ESG And The Growing Interplay With Class Action Lawsuits - Class Actions - United States

[Gunnar Larson]

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United States: ESG And The Growing Interplay With Class Action Lawsuits
17 April 2023
by Rebecca Green
Duane Morris LLP
Your LinkedIn Connections
with the authors

The plaintiffs' class action bar is exceedingly innovative and in constant
pursuit of "the next big then" insofar as potential liability is concerned
for acts and omissions of Corporate America. Environmental, Social, and
Governance – known as "ESG" – each of the verticals within ESG are surely
are topics on the mind of leading plaintiffs' class action litigators. As
ESG-related issues evolve and become increasingly more important to
corporate stakeholders, class action litigation against companies is
inevitable and has already begun to take shape. This blog post reviews the
current landscape of litigation risks, and underscores how good corporate
compliance programs and corporate citizenship are prerequisites to
minimizing risk.

The Class Action Context:
In 2022, the plaintiffs' class action bar filed, litigated, and settled
class actions at a breathtaking pace. The aggregate totals of the top ten
class action settlements – in areas as diverse as mass torts, consumer
fraud, antitrust, civil rights, securities fraud, privacy, and
employment-related claims – reached the highest historical totals in the
history of American jurisprudence. Class actions and government enforcement
litigation spiked to over $63 billion in settlement totals. As analyzed in
our Duane Morris Class Action Review
https://blogs.duanemorris.com/classactiondefense/2023/01/04/it-is-here-the-duane-morris-class-action-review-2023/,
the totals included $50.32 billion for products liability and mass tort,
$8.5 billion for consumer fraud, $3.7 billion for antitrust, $3.25 billion
for securities fraud, and $1.3 billion for civil rights.

As "success begets success' in this litigation space, the plaintiffs' bar
is loaded for bear in 2023, and focused on areas of opportunity for
litigation targets. ESG-related areas are a prime area of risk.

The ESG Context
Corporate ESG programs is in a state of constant evolution. Early
iterations were heavily focused on corporate social responsibility (or
"CSR"), with companies sponsoring initiatives that were intended to benefit
their communities. They entailed things like employee volunteering, youth
training, and charitable contributions as well as internal programs like
recycling and employee affinity groups. These efforts were not particularly
controversial.

In recent years, ESG programs have become more extensive and more deeply
integrated with companies' core business strategies, including strategies
for avoiding risks, such as those presented by employment discrimination
claims, the impacts of climate change, supply chain accountability, and
cybersecurity and privacy. Companies and studies have increasingly framed
ESG programs as contributing to shareholder value.

As ESG programs become larger and more integrated into a company's
business, so do the risks of attracting attention from regulators and
private litigants.

And The Lawsuits Begin From All Quarters:
While class action litigation can emanate from many sources, four areas in
particular are of importance in the ESG space.

Shareholders: Lawsuits by shareholders regarding ESG matters are
accelerating. Examples include claims that their stock holdings have lost
value as a result of false disclosures about issues like sexual harassment
allegations involving key executives, cybersecurity incidents, or
environmental disasters. Even absent a stock drop, some shareholders have
brought successful derivative suits focused on ESG issues. Of recent note,
employees of corporations incorporated in Delaware who serve in officer
roles may be sued for breach of the duty of oversight in the particular
area over which they have responsibility, including oversight over
workplace harassment policies. In its ruling
https://blogs.duanemorris.com/classactiondefense/2023/01/30/delaware-says-corporate-officers-are-now-subject-to-a-duty-of-oversight-in-the-workplace-harassment-context/
in In Re McDonald's Corp. Stockholder Derivative Litigation, No.
2021-CV-324 (Del. Ch. Jan. 25, 2023), the Delaware Court of Chancery
determined that like directors, officers are subject to oversight claims.
The ruling expands the scope of the rule established in the case of In Re
Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch.
1996), which recognized the duty of oversight for directors. The decision
will likely result in a flurry of litigation activity by the plaintiffs'
bar, as new cases will be filed alleging that officers in corporations who
were responsible for overseeing human resource functions can be held liable
for failing to properly oversee investigations of workplace misconduct such
as sexual harassment.

Vendors and Business Partners: As companies face increasing demands to
address ESG issues in their operations and throughout their supply chains,
ESG requirements in commercial contracts are increasing in prevalence.
Requirements imposed on vendors, suppliers, and partners – to ensure their
operations do not introduce ESG risks (e.g., by using forced or child labor
or employing unsustainable environmental practices) are becoming regular
staples in a commercial context. In addition, as more companies report
greenhouse gas emissions – and may soon be required by the SEC to report on
them – they increasingly require companies in their supply chain to provide
information about their own emissions. Furthermore, if the SEC's proposed
cybersecurity disclosure rules are enacted, companies also may require
increased reporting regarding cybersecurity from vendors and others. These
actions – and disclosures – provide fodder for "greenwashing" claims, where
consumers claim that company statements about environmental or social
aspects of their products are false and misleading. The theories in these
class actions are expanding by encompassing allegations involving product
statements as well as a company's general statements about its commitment
to sustainability.

State Consumer Protection and Employment Laws: The patchwork quilt of state
laws create myriad causes of action for alleged false advertising and other
misleading marketing statements. The plaintiffs' bar also has invoked
statutes like the Trafficking Victims Protection Reauthorization Act to
bring claims against companies for alleged failures to stop alleged human
rights violations in their supply chains. These claims typically allege
that the existence of company policies and programs aimed at helping end
human rights violations are themselves a basis for liability. In making
human capital management disclosures a part of ESG efforts (including
whether to disclose numeric metrics or targets based on race or gender),
companies may find themselves in a difficult place with respect to
potential liability stemming from stated commitments to diversity and
inclusion. On the one hand, companies that fail to achieve numeric targets
they articulate (e.g., a certain percent or increase in diversity among
management) may subject themselves to claims of having overpromised when
discussing their future plans. Conversely, employers that achieve such
targets may face "reverse discrimination" claims alleging that they
abandoned race-based or gender-neutral employment practices to hit numbers
set forth in their public statements.

Government Enforcement Litigation: Federal, state and local government
regulators have taken multiple actions against companies based on their
alleged contributions to climate change or alleged illegal activities. For
instance, in 2019, the U.S. Department of Justice investigated auto
companies for possible antitrust violations for agreeing with California to
adopt emissions standards more restrictive than those established by
federal law. While the investigation did not reveal wrongdoing, it
underscores the creativity that proponents and opponents of ESG efforts can
employ.

Implications For Corporate America:
The creation, content, and implementation of ESG programs carries
increasing litigation risks for corporations but it is unlikely that ESG
progams will diminish is size or scale in the coming years given increased
focus by Fortune 100s and 500s and increased regulation at the federal and
state levels.

Sound planning, comprehensive legal compliance, and systematic auditing of
ESG programs should be a key focus and process of all entities beginning or
continuing their ESG journey. As more and more companies adopt some level
of corporative ESG strategy planning, compliance and auditing are some of
the key imperatives in this new world of exposure to diminish and limit
one's exposure.

Disclaimer: This Alert has been prepared and published for informational
purposes only and is not offered, nor should be construed, as legal advice.
For more information, please see the firm's full disclaimer.

https://www.mondaq.com/unitedstates/class-actions/1305062/esg-and-the-growing-interplay-with-class-action-lawsuits?email_access=on
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