The backlash against ESG intensified this month when Tennessee Attorney General Jonathan Skrmetti decided to sue BlackRock, the world’s largest money management firm, alleging that the company violated the state’s consumer protection laws by publicizing inconsistent positions about its ESG policies. The first of its kind lawsuit is another warning to corporate boards that how they frame their commitments to ESG will be under increasing scrutiny which could place them under significant risk of future litigation and shareholder actions.
According to FOX Business, Attorney General Skrmetti filed the lawsuit and released a statement saying, “We allege that BlackRock’s inconsistent statements about its investment strategies deprived consumers of the ability to make an informed choice… Some public statements show a company that focuses exclusively on return on investment, others show a company that gives special consideration to environmental factors.”
The lawsuit states that “BlackRock has misled consumers about the scope and effects of its widespread ESG activity,” and that the company’s “conduct concerning the marketing or sale of its investment products or services constitutes deceptive acts and practices under the Tennessee Consumer Protection Act.”
However, perhaps the more important message the lawsuit sends is that the attorney general is suggesting that BlackRock has breached its fiduciary duties simply by stating that ESG principles might factor into some of the company’s decision-making.
According to Reuters, a BlackRock spokesperson responded, “Contrary to the Attorney General’s claims, BlackRock fully and accurately discloses our investment practices and our approach to proxy voting.”
This action by the Tennessee attorney general may lead to other states filing similar lawsuits against asset managers like BlackRock. In March, Skrmetti and 20 other Republican states attorney generals indicated that they felt asset managers in their jurisdictions were breaching their fiduciary responsibilities in the ways they were handling environmental and social concerns, Reuters reports.
Escalating ESG Risk
The emergence of this new area of attacks against ESG could increase the risk for companies dealing with legitimate shareholder concerns about how environmental and social issues are handled.
Litigation risk: The boards of asset management companies will be the first to be impacted by this type of lawsuit filed by Republican state lawmakers. Boards may need to approve more resources to defend against these and other lawsuits relating to their company’s handling of ESG matters. Fighting lawsuits is expensive and may ultimately have an impact on the financial performance of the company. Some shareholders may feel that the risk of litigation connected to ESG policies is not worth the level of financial resources needed to fight these lawsuits.
Increased activist investor risk: Corporate directors at many companies are already having their views on ESG policies challenged by activist investors. Some activists believe companies are not going far enough regarding their positions on some ESG matters, while others feel they are going too far. This new attack from state’s attorney generals may wind up emboldening activists to challenge boards on ESG policies, creating additional turmoil with shareholders on both sides of environmental or social issues. Boards will need to engage with their larger shareholders to determine if the idea of “breach of fiduciary duty” related to ESG policy may somehow become part of an activist campaign in the future.
Board re-election risk: Now that a plaintiff is asking the courts to decide if implementing ESG policies could be a breach of fiduciary duty, any board member who sits on a board that is potentially found guilty of this charge could very well lose his or her board seat when up for re-election.
Inadequate disclosure risk: This lawsuit suggests that Blackrock’s disclosures related to ESG somehow deceived investors. The potential risk of lawsuits regarding how companies explain their ESG policies to the public will require all corporate boards to review their policies on environmental and social issues and craft clear, consistent, and defendable disclosures that detail the beneficial aspects of their ESG policies as well as the potential risks so that investors are truly well informed.