ESG Update: Political Pressure and Courts Roll Back Corporate ESG Efforts

Below, we will outline why ESG programming has become increasingly controversial and discuss recent litigation and the continued prominence of Texas as a forum for ESG-related disputes.

ESG Background

We have previously discussed why the ESG acronym generates controversy and has become increasingly controversial. In 2023, we discussed the multiple meanings ESG takes on depending on the person or organization using it. These multiple uses cause confusion when ESG proponents using the term to encompass “broad principles which can themselves be implemented as risk-management tools or used to create opportunities” face off against detractors who characterize it as nothing more than a concept allowing for otherwise unrelated policy preferences to make their way into strategic decision making. In her 2022 article outlining various meanings of ESG, the University of Pennsylvania’s Elizabeth Pollman discusses how “ESG” can be used to describe different topics ranging from factors used to analyze investments to social policies which are based on simple ideological preferences.

These variable meanings of ESG result in the acronym almost never being viewed as synonymous with the pursuit of long-term sustainability. Indeed, this was not the original purpose of the term. As Pollman puts it, “ESG was coined to describe a set of issues to be integrated into enhanced financial or investment analysis, and has taken on meanings related to risk management, been treated as a synonym or subset of CSR or sustainability, and characterized as a preference or activity.” The term was not intended to serve as a value-laden shibboleth for proponents and opponents of “woke capitalism.” Instead, it was intended to describe how an organization approaches environmental and social challenges through private corporate governance – unavoidable challenges that bear relevance regardless of one’s political views.

The Trump Administration’s focus on targeting DEI measures in early executive orders drives this point home. These orders, as we also discussed earlier, have implications echoing across regulated community. .

Texas Judge Rules on ESG Investment Case

On January 10, a Texas federal judge handed down a ruling stating that American Airlines violated federal law by filling its 401(k) with funds from investment companies that pursued ESG goals. This is the latest development in a case we wrote about last March. At this phase of litigation, Judge Reed O’Connor of the US District Court for the Northern District of Texas held that American breached its fiduciary duty of loyalty – but not prudence – when it decided to invest in funds with ESG goals.

Repositioning of DEI Programs 

With federal political tides having shifted, many major corporations have recently rolled back DEI programming. Of course, political pressure can cuts both ways. Recently, 13 attorneys general signed a letter raising concerns about a major retail conglomerate’s decision to roll back its DEI efforts.

The Trump Administration’s anti-DEI executive orders, however, are beginning to be challenged in court. On February 3, groups representing diversity officers across various industries sued the President and multiple federal agencies in the District of Maryland, claiming the Administration’s executive orders targeting DEI programs are broad and overly vague to the point where they chill the plaintiffs’ free speech. The complaint states that the orders “give executive branch officials… carte blanche authority to implement the order discriminatorily” with “no anchor as to what speech or which actions the order encompasses.” Despite the amount of action we’ve seen over the last three weeks, we are still in the early stages on all of these matters, with further developments certainly forthcoming.

Texas Courts Remain a Preferred Venue

As we have noted, the Northern District of Texas has historically served as a venue for contentious political policy disputes far more often than it has managed major corporate legal disputes. The role of Judge O’Connor, who himself has been described as a “favorite destination” for conservative litigants and business groups challenging progressive policies, highlights this issue. The Fifth Circuit will likely remain a key arena for legal battles on this subject, as it will be the venue for any appeal of this latest decision and has been the forum for recent significant holdings in the ESG and DEI sphere. Additional cases including Harmon et. al. v. Shell Oil Company, which like the American Airlines case discussed above, have recently been filed in Texas federal court.

The firm’s ESG team advises clients on understanding risks and benefits posed by increased regulatory focus on ESG and greenwashing issues.