ESG Lawsuits in 2022 Challenge Environmental Reporting Discrepancies

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Zero emissions pronouncements by corporations seem visionary, illuminated, and authentic. They’re the kind of businesses we want to support, right? But a common pattern has emerged in which governments and investors are questioning the accuracy of some corporate environmental disclosures. Stakeholders are no longer blindly endorsing corporate claims about grand ways they’re addressing environmental concerns. Instead, many constituents are stepping back and unpacking distinctions between what companies disclose and what they actually do, to the point where discrepancies are forming the basis of ESG lawsuits seeking redress.

2021 saw an enormous increase in investor demand for ESG-related and ESG-driven portfolios. ESG is the acronym for Environmental, Social, and (Corporate) Governance. These 3 categories embody comfortable areas for socially responsible individuals to direct their investments because these stocks or funds incorporate their values and concerns rather than merely seeking to increase profitability at any cost.

A key challenge for market participants in 2022 is to manage that ESG growth in a way that combats rising concerns about greenwashing — when a company says it is environmentally conscious for marketing purposes but actually isn’t making adequate, actionable sustainability efforts. Companies may be using disclosures and sustainability-related labels on products and services as a marketing tool, for example, to appear more proactive on those issues than they truly are.

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Today’s corporate leaders face more scrutiny than ever to demonstrate that they are walking the talk — that they are deeply invested in mitigating climate change, protecting human rights, and alleviating social unrest. SP Global indicates that an increasing convergence among data, metrics, and reporting requirements is taking place alongside rising pressure to ensure these metrics measure ESG impact, not just inputs.

Climate is obviously the most pressing existential threat to the environment. Yet inflationary trends, higher energy costs, and tightening monetary policy are challenging the climate agenda and sharpening attention on managing the social implications of the ESG transition.

Global growth is expected to moderate from 5.9% in 2021 to 4.4% in 2022—half a percentage point lower for 2022 than in the October World Economic Outlook (WEO), largely reflecting forecast markdowns in the two largest economies. A revised assumption removing the Build Back Better fiscal policy package from the baseline, earlier withdrawal of monetary accommodation, and continued supply shortages produced a downward 1.2 percentage-points revision for the US, according to the International Monetary Fund.

Even as governments and businesses invest in low carbon energy sources like wind and solar power, the world will remain deeply reliant on fossil fuels for years to come. Only a very carefully managed economic landscape can diminish the effect of volatile energy prices and other disruptions that, in turn, can soften support for policies to reduce greenhouse gas emissions.

And then there was yesterday’s newest UN Climate Change report that unveiled how the 2021 increase in global CO2 emissions of over 2 billion tonnes was the largest in history in absolute terms. But, then again, renewables-based generation reached an all-time high, exceeding 8000 terawatt-hours (TWh) in 2021, a record 500 TWh above its 2020 level. Output from wind and solar PV increased by 270 TWh and 170 TWh, respectively, while hydro generation declined due to the impacts of drought, notably in the US and Brazil.

Meticulous Climate Impact Analysis is Needed — & Quickly

A new study finds that federal agencies are not adequately considering climate change impacts in reviews conducted under the National Environmental Policy Act (NEPA).

“Evaluating Climate Risk in NEPA Reviews: Current Practices and Recommendations for Reform” finds that, in order to meet NEPA’s requirement that federal agencies take a “hard look” at the environmental effects of proposed actions, agencies must consider how the changing weather and environmental conditions brought by climate change might impact an action and alter its environmental effects.

However, none of the 65 Environmental Impact Statements that agencies issued in relation to onshore energy activities from 2016 through 2020 contained sufficiently holistic, specific, and actionable climate impact analysis to inform agency decision-making.

To bridge the gap between NEPA’s requirements and agencies’ current practices, the report recommends:

• The Council on Environmental Quality should update its NEPA implementing regulations to explicitly require climate impact analysis and should identify best practices for this analysis in updates to its climate guidance.
• Other federal agencies should update their own NEPA regulations and practices to ensure robust climate impact analysis.
• The Council on Environmental Quality should coordinate across federal agencies and relevant experts and create or support creation of a database of climate impact information.

Climate-Related Lawsuits Against Fossil Fuel Companies

More than a dozen federal cases have now been filed against oil companies, seeking damages for their role in causing climate change; most have been brought by states or local governments that claim they and their citizens are suffering harm from climate change.

• Action by Massachusetts attorney general asserted that Exxon Mobil Corporation committed deceptive practices against Massachusetts investors and consumers, including by failing to disclose climate change risks. The ESG lawsuit alleged that Exxon deliberately misrepresented and omitted information about the risks of climate change and that Exxon was engaged in trade or commerce when it made the allegedly deceptive statements. The court also found that the Commonwealth’s deceptive advertising claims did not have to be based on allegations that Exxon’s representations about particular fuel products were false, only that the representations were misleading.
• A lawsuit brought by the City of Annapolis against fossil fuel companies sought damages and other relief based on the companies’ alleged concealment of information about their products’ contribution to climate change. Regarding prejudice to the parties, the district court wrote that “the outcome of this lawsuit cannot turn back the clock on the atmospheric and ecological processes that defendants’ activities have allegedly helped set in motion” and that “[t]he urgency of the threat of climate change writ large is distinct from plaintiff’s interest in a speedy determination of federal jurisdiction in this suit.”
• A lawsuit seeks damages and other relief from fossil fuel companies for alleged conduct that the City and County of Honolulu contends actually and approximately caused climate change impacts. The causes of action may seem new, but, in fact, are common due to the unprecedented allegations involving causes and effects of fossil fuels and climate change. Common law historically tries to adapt to such new circumstances.

Often, the results of ESG lawsuits aren’t financial but, rather, strategic and operational. These ESG lawsuits seek structural changes in business practice rather than financial restitution. In fact, cases seeking policy changes rather than compensation, or those with corresponding criminal/regulatory enforcement actions, have been more successful.

New Technology to Help Investors with ESG Goals

In addition to individual investor scrutiny of corporate stocks for greenwashing, new technology tools are emerging to aid in the process of unpacking truth to power in environmental reporting.

One such technology perk is the Sustainable Development Investments Asset Owner Platform (SDI AOP). Together with Qontigo, its exclusive distribution partner, SDI AOP has announced that asset manager NN Investment Partners (NN IP) has subscribed to the SDI AOP dataset, which allows users to enhance their investment decision making with data on the UN Sustainable Development Goals (SDGs). The SDI AOP platform was founded in 2020 by APG, AustralianSuper, British Colombia Investment Management, and PGGM to advance the standard for investing into the SDGs.

These asset owners make up the Design Authority, tasked with defining the taxonomy, rules, and classifications which are then translated through unstructured and structured data.

More technology applications are needed to help investors and governments to determine greenwashing and its detrimental effects on zero emissions climate goals. In the meantime, let’s take a critical moment when we hear too-good-to-be-true statements from companies that have sniffed at the coattails of Big Oil. In our hearts, we know better, don’t we?