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Environmental, Social, and Governance (“ESG”) refers to factors which make up part of a company’s non-financial performance indicators found in marketing, pre-initial public offering (“IPO”) statements, and government filings alongside sustainability, environmental impact, and ethical social and business practices. Investors, consumers, and increasingly government entities use ESG to make decisions regarding their involvement with a company, and rely on the company’s own ESG disclosures to do so.

Calls for uniform reporting by regulators come as ESG disclosures in companies’ filings with the U.S. Securities and Exchange Commission (“SEC”) have significantly increased in recent years. With the rising popularity and growing need for companies to adopt sustainability measures, ESG disclosures provide a way for potential investors, consumers, and other interested parties to track a company’s sustainability initiatives.

Companies understand the importance of ESG – for the good of the world as well as for business margins – but are often confused on the best way to credibly report ESG progress to shareholders. BlackRock CEO, Larry Fink, agrees that uniform ESG disclosures are important. In his annual letter to CEOs in January 2022, he urged recipients to tailor their ESG report to comply with the standard established by one of many third-party sustainability reporting bodies, the Task Force on Climate-related Financial Disclosures (“TCFD”). However, an analysis of TCFD reporting still found that “voluntary disclosure commitments seem to suffer from… cherry-picking, in the sense that companies prefer disclosure on non-material categories.” (SSRN) Fashion companies such as Burberry, Kering, LVMH, H&M, Zara, and Hermes, among others have adopted the TCFD reporting guidelines.

Regulatory Interests/ Attention

  • Uniform Disclosures

Initiatives in the House of Representatives

In June 2021, the House passed H.R. 1187, or the ESG Disclosure Simplification Act of 2021. Rationale for this Act included the need for supply chain transparency, and a “clear criteria to measure corporate social accountability.” (King & Spalding) https://www.kslaw.com/news-and-insights/will-esg-disclosures-be-mandated-by-law-a-legislative-analysis The Act combines seven other ESG bills that were approved by the House Financial Services Committee in early 2021 and requires the SEC to create exact ESG disclosure standards.

Initiatives by the SEC

While members of the SEC recognize the need for a regulated, uniform approach to ESG disclosures, they also note certain challenges to developing such an approach. Former SEC Chair Jay Clayton stated in May 2021 that companies and investors can vary widely in their specific needs for disclosure data and analytics in accordance with their goals and decision-making. Former SEC Director of Corporation Finance William Hinman stated that “the very breadth of these issues illustrates the importance of a flexible disclosure regime designed to elicit material, decision-useful information on a company-specific basis.” The SEC has stated that it “can and should continue to adapt existing rules and standards to the realities of climate risk … and the fact that investors increasingly are asking for ESG information to help them make informed investment and voting decisions.” 

To begin the process of updating reporting requirements “to include material, decision-useful, ESG factors,” the SEC recommends that the Commission “undertake a series of outreach efforts to investors, Issuers and other market participants which could include roundtables, RFI and other actions.”

 In September 2021, the SEC stated that it will begin reviewing and investigating public companies’ ESG disclosures more closely.

On March 21, 2022, the SEC proposed changes to the rules governing climate-related disclosures in business’ registration statements and reports. If enacted, the rule will require disclosure about how the registrant governs climate-related risks, any specifically identified risks to the business and how these could materially impact financial statements, how such risks have in the past or are likely to impact the business, and the impact climate-related events such as weather and natural disasters could have on financial statements. SEC Chair Gary Gensler offered his support for the proposal, stating that “it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions.”

  • Companies increasing amount of ESG disclosures

Many brands have begun playing up their consciousness credentials in consumer marketing as well as in IPO forms. Companies’ emphasis on ESG in their pre-IPO regulatory filings may be an attempt to appease increasingly climate-conscious consumers and investors. There exists a “significant relationship” between companies’ ESG representations and their IPO pricing and evaluation, in that the more ESG disclosures by a company, the better its stock’s financial performance. 

  • New York Legislation

In January 2022, proposed new legislation in New York, the Fashion Sustainability and Social Accountability Act, calls on fashion retailers with global revenues of at least $100 million in New York State to publicize environmental and social disclosures or risk facing fines. If passed, the law “would require companies to map out at least 50 percent of their supply chain, identify ‘significant real or potential adverse environmental and social impacts,’” and provide targets for improving those impacts.

  • United Kingdom Legislation

On January 14, 2022, the UK’s Competition and Markets Authority (“CMA”) announced plans to directly enforce environmental marketing claims in the fashion industry.  This initiative will target greenwashing in the fashion industry, or marketing claims made by brands to suggest that products are “environmentally friendly,” or “sustainable.”

  • European Union Legislation

The UK initiative comes almost a year after European Parliament adopted its own legislative initiative to ensure “companies are held accountable and liable when they harm – or contribute to harming – human rights, the environment and good governance.” The initiative’s two core issues are companies’ adoption of mandatory due diligence obligations, and individuals and stakeholders gaining the right to hold companies liable for not complying with said obligations.

Litigation/ legal issues

As environmental concerns become a greater factor of consideration for consumers – and in turn manufacturers, many companies have taken to using vague language, aspirational statements, and poorly-defined buzzwords in their marketing. It is easy to do so given the lack of uniform ESG disclosure standards. However, as stock prices begin to drop “as a result of specific ESG issues, these seemingly unobjectionable statements may become actionable,” and this could change.

  • Patricia Dwyer v. Allbirds, Inc.

In June 2021, a class of plaintiffs headed by Patricia Dwyer filed suit against sustainable wool footwear company, Allbirds. Dwyer alleges that while Allbirds places a large emphasis on sustainable and eco-friendly production processes in its marketing of the shoes, its claims are “false, deceptive and misleading.” Dwyer alleges that in the company’s “life cycle assessment tool,” they omit the environmental impact of sourcing their wool, such as water use and land occupation, and use conservative assumptions of calculations to skew figures in their favor. The plaintiff’s complaint details the inherent dangers of large-scale wool production, to the animals themselves as well as the surrounding ecosystems and communities. Dwyer also states that Allbirds is not transparent in their practices and “stonewalls any enquiries into its wool sourcing.” While Dwyer argues that Allbirds’ unethical business practices have allowed it to sell more shoes at a higher price point than it otherwise would have, Allbirds replies that its actions are “authorized by the applicable law and thus, are not actionable.”

This case is just one of a recent handful of class action cases against companies for misrepresenting claims regarding sustainability and eco-friendliness.

  • George Lee v. Canada Goose US, Inc.

In November 2020, Canada Goose was sued by misled consumer, George Lee, who bought the brand’s products believing they were made using ethical and humane trapping methods. Lee noted that consumers “are willing to pay more for products labeled and marketed … [as] ethically and sustainably sourced” especially when competing products do not present similar claims. He alleges that Canada Goose knows this, and “capitalizes on consumers’ knowledge gap regarding fur industry practices” by making “a series of express and implied claims and/ or omissions that [Canada Goose] knows is material to the reasonable consumer in making a purchasing decision, and that [it] intended for consumers to rely upon when choosing to purchase the products.”

In response to the claims, and Canada Goose’s motion to dismiss them, a New York judge agreed with Lee that the brand’s statements may be misleading to consumers. The judge also agreed with Canada Goose’s defense that its claims are in compliance with the specified sourcing standards. The court noted that while these standards may not be enough to ensure that animals are treated humanely, Canada Goose’s representations of complying to those standards are not false or misleading.

  • Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System

Investment bank, Goldman Sachs, was sued by shareholders in an ESG lawsuit for maintaining “significant undisclosed conflicts of interest.” Investors allege the bank had misled them by artificially propping up its share price while making “generic” public statements that misrepresented having “extensive procedures and controls that are designed to identify and address conflicts of interest” which ultimately were false.

  • Rising accountability for brands amid watchdog complaints

In addition to consumer plaintiffs and shareholders, advertising watchdogs and regulators are now looking to hold companies accountable for what used to be considered puffery. In late 2021, the National Advertising Division (“NAD”) analyzed sustainability claims used in Everlane’s marketing. While Everlane’s aspirational claims about plans to remove virgin plastic from their supply chain and using recycled water bottles in their clothing were deemed above board by the NAD, the organization took issue with the brand’s claims about its use of bluesign®-approved dyes. The NAD asserted that Everlane should modify the claim that approved dyes are “safer for dyehouse workers and better for the environment” to explain that this is just one part of a larger chemical safety procedure, that its adoption of Bluesign, an independent third-party certification, is still limited, and that only 12 percent of Everlane’s mills and 10 percent of its factories were Bluesign approved at this time. The NAD’s investigation into Everlane’s claims indicate a shift separating environmental marketing from mere puffery claims.

In 2021, Adidas’ advertisements claimed its new Stan Smith sneakers were made using 50% recycled materials. These claims were scrutinized by the Advertising Ethics Jury (“AEJ”) of French advertising watchdog, ARPP. The AEJ found that the ad is likely to mislead consumers with its claims that the shoes are 50% recycled when this is only true of the upper portion of the shoes. The AEJ also argued it is unclear whether the shoes are made with 50% recycled materials, or whether the shoes themselves can be recycled. The AEJ also took issue with the ad’s logo stating, “End Plastic Waste” because it states, “buying a product that is partially made from recycled plastic is not going to ‘End Plastic Waste.’”