Climate Reporting, ESG Wars Set to Dominate Boardrooms in 2024
ESG issues hit federal rulemakers, courts and campaign trail As the term ‘ESG’ is politicized, companies start to shy away from it
December 28, 2023, 4:00 AM CST
Climate Reporting, ESG Wars Set to Dominate Boardrooms in 2024
Andrew Ramonas
Senior Reporter
Clara Hudson
Reporter
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Topics
Companies
ESG issues hit federal rulemakers, courts and campaign trail
As the term ‘ESG’ is politicized, companies start to shy away from it
Companies are poised to face new climate disclosure requirements, greenwashing scrutiny and international supply chain risks amid increasing environmental, social and governance politicization in 2024.
The Securities and Exchange Commission is looking to issue requirements in the coming months for companies to report their greenhouse gas emissions and reveal other information about how climate change affects them. Companies that do business in California also will need to begin preparing to comply with emissions reporting mandates that are scheduled to start taking effect in 2026, and those that operate in the European Union will face new sustainability standards beginning in 2024.
That’s in addition to greenwashing litigation that continues to plague businesses. Meanwhile, the Federal Trade Commission is working on updates to guidelines that shape how far companies can go in marketing their products as environmentally friendly. Companies will also face mounting supply chain risks as forced labor and geopolitical concerns ramp up next year.
The ESG developments come as federal appeals courts near decisions on whether the SEC had the power to roll back Trump-era curbs on firms guiding investor voting. Other battles over shareholder and company rights will play out in courtrooms and on the 2024 campaign trail.
Here are five ESG matters to watch in the coming year:
1. Climate Disclosures
The SEC is aiming to release its climate disclosure rules by April, according to its latest rulemaking agenda. This would be more than two years after the agency first proposed them in March 2022.
The commission is considering requirements for all public companies to report their Scope 1 and 2 emissions, which come from their direct operations and power usage. Big companies would also have to disclose Scope 3 emissions from their supply chains and other indirect sources under the SEC’s proposal. Scope 3 reporting has faced substantial pushback from the US Chamber of Commerce and Republican state attorneys general, as well as lawmakers from both parties. Sen. Joe Manchin of West Virginia and several other Democrats have joined Republicans in their opposition.
The SEC likely will face lawsuits seeking to kill its final rules, regardless of how it handles Scope 3 disclosures. Political pushback and potential legal threats have, however, raised expectations the SEC will weaken, or possibly even eliminate, the proposed Scope 3 requirement.
California, meanwhile, moved ahead with corporate emissions reporting requirements in 2023. Large companies that have more than $1 billion in revenue and operate in the state must start reporting Scope 1 and 2 emissions by 2026 and begin making Scope 3 disclosures by 2027 under legislation signed into law in October. Big European companies will need to start reporting their emissions under the EU’s Corporate Sustainability Reporting Directive in 2024, followed by foreign companies with EU revenues of at least €150 million ($164 million) in fiscal year 2028.
2. Environmental Marketing
For the first time in a decade, the Federal Trade Commission is looking to updatethe so-called Green Guides that aim to rein in deceptive sustainability marketing. The current advisory guidelines clarify what should be advertised as “compostable” or “recyclable,” for example. The FTC signaled earlier this year that it wants to shed even more light on what can be called “recyclable.”
It’s not clear when the revised guides could take effect, but the last update took about two years since the time the FTC opened the comment period in 2010. The comment period for the latest update was opened in December 2022. The regulator has also raised the prospect of taking the guidelines further and creating mandatory rules.
While they await more clarity from the FTC, companies continue to face the prospect of greenwashing lawsuits as they prioritize marketing that presents environmentally friendly strategies or products to meet consumer demand for sustainability.
Activist or consumer-driven litigation has ballooned in recent years, from lawsuits over claims that products are “100% recyclable” to class actions claiming that marketing certain beauty products as “clean” misleads consumers about their health and environmental benefits.
3. Supply Chain Risk
Concerns about forced labor and geopolitical risks will continue to ensnare companies wrestling with their supply chains next year.
The Biden administration and Congress remain hawkish on China as an economic and national security threat, a sentiment that coincides with their attempts to encourage US companies to bring manufacturing closer to home. This year, friction between China and Taiwan, as well as continued tension between the US and China, prompted businesses to report risks that would come from an escalation of sanctions or tariffs.
Companies are also grappling with a relatively new US human rights law that targets Chinese goods made with forced labor, the Uyghur Forced Labor Prevention Act. Unless a company can prove otherwise, the law assumes that any product made with goods even partially sourced from the Xinjiang region of China has been made with forced labor.
On Capitol Hill, there’s support on both sides of the aisle to press companies to reroute their supply chains away from the Democratic Republic of the Congo, where alleged inhumane labor practices are used to secure cobalt, a mineral used in batteries for electric vehicles, smartphones, and tablets. The cobalt from the DRC is then processed by Chinese companies before being sold to battery makers globally.
The war in Ukraine and the conflict between Israel and Hamas will continue to pose supply chain risks as well.
4. Proxy Firm Battles
Federal appeals courts are expected to rule in the coming months on whether the SEC overstepped its authority in 2022 by reversing 2020 restrictions on proxy advisory firms.
The 2020 rules increased oversight of the firms, led by Institutional Shareholder Services Inc. and Glass, Lewis & Co., which control much of the proxy advice industry. Companies long have claimed ISS and Glass Lewis improperly influence the results of votes on board directors and ESG-related proposals at companies’ annual meetings—allegations the firms dispute.
Lower courts upheld the 2022 alterations, but the National Association of Manufacturers and US Chamber of Commerce—which brought the cases against the SEC—appealed.
The US Court of Appeals for the Fifth Circuit raised questions about the need for the 2022 revisions during oral arguments in August. The updated rules then got a mixed reception at the the US Court of Appeals for the Sixth Circuit in October.
The SEC’s 2022 changes included removing a rule for proxy firms to give their voting advice to companies and their customers at the same time.
5. ESG Politicization
The political backlash over ESG investing and corporate policies is set to continue in 2024, with Republicans making their “anti-woke” stances known, both on the campaign trail and in courtrooms.
Florida Gov. Ron DeSantis (R) and entrepreneur Vivek Ramaswamy had a history of fighting companies over social issues before they announced their presidential bids in 2023. DeSantis started feuding with Walt Disney Co. after the entertainment giant backed repealing Florida’s “Don’t Say Gay” law. Ramaswamy co-founded Strive Asset Management as an alternative to BlackRock Inc. and other established investment firms that conservatives deem “woke” for their ESG investing. Ramaswamy went after fellow Republican contender Nikki Haley during a Dec. 6 debate for alleged ties to BlackRock CEO Larry Fink, whom Ramaswamy called the “the king of the woke industrial complex.” (Haley has said she would not let Fink influence her policy decisions.)
ESG-related cases are also floating around courts. One such case from former senior Trump adviser Stephen Miller’s America First Legal Foundation against Target Corp. is pending in federal court in Florida. The group sued on behalf of a Target shareholder alleging the retailer misled investors about the financial risks from LGBTQ+ Pride marketing that brought a conservative backlash costing shareholders billions of dollars.
The acronym “ESG” has disappeared from some companies’ lexicon amid the attacks. Fink reportedly has abandoned the term due to its politicization. McDonald’s Corp. also took the abbreviation off its website in 2023.
To contact the reporters on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com; Clara Hudson in Washington at chudson@bloombergindustry.com
To contact the editors responsible for this story: Amelia Gruber Cohn at agrubercohn@bloombergindustry.com; Jeff Harrington at jharrington@bloombergindustry.com