An Update on ESG Litigation Risks in the United States

Key Takeaways

• Early in the second Trump administration, the SEC has shown a less permissive attitude to company and investor engagement on environmental, social and governance (“ESG”) matters.
• While litigation efforts by state and private actors challenging ESG-policies have had mixed results, successes have been achieved where plaintiffs have focused on potential faults in decision-making processes or disclosures.
• Any legal requirement to oversee business, and thus ESG risks, remains an open question under Delaware law.

We previously wrote about litigation developments related to the growing ESG backlash in the United States.  Since our last guidance, there have been a number of developments impacting litigation risk, including regulatory actions in the aftermath of the election of Donald Trump to a second term as president, continued refinement of anti-ESG theories being pursued by “red state” attorneys general, and mixed litigation results impacting ESG-decision making. We summarize these developments, as well as strategic considerations for corporate boards and investment managers in light of broader market considerations, below.

Recent Regulatory Action, Inquiries and Litigation

SEC Actions

In the immediate aftermath of the 2024 presidential election and the second inauguration of President Donald Trump, policies at the Securities and Exchange Commission (“SEC”) have changed at a rapid pace.  These policies changes have included:

• requesting the Eighth Circuit Court of Appeals not to schedule further argument in litigation related to the climate disclosure rules that the SEC adopted in March 2024;
• new interpretive guidance on beneficial ownership reports on Schedule 13D and Schedule 13G, stating that a shareholder may be disqualified from reporting on Schedule 13G if the shareholder engages with company management on ESG topics while also stating or implying that the shareholder will not support the issuer’s director nominees if its recommendations are not adopted; and
• adopting a narrower view of the “economic relevance” and “ordinary business” exclusions under Rule 14a-8, potentially making it easier for companies to exclude ESG-related shareholder proposals from the annual proxy statement.

To the extent these actions reflect the SEC’s priorities, they suggest a less permissive attitude to ESG-related engagement by investors. The SEC’s positions also could impede engagement between companies and investors, particularly if 13G investors feel constrained in explaining the specific reasoning behind their past or upcoming votes at an annual or special meeting. How companies and investors respond to the SEC’s new guidance will depend in large part on further actions the SEC may take and how the SEC implements and enforces its positions.

Inquiries from State Attorneys General and Regulators

For the past several years, various groupings of Republican state attorneys general and state treasurers have sent a number of requests for information or inquiries to a range of different asset managers. These inquiries have often been made public and included statements articulating theories of potential violations of state and federal antitrust, fiduciary duty, disclosure, or consumer protection laws, which the state officials have stated that they are investigating. These inquiries have evolved and sharpened as these state officials have gathered more information and gained more understanding of the asset management industry.

Most recently, on November 27, 2024, a group of Republican state attorneys general filed a lawsuit in the Eastern District of Texas against three large asset managers. The lawsuit makes a series of novel claims, accusing the asset managers of engaging in a coordinated scheme to leverage their substantial shareholdings in major U.S. coal producers to coerce the companies to reduce coal production, thereby increasing energy prices for consumers, and further allege that defendants agreed to share competitively sensitive information regarding these efforts. The states cite the defendants’ participation in groups like the Net Zero Asset Managers Initiative and Climate Action 100+ as evidence of an agreement to coordinate ESG strategies aimed at reducing coal output. The plaintiffs assert violations of Section 7 of the Clayton Act, Section 1 of the Sherman Act, and various state antitrust laws. This lawsuit echoes claims made in a June 11, 2024, interim staff report released by the Judiciary Committee of the U.S. House of Representatives.[1]

The defendants have until March 17, 2025, to respond to the complaint, and it remains to be seen how the District Court will treat these novel claims. Defendants can be expected to move to dismiss the complaint based on a number of possible defenses, including the absence of an agreement among the affected coal companies and the fact that the information shared was not competitively sensitive. Observers will be closely watching to see if the District Court grants in whole or in part a motion to dismiss.

Utah, et al. v. Micone[2]

Twenty-five states and certain oilfield exploration interests filed a lawsuit against the U.S. Department of Labor (the “Department”) in the United States District Court for the Northern District of Texas challenging the Department’s rule finalized under the Biden administration in December 2022 concerning the management of retirement investment accounts. Among other matters, plaintiffs alleged that the rule subverted fiduciary duties required by the Employee Retirement Income Security Act (“ERISA”) by allowing plan administrators to consider ESG factors in investment decisions rather than managing plan assets for the “exclusive purpose” of providing participants and their beneficiaries with a financial benefit.

On February 14, 2025, the District Court held that the rule is valid under ERISA by permitting fiduciaries, when choosing among economically indistinguishable and equally valid investment options that serve the beneficiaries’ financial interests, to select an investment option based on collateral, non-pecuniary factors.  The District Court reached this conclusion after conducting its own analysis of ERISA, as it was directed to do by the Fifth Circuit Court of Appeals in the wake of the U.S. Supreme Court’s decision in Looper Bright Enterprises v. Ralmondo, 144 S. Ct. 2244 (2024).  In reaching its conclusion, the District Court noted that while “[f]iduciaries should strenuously guard against letting impermissible considerations taint their decisions,” the rule complies with ERISA by not permitting a fiduciary “to act for other interests than the beneficiaries’ or for other purposes than the beneficiaries’ financial benefit.”

It is entirely possible that the District Court’s decision in Micone will be short-lived under the second Trump administration and the expectation that ESG-related regulations such as the Department’s rule will be the targets of further regulatory or legislative action.

Wong v. New York City Employees’ Retirement System, et al.[3]

In July of last year, the Supreme Court of New York in New York County held that plaintiffs lacked standing to challenge the decision by the administrators of New York City’s Qualified Pension Plans (the “Plans”) to divest from fossil fuel investments in an effort to combat climate change. Central to the Court’s finding was that the Plans were “defined benefit” retirement plans, thereby entitling plaintiffs only to a “fixed benefit each month . . . regardless of how much [plaintiffs] win or lose [in] this action.” As such, plaintiffs could not demonstrate that the divestment decision caused plaintiffs a loss, and thus plaintiffs could not demonstrate an “injury in fact” to have standing. The Court likewise rejected alternative arguments offered by plaintiffs, including finding as too speculative plaintiffs’ claims that the divestment impacted the ability of the Plans to pay the benefits they owed. Plaintiffs’ appeal of the dismissal is pending.

If affirmed on appeal, the scope of the New York Court’s decision may be limited, anchored to the specific “defined benefit” retirement plan at issue.

Spence v. American Airlines, Inc., et al.[4]

On January 10, 2025, the United States District Court for the Northern District of Texas issued its post-trial decision finding that American Airlines and the American Airlines Employee Benefits Committee “breached certain fiduciary duties under ERISA when investing—or relying on others to invest—their employees’ retirement assets towards environmental, social and governance objectives.”[5] The District Court concluded that the facts demonstrated that defendants breached their duty of loyalty, including from a failure to follow internal policies and to take actions in deference to an administrator of the benefits plan, but that the allegations failed to demonstrate a breach of the duty of prudence. Left undecided was the amount of damages from the District Court’s finding of breach, which is pending further briefing by the parties.[6]

Aspects of the District Court’s decision are worthy of note, especially if its findings influence fiduciary standards other than when the exacting fiduciary requirements of ERISA, the “highest known to the law,”[7] do not apply. These findings include:

• The District Court’s definition of ESG as “a strategy that considers or pursues a non-pecuniary interest as an end itself rather than as a means of some financial end,” which the District Court used to anchor its analysis between permissible considerations versus impermissible considerations.[8]
• Whether a party is engaged in a permissible assessment of “material risk-and-return factors” that otherwise touch on environmental or social factors, as opposed to the District Court’s definition of an ESG-strategy, would require a “sound basis for characterizing something as a financial benefit” so that the purported financial benefit is not a “pretext for non-pecuniary interests.”[9]
• That companies and their fiduciaries may have an interest in favoring the stated ESG-goals of significant or influential investors to secure those investors’ support during a proxy campaign.[10]

Thus, it remains to be seen whether these findings will present opportunities, in other contexts, to challenge the good faith, business judgment of fiduciaries’ decisions that ESG-based decisions benefit investors’ interests.[11]

Craig v. Target Corporation[12]

At the end of 2024, the United States District Court for the Middle District of Florida denied a motion to dismiss a securities class action complaint alleging Target Corporation’s purported failure to disclose risks associated with its Diversity, Equity and Inclusion (“DEI”) initiatives.

Accepting the complaint’s allegations as true for purposes of the motion to dismiss, the Court found that the company’s disclosures in previous years’ SEC filings about the general risks of the company’s DEI initiatives failed to address the specific risks associated with the company’s 2023 Pride Month campaign. The Court further credited the complaint’s allegations both that the potential for a boycott in response to the 2023 campaign was known (or at least recklessly disregarded) based on previous customer backlash, and that the alleged failure to disclose the specific risks and changes from the 2023 campaign, and the subsequent customer backlash, caused the company’s market valuation to decline by $10 billion in late May 2023.

The District Court’s decision has the potential to be applied to other corporate initiatives that have ESG, DEI or other societal and political goals that cause a negative customer response, regardless of the political bent of such goals, providing another factor for companies to incorporate into their considerations as they evaluate their environmental and social engagement.

Update on Delaware

In the background of broader trends related to ESG litigation, there has been an ongoing debate in the Delaware Court of Chancery whether directors have an affirmative duty to manage business risk like they do legal compliance. Specifically, in In re Caremark International Inc. Derivative Litigation[13] and its progeny, the Delaware courts have recognized that to comply with their duty of oversight, corporate directors must both ensure that an adequate reporting system exists to report core legal risks to the board and actively monitor that system. More recently, in Construction Industry Laborers Pension Fund v. Bingle, Vice Chancellor Glasscock had indicated the possibility that the duty of oversight may require directors also to oversee business risks, which would include ESG-related risks, that go beyond legal compliance.[14] On the other hand, Vice Chancellor Will has noted in a number of decisions that the duty of oversight does not extend to business risks.[15] Indeed, extending oversight liability to business risks for otherwise lawful conduct “would eviscerate the core protections of the business judgment rule—protections designed to allow corporation managers and directors to pursue risky transactions without the specter of being held personally liable if those decisions turn out poorly.”[16]

In light of the debate within the Court of Chancery, it will eventually be up to the Delaware Supreme Court to provide guidance on directors’ oversight obligations with regard to business risks, particularly where the consequences for finding an affirmative duty to oversee business risks would risk undermining the policy choices reflected in the business judgment rule.

Strategic Considerations in the Current Environment

Since we last wrote on litigation risks related to the ESG-backlash in the United States, the market and investing environment with respect to ESG has continued to shift significantly. Coinciding with these shifts has been increasing legal risks associated with ESG strategies. This shifting landscape further underscores that ESG strategies reside at the intersection of political, reputation, commercial, and legal tensions. We anticipate these tensions will continue to increase in the second Trump administration, particularly where federal policies may create further divergence both within the United States between “blue states” on the one hand and the U.S. government and “red state” on the other.