ESG Investing and Securities Class Actions

Social media was envisioned to network people, and its development has shifted global perspectives and redefined the Information Age.  In securities class actions, social media has made it more convenient to issue notices for suits and to help investigations of potential witnesses, class members, and defendants.  But social media has revolutionized more than just logistics and data collection for securities cases: in the last couple of decades, the rippling effects of socially conscious movements have greatly impacted the Information Age, such as Environmental, Social, and Governance (ESG) investing.

ESG investing is a strategy which allows investors to participate in ethical investing, i.e., “putting their money where their values are.”[1]  Companies make ESG disclosures that investors use to screen potential investments, and these disclosures are broadly categorized based on three criteria:
•    Environment – the impact and policies the company has on the environment, which can range from the sustainability of supply chain to corporate climate policies and resource conservation.  Investments that prioritize this aspect are often referred to as eco-investing or green investing.
•    Social – human rights and the relationships of the company, which can range from labor and consumer practices to philanthropic efforts. Investments focusing on ethical and social justice themes are often referred to as socially responsible investing.
•  Governance – the management and leadership within the company, which can range from accounting and auditing methods to stakeholder accountability.  Historically, this aspect has had the most government regulation.

As more investors prioritize ESG factors, case law on materiality will need to be reexamined.  In securities cases, materiality relates to whether information would be significant to a reasonable investor’s trading decisions.[2]  Thus, the objective standard for a “reasonable investor” is evolving as investors become more concerned with ESG disclosures relating to social consciousness than economic assessments.  

Typically, courts have characterized alleged misstatements about ESG efforts as inactionable, i.e., opinions, puffing corporate optimism, or aspirational and forward-looking.  However, as ESG-related class actions increase, the chances for success increase.  The courts are splitting, and more statements are being found actionable.[3]  A few examples of successful securities class actions are:
•    Environmental – On November 2015, the Fundão dam containing toxic mud collapsed, causing catastrophic pollution to the environment, killing nineteen people and countless wildlife, and displacing hundreds more people in Brazil.  This case was a mixed bag of inactionable and actionable statements concerning “Values and Commitment to Health, Safety, and the Environment” and “Risk Mitigation Plans, Policies, and Procedures.”[4]  The Southern District of New York found that some statements in the latter category were representations of present or historical fact or were not “accompanied by” risk disclosures, and thus, actionable.  The suit was able to survive the motion to dismiss and later settled in 2021.
•    Social – On April 2010, twenty-nine people died in an explosion, and the resulting fire, of a West Virginian coal mine.  Contrary to the defendants’ assurances “that it had a strong company commitment to the safety of its miners,” it was revealed that over the last two years the company’s number and severity of violations were increasing, and it had the worst fatality rate and below average inspection performance in the nation.[5]  The Southern District of West Virginia found the misrepresentations actionable because “Defendants closely aligned their statements of commitment to safety to their productivity and success as a company” and the veracity of the statements could be determined from the context of the “past achievements and current goals.”  Thus, the motion to dismiss was denied, and the case was later settled in 2014. 
•    Governance – Codes of Ethics that contain directly contradictory statements may be found actionable.  For example, a company’s Code of Business Ethics stated that it “never offer[ed] or provide[d] anything of value…to inappropriately influence [healthcare professionals’] medical judgment” but it was revealed the company was actually engaged in an unlawful kickback scheme.[6]  In another case, a company had an “unwritten policy” of hiring uniformed officers to accept bribes even though its Code of Ethics “professed to ban sensitive payments whether lawful or unlawful.”[7]  Both cases have survived motions to dismiss and are currently on-going.

Companies are pushing back against increasing government regulations aligned with ESG aims.[8]  Political backlash on both sides is also influencing the effectiveness of ESG investing efforts.  Some critics have referred to it as “woke” capitalism, and admittedly, the current ranking system for ESG is unregulated.[9]  In 2022, Elon Musk posted critical comments on social media when Tesla scored lower than fossil fuel companies, and in 2023, CEO of BlackRock Inc Larry Fink, who was quite vocal about the movement, stopped using the ESG label.[10], [11]  Regardless, activist-driven litigation will likely continue pressuring companies and courts to be more conscientious about ESG factors throughout 2024.

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[1] Jefreda R. Brown (reviewer), What is Environmental, Social, and Governance (ESG) Investing?, Investopedia, Feb. 6, 2024, https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp; see also E. Napoletano, Environmental, Social And Governance: What is ESG Investing?, Forbes Advisor, Feb 1, 2024, https://www.forbes.com/advisor/investing/esg-investing/.

[2] See Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 38, 131 S. Ct. 1309, 1318, 179 L. Ed. 2d 398 (2011).

[3] Neal Brody & Robin Cantor, More ESG Class Actions Are Coming. Economic Analysis Can Help, thinkset, Oct. 4, 2023, https://thinksetmag.com/insights/more-esg-class-actions-are-coming-economic-analysis-can-help.

[4] In re Vale S.A. Sec. Litig., No. 1:15-CV-9539-GHW, 2017 WL 1102666 (S.D.N.Y. Mar. 23, 2017).

[5] See In re Massey Energy Co. Sec. Litig., 883 F. Supp. 2d 597 (S.D.W. Va. 2012).

[6] Holwill v. AbbVie Inc., No. 1:18-CV-06790, 2020 WL 5235005 (N.D. Ill. Sept. 1, 2020).

[7] Allegheny Cnty. Employees' Ret. Sys. v. Energy Transfer LP, 532 F. Supp. 3d 189 (E.D. Pa. 2021).

[8] Declan Harty, Wall Street strikes back: Firms slam Biden’s top finance cop with lawsuits, Politico, Feb. 2, 2024, https://www.politico.com/news/2024/02/01/gary-gensler-wall-street-showdown-00139045.

[9] Andrew Ramonas & Clara Hudson, Climate Reporting, ESG Wars Set to Dominate Boardrooms in 2024, Bloomberg Law, Dec. 28, 2023, https://news.bloomberglaw.com/esg/climate-reporting-esg-wars-set-to-dominate-boardrooms-in-2024.

[10] Eloise Barry, Why Tesla CEO Elon Musk Is Calling ESG a ‘Scam’, Time, May 25, 2022, https://time.com/6180638/tesla-esg-index-musk/.

[11] Saijel Kishan, ESG Investing Goes Quiet After Republican Attacks, Bloomberg Law, May 19, 2023, https//news.bloomberglaw.com/esg/esg-investing-goes-quiet-after-republican-attacks.