Consumers are increasingly expecting their favorite companies to prioritize – and publicize – Environmental, Social, and Corporate Governance (“ESG”) issues, from addressing their carbon emissions to being transparent about the labor practices in their supply chains. At the same time, “As evidence mounts that the financial performance of companies corresponds with how well they contend with ESG and other non-financial matters,” McKinsey & Company stated in a value-based sustainability report that investors are also “seeking to determine whether executives are running their businesses with these issues in mind.”
With this ever-growing focus on ESG issues from consumers and investors, alike, no shortage of consumer-facing companies, including those in various segments of the fashion and luxury markets, have been unveiling sustainability initiatives and in many cases, making voluntary disclosures about their efforts. As part of its 2025 Climate Action Strategy, for example, Levi Strauss & Co. has made elective commitments, such as its aim to source 100 percent renewable electricity, to reduce greenhouse gas (“GHG”) emissions by 90 percent in all owned-and-operated facilities, and to cut the GHG emissions of its global supply chain by 40 percent.
At the same time, Kering – the parent to brands like Gucci, Balenciaga, Bottega Veneta, and Saint Laurent, among others, and the pioneer behind the August 2019-launched Fashion Pact – revealed that it is “targeting a 50 percent GHG reduction” related to its own operations and [those across its] supply chain by 2025.” The French luxury goods conglomerate, which routinely ranks highly on sustainability-centric lists, such as the Corporate Knights’ Global 100 Index, for its oft-pioneering efforts, also asserted in 2019 that it is “committed to full carbon neutrality across the Group by offsetting [its] annual GHG emissions from 2018 [onwards] on top of all efforts to first avoid and then reduce them.”
In addition to publishing ESG-centric roadmaps on their websites for their various stakeholders to read, in a growing number of cases, companies are going a step further and incorporating ESG disclosures into their filings with the U.S. Securities and Exchange Commission (“SEC”). In a survey of the top 50 companies by revenue in the Fortune 100 that was published in August 2020, White & Case found that “every company surveyed increased its ESG disclosures in at least one category in their proxy statements between 2019 and 2020, and 21 companies (or 42 percent) also increased their ESG disclosures in at least one category in their annual report on Form 10-K between 2019 and 2020,” with top categories including human capital management, environmental matters (including energy and sustainability initiatives), corporate culture, and social impact, among others.
“Federal securities laws generally do not require the disclosure of ESG data except in limited instances. (That is expected to change given that the incoming Biden Administration has stated that it intends to require “public companies to disclose climate risks and greenhouse gas emissions in their operations and supply chains.” As such, while the practice of companies making their ESG-specific goals available on their websites and/or in government filings is firmly within each individual entity’s discretion as of now, voluntary ESG disclosures do not come without risk.
Potential liability may still arise from voluntary ESG-related disclosures that are “materially misleading or false,” according to Marsh & McLennan Companies, Inc. Chief Corporate Counsel Connor Kuratek, and Davis Polk attorneys Joseph Hall and Betty Huber. As a result, it is critical that companies be aware of the risks at play. “Even if voluntary, significant legal liability implications [remain] for those who do choose to make these disclosures,” they note.
As such, companies should ensure that the statements contained in ESG reports “are supported by fact or data and should limit overly aspirational statements, and [since] representations made in ESG Reports may become actionable, companies should disclose only what is accurate and relevant to the company,” they assert.
In addition to putting themselves at risk if the information that is disclosed in voluntary sustainability reports and SEC filings is not accurate, liability can creep up for companies if the often-marketing-centric ESG communications they publish on their websites – or declare in other types of communications – is inconsistent with the facts and/or figures that they make in their filings with the SEC. Hardly a purely hypothetical concern, the SEC’s Division of Corporation Finance Director William Hinman has held that “the SEC is ‘actively’ comparing the information companies voluntarily provide with the information disclosed in SEC filings.” Accordingly, White & Case encourages “companies [to] take steps to ensure that they have controls in place to effectively process, summarize, assess, and review the accuracy of all of their ESG disclosures,” and to ensure consistency among all of the data that they share no matter the medium.
Still yet, the risk of ESG-related litigation is expected to “increase amid greater scrutiny regarding companies’ ESG performance and higher expectations from stakeholders,” according to Latham & Watkins LLP’s Paul Davies, Arthur Foerster, Christopher Garrett, and Stacey VanBelleghem. Such anticipated growth in legal action is likely to cover “a broad range of ESG factors,” including climate change litigation. “Supply chain issues, greenwashing, and diversity [also] appear to be common topics for litigation, as stakeholders look to challenge companies whether there are material differences between public commitments and the actual position on the ground.”
In addition to potential liability that may arise from making ESG-related disclosures that are “materially misleading or false,” or otherwise inconsistent, Kuratek, Hall, and Huber assert that companies need to be aware that “the anti-fraud provisions of the federal securities laws apply not only to SEC filings, but also extend to less formal communications, such as citizenship reports, press releases and websites.” All the while, potential liability could arise from other statutes and regulations, such as federal and state consumer protection laws.
With the foregoing in mind, and in light of what many see as a growing global push for more rigorous and uniform disclosure practices in the ESG space, it is still relatively early-days for some companies when it comes balancing what to – and what not to – disclose and the level of detail they want to provide both on their own websites and to entities like the SEC. “Companies may see a benefit to voluntary ESG disclosures and/or face pressure from stakeholders demanding such disclosures,” Paul Weiss stated in a client note this summer, particularly as the practice of linking ESG practices (and promises) to marketing in order to lure consumers and grow enterprise value continues to be a strong draw in the modern market.
Ultimately, Paul Weiss asserts that companies need to consider “the potential materiality of known trends and uncertainties for purposes of their disclosures,” with the rising number of lawsuits, including ones that contest the legitimacy of companies’ claims compared to their actions on ESG fronts (some of which have been securities fraud actions), which “likely will become more prevalent, notwithstanding the SEC’s current position on ESG disclosures or any future shift to line-item requirements” with any voluntary disclosures they make.