Rick S. Horvath, Julien Bourgeois, and Mark D. Perlow are Partners at Dechert LLP. This post is based on a Dechert memorandum by Mr. Horvath, Mr. Bourgeois, Mr. Perlow, David A. Kotler, James A. Fishkin and Stephen M. Leitzell. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.
Key Takeaways
- In the past year, environmental, social, and governance (“ESG”) practices have faced heightened scrutiny in the United States from state attorneys general, state and federal legislators, other government officials, and private parties.
- There has been a sudden increase in governmental inquiries and both public and private litigation critical of ESG-related decisions.
- Corporate boards and members of the financial industry, as well as their attorneys and other advisors, should consider preparing for potential involvement in the growing ESG scrutiny.
The consideration of ESG factors as part of investment or corporate decision-making processes is at an important crossroads in the United States. Until recently, the ESG discussion has primarily taken place outside the courtroom. In the past year, however, private litigants, “red state” attorneys general, and other government officials in the United States have increasingly scrutinized the ESG-related decisions of corporate boards, investment managers, pension fiduciaries, and funds—including through litigation filings in state and federal courts. Meanwhile, some investors, “blue state” officials, foreign governments, and regulators continue to advocate for including ESG factors in business and investment decisions.
As the proper scope of incorporating ESG into business and investment decisions continues to be debated, and the current political environment remains unsettled, the risk of litigation and state inquiries is likely to continue, if not expand. In this environment of competing demands from different regulators and investors, corporate boards and investment managers will face increasingly difficult choices regarding their consideration of ESG factors, and should consider preparing to respond if their organization draws scrutiny over its ESG practices.