Michael Steinlage and Madison Fernandez
The past few years have seen a rush of companies re-examining their relationship to climate change. Spurred on by the collective demand for action on and accountability for climate change, companies in industries not traditionally associated with climate change are now taking steps to publicly demonstrate their corporate responsibility and environmental stewardship. These efforts often result in public commitments to corporate sustainability, long-term carbon reduction goals, and environmental, social, and corporate governance (“ESG”) principles.
The corporate focus on ESG disclosures is driven in large part by the fact that investors are increasingly using ESG factors to guide their investment decisions. “What was once purely thought to be a nice to have, a thoughtful ESG program is now commonly viewed as a must-have for companies, as companies are now routinely being evaluated on these non-financial metrics alongside more common financial ESG metrics.”
As of June 2020, “socially conscious” registered investment products accounted for over $1.6 trillion in assets under management. One of the largest hedge funds in the world, Blackrock, is committed to prioritizing ESG investing principles through its investment holdings. These ESG-minded investors put their money behind companies that are perceived as good stewards of the environment and avoid companies that lack a clear climate-change strategy or pose a greater financial risk due to their environmental practices.
As more companies promote their climate-friendly bona fides to environmentally conscious investors and consumers, the risk of “green washing,” or companies making unrealistic and misleading statements around sustainability, carbon reduction and other operational shifts, is inevitable. Regulators are increasingly focused on these disclosures, evaluating public declarations with a heightened level of scrutiny, and warning companies that their published statements must not misrepresent their efforts to investors.
Companies navigating this brave new world of ESG disclosures may draw insight from the recent Supreme Court decision in Goldman Sachs Group Inc., et al. v. Arkansas Teacher Retirement System, et al.  In that case, Goldman Sachs shareholders sued the bank for securities fraud, alleging that the bank made repeated misrepresentations about its conflict-of-interest policies and business practices that caused the company’s stock to trade at artificially high levels. The alleged misrepresentations included generic statements, such as:
- “We have extensive procedures and controls that are designed to identify and address conflicts of interest”
- “Our clients’ interests always come first”
- “Integrity and honesty are at the heart of our business”
The shareholders claimed that when these generic statements were later shown to be false through the revelation of several undisclosed conflicts of interest, the stock price plummeted, and the shareholders were left to bear the loss.
The Goldman Sachs plaintiffs were proceeding on the fraud-on-the-market theory, which presumes that an investor relies on a misrepresentation so long as it was reflected in the market price at the time of his transaction, and the related Basic presumption (endorsed by the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224 (1988)), which holds that the market price of a security in an efficient market incorporates all of the company’s public statements. However, a defendant may rebut the Basic presumption by showing that an alleged misrepresentation did not actually affect the market price of the stock.
Goldman Sachs had argued that the generic quality of the alleged misstatements, together with expert evidence it proffered, compelled a finding of lack of price impact. In the majority opinion written by Justice Barrett, the Supreme Court agreed that the generic nature of an alleged misrepresentation can be important evidence of price impact because, as a rule of thumb, “a more general statement will effect a security’s price less than a more specific statement on the same question.” The Court further held that courts may consider expert testimony and use their common sense in assessing whether a generic misrepresentation had a price impact. Significantly, the Supreme Court remanded the case to the Second Circuit with instructions to consider all record evidence relevant to price impact, including the generic nature of the statements, in considering whether the class was properly certified.
How the holding in Goldman Sachs will apply to corporate statements regarding climate change remains to be seen. Previous efforts to hold oil companies responsible for allegedly misleading statements regarding their approach to climate change have had limited success. Most notably, in People of the State of New York v. ExxonMobil Corporation, following a lengthy bench trial, the court found that the New York Attorney General had failed to prove that ExxonMobil violated the Martin Act in connection with representations Exxon made to investors about potential future costs of climate change, finding no evidence that two March 2014 reports had any market impact at the time they were published or that investment analysts took note of the contents of the documents. The court rejected the contention “that reasonable investors would attach material significance to the fact that ExxonMobil internally determines when it is appropriate to apply GHG costs with respect to specific projects,” finding that ExxonMobil investors “had no insight into” the criteria ExxonMobil used to make such determinations.
However, with the increasing investor and regulatory focus on ESG disclosures, future plaintiffs may have greater insight into a company’s climate calculus and strategy and be better positioned to argue that even generic misrepresentations regarding climate change have an impact on a company’s market price. Accordingly, companies that seek to tie themselves to positive climate actions should do so by accurately describing their role in the problem and the realistic measures they are taking to actively manage and reduce that role.
Reach out to a Larson • King attorney if you have any questions about the information above.
 Madison Fernandez, University of St. Thomas School of Law, JD Candidate, May 2022.
 Michael Stiller, Nasdaq ESG Advisory Program, https://www.nasdaq.com/solutions/IR-Intelligence/ESG-Advisory-Program
 See, e.g. U.S. Securities and Exchange Commission, Asset Management Advisory Committee, Recommendations for ESG (July 7, 2021), https://www.sec.gov/files/amac-recommendations-esg-subcommittee-070721.pdf; IOSCO, Final Report on Sustainability-related Issuer Disclosures (June 2021), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf
 Goldman Sachs Group Inc., et al. v. Arkansas Teacher Retirement System, et al., 141 S. Ct. 950 (2021).
 People by James v. ExxonMobil, 65 Misc.3d 1233(A), 119 N.Y.S.3d 829 (Table), 2019 WL 6795771 (N.Y. Sup. Dec. 19, 2019) (holding an alleged misstatement is material to a reasonable investor only if it is “sufficiently specific” to “guarantee some concrete fact or outcome.”)