The growth of ESG (Environmental, Social and Governance) measures has also led to class action lawsuits that challenge assertions made in company materials and advertising.
The trend has in-house counsel at businesses nationwide preparing for a spate of “greenwashing” lawsuits.
“The convergence of shareholder activism, youth getting older who care deeply about climate change, massive amounts of capital being raised and deployed into sustainability initiatives and a regulatory environment that is continuing to get more focused on disclosure about and around sustainability and ESG topics has created an environment that is rife with different groups focused on what companies are saying and how they say it,” said Brad Molotsky, a Duane Morris partner, in an email to the Northern California Record.
Brad Molotsky
| https://www.duanemorris.com/
“If and to the extent a company is unable to factually back up their assertions about a particular product or attribute, these groups continue to have less and less patience for wait-and-see and are more and more prone to raise their hand and claim/cry ‘foul’ in the context of a misleading advertisement, a shareholder lawsuit, a regulator’s enforcement action focused around ‘greenwashing’ – or making statements that have not been or cannot be factually substantiated,” Molotsky said. “In the EU and UK claims are increasing as regulatory mandates require disclosure and verification of factual assertions. The US has also seen a marked increase in the number of lawsuits over the last five years in the context of SEC, FDA, shareholder and class actions being filed with a false ESG narrative as the basis of these claims.”
Alex Karasik, a partner at Duane Morris, also noted that the majority of class-action ESG litigation filed last year was certified.
“In 2022, courts granted 268 out of 360 motions for class certification, which amounted to nearly 75 percent of all such cases; while not a ‘slam dunk,’ class certification is also far from a ‘jump ball,’” Karasik said in an email response to the Record.
He noted that class certifications rates varied in terms of specific subject areas relevant to ESG.
“There were notably high securities fraud class actions (23 of 24 motions granted); products liability/mass tort actions (11 of 16 motions granted); and complex employment discrimination disputes (8 of 15 motions granted),” Karasik said.
While antitrust lawsuits had lower rates of class certification (10 out of 27 motions granted), Karasik noted this is an emerging, high-priority area for both government and private-plaintiff litigants.
“Finally, corporations should note that the top 10 settlements in government enforcement lawsuits more than doubled in the past year, reaching over $400 million in 2022,” Karasik said.
The class actions have been filed in a number of jurisdictions.
“The Ninth Circuit, which includes California, continues to be one of primary hotbeds for bet-the-company ESG class action lawsuits,” Karasik said. “District courts in this region are no strangers to these massive, often high-profile cases. The Second Circuit, which houses New York, is another region that is well-known for its robust ESG class action docket. But more recently, states such as Georgia, Pennsylvania, and Illinois have drawn the attention of the plaintiff class action bar. Factors such as the certification standards and substantial recovery opportunities are making these states prime destinations for class action filings.”
A federal class action filed May 30 in the Central District of California alleges Delta misrepresented its airline as carbon neutral. A pilot at another major airline has alleged breach of fiduciary duty over its ESG investment policies.
“Once certified, many class actions are dismissed or settled before trial. Eye-popping financial exposure coupled with jury pools that are known to be less forgiving in certain parts of the country lead many corporations to conclude that there is too much risk in trying ESG class actions to verdict,” Karasik said. “With class action trials seemingly becoming more rare due to potential financial exposure, settlement numbers have continued to grow each year for class actions, especially in the areas encompassing ESG.”
Molotsky noted the volume of class action filings has increased each year for the last decade.
“In 2022, the ESG aggregate settlement amounts were unprecedented,” Molotsky said. “Areas such as products liability, consumer fraud, securities fraud, employment discrimination, and privacy-related class actions continued to become focal points for the plaintiff’s bar.
“Paired with the development of laws and regulations targeting transparency and diversity in corporate structures, the ESG class action landscape is ripe for novel challenges going forward. Businesses would be prudent to focus on auditing corporate operations to stay compliant with the constantly evolving regulatory climate.”
Meanwhile, in Congress, the House Oversight Committee has held hearings to examine the impact of ESG practices on businesses and consumers.
“Furthermore, reviewing actual printed materials, whether proxy materials, ESG reports and websites to determine whether and how statements can be factually verified and having this back-up support at the ready will become increasingly important as the SEC likely moves to roll out their final Climate Disclosure mandates this fall,” Molotsky said. “Having a relevant system that measures, monitors and can verify information and measure and appropriately report on Scope 1, 2 and 3 emissions will be part of a holistic strategy to enable efficient verification and reporting on various climate disclosure topics.”