The chilling effect of “anti-ESG” litigation
n 2015, the then Bank of England Governor Mark Carney gave a landmark speech at Lloyd’s of London, warning of the “catastrophic” impacts of climate change on global financial stability.1
Climate change has been gradually rising up the agendas of regulators and corporations since then. New regulation have been introduced across the globe which require companies to take climate-related action, for example:
- Germany’s Act on Corporate Due Diligence Obligations in Supply Chains, which came into effect on 1 January 2023, requires in-scope companies to undertake environmental due diligence in their supply chain;
- The Vermont “Climate Superfund Act”, passed in May 2024, will require fossil fuel companies responsible for emitting a certain level of greenhouse gas (GHG) emissions in the state to pay into a fund which provides funding for climate change adaptive or resilience infrastructure projects in Vermont;2 and
- The EU’s Corporate Sustainability Due Diligence Directive (CS3D), which was published in the EU Journal on 5 July 2024, will require in-scope companies to prepare transition plans for climate change mitigation once it is transposed into national legislation.3
However, the “anti-ESG movement” has also been building, which pushes back against this regulation (‘ESG’ refers ‘environmental, social and governance’ considerations, which includes climate issues). It is centred in the US, and is led by Republican states with support from oil and gas majors, as well as lobbying groups.
These organisations have deep pockets and are not afraid to oppose proclimate policies in the courts, in lengthy legal battles. The number of such cases, categorised as “non-climate-aligned cases” by LSE’s Grantham Research Institute in their ‘Global trends in climate change litigation: 2024 snapshot’ report, is increasing in the US.4 At the same time, regulators are also being criticised for not doing enough on climate change: they are ‘stuck between a rock and a hard place’.
A striking illustration of this is the issuance of the US Securities and Exchange Commission’s (SEC) climate change disclosure rule, ‘The Enhancement and Standardization of Climate-Related Disclosures for Investors’.5 The final rule, published on 6 March 2024, will require public companies to disclose climate-related risks that have materially impacted, or are reasonably likely to have a material impact on the company’s business strategy, results of operations, or financial condition.
Finalisation of this rule took some time, after a draft was first published in March 2022. Its scope has also been reduced – for example, the SEC initially proposed to require disclosure of Scope 3 emissions (which refers to the emissions a company is indirectly responsible for, up and
down its value chain, including suppliers and consumers) but dropped this requirement after substantial criticism, for example from SEC Commissioner Hester M. Peirce.6
Nevertheless, even after the rule was watered down, the SEC has faced significant challenge for going too far: on the same day it was published, 10 Republican states issued a petition for its review, arguing that the new rule “exceeds the SEC’s statutory authority and otherwise is arbitrary, capricious, an abuse of discretion, and not in accordance with law”.7 Energy suppliers Liberty Energy Inc and Nomad Proppant Services LLC also issued a petition on 6 March 2024,8 and other Republican states and lobby groups followed suit throughout March.9
Meanwhile, environmental groups have challenged the SEC on the basis that it “needs to do much more”:10 the Natural Resources Defense Council issued a petition against the rule on 12 March 2024,11 and the Sierra Club did the same on 13 March 2024.12 While these two organisations have now withdrawn their petitions, they will focus their attention on advocating for better investor protections outside of court.13 The remaining claims have been consolidated and will be heard by the St. Louis-based Eighth Circuit Court of Appeals.14
This position between a ‘rock’ (those who criticise the SEC for going too far) and a ‘hard place’ (those who say the SEC does not go far enough on climate change) leaves the regulator in a state of paralysis. The SEC has voluntarily stayed the application of its climate disclosure rule indefinitely while a decision from the Eighth Circuit Court of Appeals is pending,15 and will likely be increasingly hesitant to introduce any additional climate-related regulation for fear of facing costly lawsuits.
The consequent uncertainty about whether and how the rule will apply is making it very difficult for businesses to prepare for change. The chilling effect of anti-ESG litigation in the US is therefore twofold: regulators appear hesitant to introduce regulation, and there is likely to be a slowdown in corporate climate action while companies navigate the uncertainty.
There are some indications that the anti-ESG movement is picking up in the EU and UK. For example, the scope of the EU’s CS3D had to be watered down substantially before it could be agreed on by Member States, after criticism from some governments and businesses in the EU that it went too far. Nevertheless, it remains to be seen whether the trend for anti-ESG litigation will spread from the US across the pond to the EU and UK. ■
Catríona Campbell
Associate, Clyde & Co.
(1) Mark Carney, Governor of the Bank of England, ‘Breaking the tragedy of the horizon’ (Speech at Lloyd’s of London, 29 September 2015) https://www.bankofengland.co.uk/-/media/boe/files/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability.pdf
(2) https://legislature.vermont.gov/Documents/2024/Docs/ACTS/ACT122/ACT122%20As%20Enacted.pdf
(3) Article 22 of CS3D
(4) Joana Setzer and Catherine Higham, ‘Global trends in climate change litigation: 2024 snapshot’ (Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, June 2024) 41, 52 https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2024/06/Global-trends-in-climate-change-litigation-2024-snapshot.pdf
(6) Commissioner Hester M. Peirce, ‘We are not the securities and environment commission - At least not yet’ (US Securities and Exchange Commission, 21 March 2022) https://www.sec.gov/newsroom/speeches-statements/peirce-climate-disclosure-20220321
(7) State of West Virginia et al v SEC, case number 24-10679, US Court of Appeals for the Eleventh Circuit
(8) Liberty Energy et al v SEC, case number 24-60109, US Court of Appeals for the Fifth Circuit
(9) State of Iowa et al v SEC, case number 24-1522, US Court of Appeals for the Eighth Circuit; Texas Alliance of Energy Producers et al v SEC, case number 24-60109, US Court of Appeals for the Fifth Circuit; Ohio Bureau of Workers’ Compensation et al v SEC, case number 24-3220, US Court of Appeals for the Sixth Circuit; State of
Louisiana et al v SEC, case number 24-60109, US Court of Appeals for the Fifth Circuit; Chamber of Commerce of the United States of America et al v SEC, case number 24-60109, US Court of Appeals for the Fifth Circuit
(10) ‘SEC financial disclosure rule is good for investors’ (Natural Resources Defense Council, 6 March 2024) https://www.nrdc.org/press-releases/sec-financial-disclosure-rule-good-investors
(11) Sierra Club et al v SEC et al, case number 24-1067, US Court of Appeals for DC Circuit
(12) Sierra Club et al v SEC et al, case number 24-1067, US Court of Appeals for DC Circuit
(13) Natural Resources Defense Council v SEC, case number 24-1623, US Court of Appeals for the Eighth Circuit; Sierra Club et al v SEC, case number 24-1633, US Court of Appeals for the Eighth Circuit
(14) State of Iowa et al v SEC, case number 24-1522, US Court of Appeals for the Eighth Circuit
(15) ‘The enhancement and standardization of climate-related disclosures for investors; delay of effective date’ (Federal Register, 12 April 2024) https://www.federalregister.gov/documents/2024/04/12/2024-07648/the-enhancement-and-standardization-of-climate-related-disclosures-for-investors-delay-of-effective
