SHIFTING VENUES — The rowdy political battles Republicans have waged in Congress and state capitals to limit corporate sustainability policies over the past three years are steadily being supplanted by some must-watch courtroom dramas. Judges in at least six states will weigh in on a wide range of environmental, social and governance litigation this year, including restrictions on climate advocacy among shareholders and laws in red states designed to protect fossil fuel interests. Courts are now the crucial testing ground for the future of these practices. “The main ramification is that judicial scrutiny helps refine the notion of ESG and pushes companies to seek and clearly explain its strategic value,” Matteo Tonnello, managing director of ESG at The Conference Board, a global think tank, said of the litigation. “The business judgment rule will continue to protect bold executives and board members who make informed and strategically meaningful decisions in the interest of the sustainability of their companies.” A federal judge in Texas on Monday dismissed a lawsuit brought by ExxonMobil against shareholder advocacy groups, one of the most prominent ESG cases to go to court. Exxon targeted the groups for previously backing a proposal urging the oil giant to speed up work to curb its greenhouse gas emissions, though they withdrew the proposal and vowed to never raise it again following the lawsuit. In Oklahoma, a state court blocked the enforcement of one of the most aggressive anti-ESG laws in the country earlier this year. On top of that, two other red states have hit BlackRock with legal complaints over the firm's ESG practices. And both the SEC and California are facing legal challenges over their attempts to compel companies to report on their carbon footprints. In a report last week, House Republicans argued that the push for corporate environmentalism would ultimately restrict Americans' ability to “drive, fly and eat.” But the legal cases also come with some risk for conservatives: They could lose, making a clearer path for ESG-related policymaking. A conservative federal judge in Texas last year allowed a Labor Department rule to take effect, giving retirement fund managers the option to consider ESG factors. “This is a new chapter in a broader deregulatory story that's a century old,” said Luke Morgan, an attorney with As You Sow, a shareholder advocacy nonprofit. “The reason that this has moved to focus on litigation is because the political movement failed. There was no popular support for this whatsoever.” The anti-ESG crusade, backed by conservative megadonor Leonard Leo, is having an outsized market impact despite little voter support for the campaign, which was reaffirmed by polling this month from the National Taxpayers Union, a fiscally conservative D.C.-based nonprofit. A new report out today from Pleiades Strategy, a climate policy and research firm, suggests there’s also been a slowdown in ESG animosity in red states even as House Republicans continue their drumbeat in Congress: Only six anti-ESG bills have passed in states this year out of 161 measures, down from 23 such laws last year. The growing body of ESG-related cases is poised to affect how far companies, pension funds and states can go in evaluating climate risk or punishing firms for doing so. But the biggest claims from GOP officials — allegations of antitrust violations and discrimination against fossil fuels on the part of Wall Street and industry net-zero groups — remain untested in court. Still, even if more legal clarity surfaces in the future, the litigation is already having a chilling effect, supporters say. “It largely makes business more cautious,” said Maura Hodge, sustainability reporting leader at accounting firm KPMG. “When these more controversial issues come up, the litigiousness in the U.S. just fans the fire. Particularly for some smaller companies, they will hold off on implementation until they have more insight into actual effective dates and final regulations.” The ultimate outcome from the case in Oklahoma, where a judge blocked enforcement of an anti-ESG law, could prompt players in other states to sue over other similar laws, said Leah Malone, head of the law firm Simpson, Thacher & Bartlett’s ESG and sustainability practice, as judges apply more scrutiny to such efforts and wade into the wonky ESG details. “Once we have a little bit more guidance from that court, I expect to see more challenges and I'm a little surprised that I haven't seen any more [filed] yet,” Malone said.
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