ESG Disclosures and Litigation Concerns

Martin Lipton is a founding partner and David M. Silk and David B. Anders are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

The publication of the World Economic Forum’s (WEF) proposed core metrics and recommended disclosures under the auspices of the International Business Council, while seeking to align mainstream ESG reporting, has prompted concern about litigation risks. One specific area of concern stems from the proposed framework’s recommended disclosure of scenario analysis.

Scenario analysis is a key recommendation of the Task Force on Climate-related Financial Disclosures and is incorporated into the WEF’s proposed framework. The purpose of scenario analysis is to consider and better understand how a business might perform under different future states by evaluating a range of hypothetical outcomes under a variety of plausible future climate-related scenarios. Many companies already conduct scenario analysis and an increasing number of companies already make disclosures concerning such analyses.

Some companies have expressed concern over whether scenario analysis and disclosure of underlying analyses, assumptions and parameters or the failure to consider other plausible climate-related scenarios may lead to heightened securities litigation risks or enforcement actions. A related concern is whether work papers generated by scenario analysis may be used as a basis to commence or bolster litigation or whether ESG-related statements that are later alleged to be materially inaccurate or misleading could become the basis for securities litigation.

We believe that companies that make accurate disclosures and take advantage of the protections available under existing statutory and common law safe harbors are unlikely to face significant litigation risks from scenario analysis disclosures. Companies disclosing ESG metrics should take necessary precautions to ensure that their disclosures are not materially misleading or inaccurate, including issuing cautionary statements, such as the examples set forth in Annex A. If companies make use of existing safe harbors and exert the same degree of care when making ESG scenario analysis disclosures as their other public disclosures, they should not face new or heightened litigation risks.

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