Sustainability and Esg: Disclosure Defense, Governance, and Litigation

A greenwashing claim alleges that a company made environmental representations that were false, misleading, or unsubstantiated, and ESG compliance counsel reviewing marketing and disclosure materials must evaluate every environmental claim against the specific substantiation standard applicable in the relevant jurisdiction, since the FTC's Green Guides, the EU Green Claims Directive, and the UK's Green Claims Code each establish distinct requirements for what constitutes adequate support for a net zero or carbon neutral claim.

Scope 3 emissions encompass all indirect emissions in a company's upstream and downstream value chain, and the data quality challenges create disclosure accuracy risks substantially greater than those for Scope 1 and 2. Carbon emissions compliance counsel must evaluate the safe harbor provisions available for forward-looking statements and ensure the disclosure includes adequate caveats about estimation methodology.

The EU Corporate Sustainability Due Diligence Directive, Germany's Supply Chain Due Diligence Act, and the US Uyghur Forced Labor Prevention Act each impose distinct due diligence, disclosure, and remediation obligations, and sustainability and responsible business counsel must evaluate which laws apply based on the company's size, sector, and the jurisdictions in which it operates and sources materials.

Human capital disclosures that include diversity metrics, pay equity data, and workforce composition statistics create the potential for employment discrimination claims, and equal employment opportunity counsel must evaluate whether the disclosed metrics accurately reflect the company's hiring and promotion practices. If any diversity programs are structured in a manner that creates reverse discrimination exposure, those programs must be redesigned before the disclosure is published.

A board that delegates ESG oversight to a dedicated committee without ensuring that the full board receives regular reporting on material ESG risks may find the delegation insufficient when a derivative claim alleges that the board failed to identify a risk that caused significant loss. Corporate governance advisory counsel must evaluate which ESG topics require full board attention and develop a reporting cadence that ensures the board receives timely information about developing ESG risks.

The inclusion of ESG performance metrics in executive compensation programs draws objections from shareholders who question whether the metrics are objective, measurable, and genuinely linked to long-term value creation, and corporate governance counsel must evaluate whether each metric satisfies the scrutiny applied by proxy advisory firms. The compensation committee's rationale for selecting specific ESG metrics must be documented and disclosed in sufficient detail to demonstrate that the metrics were chosen to advance the company's strategic objectives.

A derivative claim alleging that directors breached their fiduciary duties by failing to oversee the company's ESG practices must overcome the business judgment rule's presumption that the board acted in good faith and on an informed basis, and shareholder derivative lawsuit defense counsel must demonstrate that the board had in place a reasonable system for receiving information about material ESG risks and that any disclosure decisions reflected a good faith judgment about what information was material to investors.

An SEC investigation into a company's ESG disclosures typically begins with a document request covering the company's internal disclosure preparation process, the data sources underlying specific claims, and communications between management and outside advisors. SEC investigations counsel must protect privileged communications throughout the production process and evaluate whether a proactive voluntary disclosure would produce a more favorable outcome than a purely defensive response.