News & Insights

ESG Excellence

September 20, 2022

Trending in September: Efforts to Limit ESG Considerations in Investing, Challenges to Board Diversity Rule, Strengthening ESG Disclosures and More

At King & Spalding, we are advising our clients on ESG issues every day. We are tackling our clients’ most pressing ESG matters and doing so while collaborating across industries and practice areas. Our attorneys in Corporate, Finance and Investments, Government Matters and Trial and Global Disputes are actively involved and ready to help our clients in this fast-moving area. Below are a few of the ESG issues, topics and developments that we have been thinking about so far in September.

  1. Fifth Circuit Hears Challenge to Nasdaq Board Diversity Rule: The U.S. Court of Appeals for the Fifth Circuit recently heard from conservative activists challenging Nasdaq’s board diversity rule. Two conservative groups are seeking to have the Fifth Circuit overturn the rule, which requires Nasdaq-listed companies to have diverse boards or explain why they do not.  During the hearing, Judge Stephen Higginson questioned why the disclosures would not “help the market function according to investor interest.” The challengers argued, among other things, that there is no conclusive evidence that diverse boards increase corporate performance. Nasdaq, in turn, argued that the rules level the playing field between large investors who have the resources to compile boards’ demographic information and small investors who do not.
  2. How ESG Investing Got Tangled Up In America’s Culture Wars: Certain Republican officials are stepping up efforts to prevent investors from considering environmental and other ESG factors in their investing decisions.  For example, a state board in Florida chaired by Governor Ron DeSantis recently banned state pension fund managers from incorporating ESG factors into their investments.  Similarly, in Texas and West Virginia, GOP leaders have stated that they intend to block investors that “boycott” the fossil fuel industry from state business.  Fifteen other states are considering similar measures, and some Republicans have announced plans to pursue federal legislation curtailing “woke” investment decisions if Republicans retake Congress in the midterm elections.
  3. European Litigation Funding Focusing on ESG Class Action Litigation: European litigation funding companies—which could account for 16% of the $18 billion global litigation funding market in the next few years—are focusing their growth on ESG claims.  This litigation allegedly involves instances where “big companies make promises relating to the environment, society and governance, and they break those promises, causing a range of losses.”  Much of this litigation to date has focused on climate change and human rights issues.  Another large focus of this litigation funding is shareholder cases targeting businesses whose alleged ESG failings have purportedly caused stock prices to drop.  New legislation in the EU and elsewhere regarding ESG could also spur the growth of this type of litigation (and the related financing that helps support it).
  4. Starbucks Executives, Directors Sued Over Diversity Policies: Starbucks Corporation directors and executives have been sued by a conservative think tank that alleges the coffee chain’s efforts to promote diversity amount to racial discrimination. The lawsuit involves Starbucks’s hiring and contracting policies, awarding contracts to “diverse” suppliers and advertisers, while also tying executive pay to diversity. The plaintiff, a Starbucks shareholder, alleges that those policies require the company to make race-based decisions that benefit minorities while violating federal and state civil rights laws. Thirty-five current and former Starbucks executives and directors, including interim CEO Howard Schultz, are among the defendants.
  5. Corning, Polaris Pressed on Climate Reporting as SEC Wraps Rules: The SEC is urging more companies, including snowmobile maker Polaris Inc. and ceramics manufacturer Corning Inc., to consider strengthening their disclosures to investors regarding ESG issues. At least six companies have recently received inquiries from the SEC about ESG reporting that was included in company sustainability reports but left out of the companies’ Form 10-Ks. These companies defended their ESG disclosures, but also agreed to consider changes for future SEC filings. These inquiries do not mean, however, that the SEC is investigating the companies for any wrongdoing. Instead, the SEC is working on rules that would require companies to provide details regarding greenhouse gas emissions and other climate information in their annual reports.  Currently, such climate information is only included in Form 10-Ks on a voluntary basis.

In Case You Missed It
In case you missed them, linked below are some recent Client Alerts from King & Spalding on particular ESG-related legal developments along with other links of interest.