The fashion industry is obsessed with going “green.” To keep up with consumer and investor pressures, companies are rushing to tout their dedication to Environmental, Social, and Corporate Governance (“ESG”) ventures, often making generalized statements about circular business models and “sustainability,” pushes for diversity and inclusion, and quests to cut down on their carbon emissions. Given the lack of concrete legal definitions for terms, such as “sustainability,” “green,” “eco-friendly,” “ethical,” etc., and in many cases, a dearth of industry-wide metrics for gauging emissions or standards for uniformly reporting diversity initiatives, it is commonplace for companies to publicize largely vague efforts in the ESG vein in their marketing campaigns and even in filings with the Securities and Exchange Commission (“SEC”).
The absence of such standards, paired with the aspirational and often non-committal nature of many companies’ proclamations have enabled them to tout – and in many instances, over-state – the merits of their ESG initiatives without legal ramifications. That may soon be subject to change, and “when stock prices drop as a result of specific ESG issues, these seemingly unobjectionable statements may become actionable,” according to Bracewell LLP’s Keith Blackman, Joshua Klein, Rachel Goldman and Russell Gallaro. This is the message that is being sent by way of a handful of new ESG lawsuits, including one that recently landed before the Supreme Court, and new efforts being carried out by the Biden Administration, which “may be a harbinger of a wave of litigation in coming years.”
In light of ever-growing attempts by companies to bolster their bottom lines by way of ESG messaging, including a slew of more-ambitious-than-objective statements, market players need to be sure “not to undercut their public statements with contradictory actions,” per Blackman, Klein, Goldman and Gallaro, who note that “a few companies have already been the target of lawsuits claiming that [they] failed to live up to their aspirational statements.” Such stock-drop cases follow a similar pattern, the Bracewell attorneys assert: “When a negative event causes a drop in a company’s share price, shareholders bring a class action lawsuit, arguing that the negative event renders a prior statement issued by the company false or misleading.”
They point to the securities-fraud class action lawsuit that BP shareholders filed on the heels of the Deepwater Horizon oil spill in 2010, in which they argued that “vague statements issued by BP concerning its commitment to safety – such as ‘BP America is in the midst of a comprehensive effort to improve its safety culture’ and ‘Safety remains our number one priority and we can see clear progress’ – were false and misleading.” In the same vein, Blackman, Klein, Goldman and Gallaro state that in 2018, Equifax shareholders waged a securities-fraud class action fight after the American credit bureau announced a data breach that exposed the personal information of 147 million people. “The court allowed that class action to move forward, on the basis of allegations that Equifax had misled investors with generic statements like ‘[s]afeguarding the privacy and security of information … is a top priority for Equifax.’”
Most recently, Goldman Sachs landed on the receiving end of one of the latest shareholder ESG lawsuits on the basis that the investment bank maintained significant undisclosed conflicts of interest, and thus, misled shareholders – and artificially propped up and maintained its share price – when it simultaneously made public statements, including, “We have extensive procedures and controls that are designed to identify and address conflicts of interest;” “Our clients’ interests always come first;” and “Integrity and honesty are at the heart of our business.” The case – which was filed in 2011 by a group of Goldman shareholders led by the Arkansas Teacher Retirement System – “presents a variety of legal issues,” per Blackman, Klein, Goldman and Gallaro, but “the primary question is to what extent companies can be held liable for making ‘generic’ public statements, when those statements are later alleged to be false.”
Counsel for Goldman has argued that the disclosure-centric statements at issue are so “generic” that they could not have an effect on the price of its stock. At the same time, Reuters reported that the financial titan argued in its bid for Supreme Court intervention that “generic statements, such as its promises to put investor interests ahead of its own, cannot, as a matter of law, serve as the basis of a shareholder class action,” while also claiming that a win for the Arkansas Teacher Retirement System would enable shareholders to point to “boilerplate aspirational statements that nearly all companies make” as the basis for future ESG lawsuits, and in particular, stock-drop suits.
During phone-in oral arguments before the nation’s highest court on March 29, Paul Weiss’s Kannon Shanmugam – who represents Goldman – asserted a seemingly less staunch position, stating that “the more generic a statement is, the less likely it is to have price impact.” Meanwhile, Reuters notes that Arkansas Teacher Retirement System previously “conceded in [an October 2021] brief to the Supreme Court that courts can take into account that generic statements are less likely to affect share price than specific misrepresentations.”
In the amicus brief that it filed with the Supreme Court in February 2021, the Society for Corporate Governance argued that not only would such an outcome have “a severe chilling effect on companies’ willingness to make public statements,” if affirmed, the Second Circuit’s decision “will have the practical effect of discouraging public companies from making positive or aspirational public statements of principle on important internal and external issues,” including “sustainability, the environment, diversity, sexual harassment, worker safety amidst the Covid-19 pandemic, and other issues of pressing social concern.”
“On the other side,” CNBC reported in March, “financial transparency groups have argued that Goldman should be held accountable” for the statements, as holding otherwise “would let companies off the leash, ushering in a wide range of misleading behavior that could materially harm U.S. investors.”
While the ultimate outcome in the Goldman case is not yet known, and while these cases technically lie outside of the bounds of the fashion and luxury goods industries, the takeaways apply across the board. For instance, the Bracewell attorneys assert that “if the Supreme Court affirms the Second Circuit’s decision” to enable the case to proceed as a class action of all the purchasers of Goldman stock between February 2007 and June 2010 on the basis of Goldman’s relatively general, aspirational statements, that could have a significant impact for ESG advertisers and for other potential ESG lawsuits going forward. In short, “Companies that issue generalized disclosures concerning ESG issues could be vulnerable to the risk of expensive shareholder-driven litigation.”
UPDATED (June 21, 2021): The Supreme Court issued its opinion in the Goldman case, holding that the lower court “failed to properly assess whether the bank’s statements that the investors had called misleading were too generic to have affected its stock price,” according to Reuters. “The ruling, authored by Justice Amy Coney Barrett, gives Goldman another chance to avoid the class action in which the plaintiffs said they lost more than $13 billion due to the bank’s conduct.”
UPDATED (December 8, 2021): The Goldman case made its way back before the U.S. District Court for the Southern District of New York, where Judge Paul A. Crotty determined that the case could proceed as a class action. Revisiting the evidence following the Supreme Court’s “fresh guidance,” Judge Crotty held that the evidence presented still supported a conclusion that the alleged misstatements impacted Goldman’s stock price. Specifically, Judge Crotty rejected Goldman’s claim that its statements about its business, including that client interests “always come first” and “integrity and honesty are at the heart of our business,” were too generic to mislead investors and affect its stock price.
“Only time will tell whether Judge Crotty’s decision becomes the norm, where cases are certified based upon ESG statements issuers consider generic, or if other courts take the Goldman Sachs ruling as a directive to deny certification based on such statements,” the Bracewell attorneys have since asserted. “Barring a settlement, the case is likely to make its way back up to the Second Circuit, and perhaps again to the Supreme Court.”