Note: This piece was published in April 2024. Updates are forthcoming.
The past several months have seen a troubling surge of litigation threatening investor rights and the ability of regulators to respond to market imperatives. These attacks stem from the same desire to halt progress by private sector leaders and regulators toward a more transparent and accountable economic system. The U.S. Impact Investing Alliance has been working to counter the anti-environmental, social and governance (ESG) movement, and we see the same anti-ESG forces now mobilizing to undermine everything from climate disclosures to diversity, equity and inclusion (DEI). This piece analyzes the legal challenges that impact investing advocates should be tracking – some more high-profile than others, but all with the potential for significant ramifications for our collective ability to manifest a thriving, competitive economy.
Challenges to milestone corporate climate disclosure progress: The Securities and Exchange Commission (SEC) recently finalized the much-anticipated climate disclosure rule, requiring publicly traded companies in the United States to report on climate risks, governance of those risks, climate commitments and certain greenhouse gas (GHG) emissions. Since the rule was proposed two years ago, the SEC has been contending with significant pushback from special interest and industry groups, leading to compromises on key provisions, such as the removal of Scope 3 GHG emissions disclosures. Even with these rollbacks, the SEC is now facing a suite of lawsuits and challenges threatening their ability to respond to investor needs and implement corporate climate disclosure requirements. These challenges include the following:
Several industry groups, environmental groups, companies and Republican-led states have filed suit against the SEC, and those cases have been consolidated into the 8th Circuit Court of Appeals. This court will first determine the fate of an administrative stay halting the implementation of the rule that was put in place by the 5th Circuit Court of Appeals. From there, the Court will have to weigh the competing claims in a process that will likely make its way before the Supreme Court. (Note: The majority of the suits filed claim the rules are too burdensome for companies, whereas the challenge from environmental groups is based on the SEC not going far enough to protect investors.)
Relatedly, California lawmakers in late 2023 passed a set of bills requiring climate disclosures for publicly traded and large private companies operating in the state, going further than the SEC rule by including Scope 3 emissions. Unfortunately, these laws have also faced similar ire from companies and industry groups, with at least one lawsuit ongoing and indications from Governor Newsom that he may push for rollbacks in places.
Mandated, standardized corporate disclosures on climate factors have been in development for years, thanks to the hard work of investor advocates seeking access to more consistent, comparable and reliable climate-related information. While the final rule from the SEC may fall short on certain provisions, the field must defend the progress made and push for continued U.S. leadership on these issues. Read more from the U.S. Impact Investing Alliance on the final SEC rule.
Silencing investor voices on climate: ExxonMobil brought a suit against investors – Arjuna Capital and Follow This – who sought a vote on the corporation’s climate policies as part of the shareholder proposal process. Despite the withdrawal of the proposal, Exxon is looking to proceed with the case, citing concerns about contending with similar proposals from shareholders in the future. Investor advocates are taking notice, given that this case could set a dangerous precedent and deter future shareholder engagement. Following calls from community, labor and environmental groups, board members from CalPERS – the largest U.S. public pension – publicly raised concerns about continuing to invest in the company.
Attacks on DEI: The 2023 Supreme Court rulings against affirmative action in higher education sent shockwaves through economic, social and cultural institutions. Cross-sector leaders have grappled with the potential implications for their work. Unfortunately, some companies and private sector leaders have been pulling back on publicly facing DEI strategies. In the wake of the affirmative action rulings, several cases have also targeted private sector funds investing in and otherwise supporting diverse-owned businesses.
The same groups that targeted Harvard and UNC’s programs filed suit against the Fearless Fund, a venture capital firm focused on supporting Black women-led businesses. The suit calls into question Fearless Fund’s grant program, which provides modest awards to these businesses that receive less than 1% of overall venture capital funding.
Similar attacks have also been leveled against critical community financial intermediaries. Most notably, LiftFund, a community development financial institution (CDFI) supporting small businesses in Texas, was accused of discrimination in its awarding of business assistance grants. These cases serve as an early warning sign that the anti-ESG movement has set its sights on DEI despite it being a driver of performance and innovation.
Rollback of support for minority businesses: A group of White business owners successfully sued the Minority Business Development Agency (MBDA), claiming that the agency’s core purpose is unconstitutional. Despite acknowledging that minority-owned businesses face significant discrimination, a federal judge ruled that the MBDA is now barred from providing exclusive assistance to minority businesses. The Commerce Department, which administers MBDA, and the Justice Department may still appeal the ruling to the 5th Circuit Court of Appeals. The MBDA traces its roots back to President Nixon’s administration and was only recently permanently authorized in 2021, following calls for robust public and private sector action to address racial disparities in access to economic opportunity. Undermining the MBDA’s core purpose just three years later is harmful and without merit.
Halting progress on long-awaited community investing reforms: Just last week, in response to a lawsuit from banking and business groups, a federal judge blocked new regulations modernizing the Community Reinvestment Act (CRA) from taking effect. The CRA is a foundational community investing policy that was signed into law in 1977 in response to racist redlining practices by banks, requiring that they lend to communities where they do business. Last fall, the federal banking regulators finalized the most significant CRA reforms in nearly 30 years, accounting for modern day practices such as online and mobile lending. These legal challenges jeopardize a strengthened and modernized CRA, a policy often credited with driving private capital to support CDFIs, minority depository institutions (MDI) and the broader community investing ecosystem.
Potential weakening of regulatory authorities: The Supreme Court is currently considering a set of cases that could upend a longstanding concept known as “Chevron deference,” which grants deference to regulatory agencies in interpreting ambiguous statutes. On its face, this issue appears far outside the realm of impact investing, with one case revolving around fishery conservation law, but they have the potential to strip federal agencies of their authorities in interpreting the law, a fundamental avenue for productive policymaking. The potential ripple effects of this set of cases are broad, including jeopardizing the ability of regulators like the SEC and the Environmental Protection Agency (EPA) to issue important rules and standards to protect American investors, consumers and communities.
Why these cases matter:
These lawsuits could have implications extending far beyond the individual cases, potentially stifling investor engagement and federal policymaking on issues essential to preserving a thriving and competitive economy. Each case represents an additional strike at the core of regulatory agencies’ authority, shareholder rights and corporate transparency. Notably, these challenges are closely intertwined with broader anti-free market movements afoot. We see the weaponization of litigation as just one element of the broader push to politicize and undermine impact investing principles and the broader pairing of financial and impact factors, even when financially relevant.
The primary goal of these attacks is to create a chilling effect for leaders seeking to advance a more transparent, accountable economy. In recent years, there have been several high-profile defections – at least in part motivated by the anti-ESG and anti-DEI movements – from important initiatives like Climate Action 100+, the Equator Principles, the Net Zero Asset Managers initiative (NZAM) and Glasgow Financial Alliance for Net Zero (GFANZ). It is imperative for impact investing advocates to remain steadfast in their commitments to hold corporations accountable and drive meaningful progress toward a more just and sustainable future.