ESG Update: Two Court Decisions Highlight the Importance of the “G” in “ESG”

ESG stands for “environmental, social, and governance.” Though often overlooked, two recent cases — Spence v. American Airlines and Exxon v. Arjuna Capital, LLC — focus on G’s place in the ESG initialism

Here, we break down these decisions, provide background, and outline takeaways for the regulated community. The primary takeaway is that ESG issues increasingly animate litigation because ESG proponents often seek changes in corporate behavior that do not directly relate to any benefit to corporate shareholders. Corporate and investment decisions that factor in ESG-related criteria must carefully frame ESG-related decisions in terms that tie them to benefits to corporate shareholders — and not to society.

ESG Basics

The “G” can relate both to public governance and private governance. Private governance refers to the rules and structures used to establish and operate corporations, to manage the relationship between various parties (i.e. boards of directors, managers, shareholders, and employees) who are involved with a company.

Related to ESG, private governance includes the collection and preparation of corporate disclosures providing information to parties like stockholders, managers, or even government regulators.

The decisions in Exxon and American Airlines both rely on standard principles of private governance that prioritize shareholder profit. In both cases, plaintiffs question whether overweighting ESG-related inputs punishes shareholders in favor of a benefit accruing to the broader society.

Exxon Mobil v. Arjuna Capital

Exxon involves claims by a corporation against activist investors seeking to influence its actions. Rule 14a-8 of the Securities Exchange Act allows shareholders — even those possessing small shares in the company — to submit proposals to be considered at shareholder meetings.

In recent years, this rule has been used by socially minded shareholders like Arjuna Capital to advance ESG goals including cleaner climate practices or heighten regulatory reporting. While typically companies respond to these “activist investor” proposals with a no-action letter permitted by federal security laws or by letting the proposals come to vote, Exxon instead chose to sue the activist investors, seeking a declaratory judgment to exclude the greenhouse-gas-related proposal from further consideration.

A May 22 opinion from the US District Court in the Northern District of Texas allowed Exxon’s claims to move forward over the investor’s assertion of mootness. The court stated that Arjuna’s withdrawal letter to Exxon “failed to assure Exxon that the 2024 Proposal will not resurface.” The court concluded that “[t]he voluntary-cessation doctrine requires more than platitudes to render a case moot; it requires proof that the offending conduct will not recur.”

Since the decision, Arjuna Capital has advised the court that it will refrain from pursuing future resolutions seeking to push Exxon to address greenhouse gasses. There is no word yet from the court on whether this promise will impact the litigation.

Takeaways for the Regulated Community

Taken together, the decisions emphasize that the fundamentals of US corporate law remain unchanged, despite the recent focus on ESG issues. Accordingly, companies must ESG-related decisions by reasoning, and ideally data, that show their benefit to shareholders. One other issue worth noting is that these decisions originated in Texas federal courts, which have drawn more than their fair share of ESG-related disputes. While the reasons behind this are somewhat speculative, Texas federal courts permit judge-shopping to a greater degree than do other federal courts, and the US Court of Appeals for the Fifth Circuit is viewed as being the most conservative-leaning federal appellate court.

Read the full article and another case related to American Airlines

By J. Michael Showalter via ArentFox Schiff

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