Listen to this post

The idea that investors might choose to consider certain environmental, social, and governance factors when deciding whether to buy shares of a company—a concept commonly known as ESG—continues to gain popularity with trillions of dollars currently held in investment funds that take into account ESG principles. Yet recently, the use of ESG investment measures has been the target of intense scrutiny and political pushback that threatens to produce inconsistent regulation and enforcement approaches at the federal, state, and local levels. The United States Securities and Exchange Commission (“SEC”), for example, has focused on ESG by investigating and taking action against companies that tout business practices such as consideration of environmental sustainability, but fail, in practice, to live up to their claims. In contrast, a number of state governors, legislatures, and attorneys general have passed laws or issued cease-and-desist-type letters to stop or discourage companies from considering ESG factors, in whole or in part, when making investment decisions. These varied and seemingly conflicting approaches to ESG can easily create a conundrum for companies that have incorporated or are seeking to incorporate ESG initiatives into their operations. When dealing with ESG, businesses today face the difficult task of determining how best to implement ESG-based policies, procedures, and practices, while mitigating the risk that such actions may draw the ire of officials and regulators who view the consideration of ESG factors in investment decisions to be a breach of the fiduciary duty to prioritize return on investment over non-financial considerations.

In hopes of providing useful guideposts for companies seeking to mitigate risk in such a complex and developing landscape, this article discusses (1) ESG criteria and the business case for ESG; (2) the current federal regulatory framework for ESG; (3) recent ESG-related actions at the state level; and (4) best practices for companies to help mitigate risk when engaging with ESG.

1. ESG Criteria and the Business Case for ESG

ESG, as a framework, helps investors understand how an organization manages risks and opportunities related to environmental, social, and governance criteria. When a firm seeks to use ESG principles in its business operations and/or investing decisions, it may do so by providing public disclosures, statements, or claims related to the following types of criteria:

  • Environmental: Information related to, inter alia, energy efficiencies, water usage, water and ground pollution, greenhouse gas emissions, impact on biodiversity and deforestation, use of recycled or renewable materials, or a product’s cradle-to-grave lifecycle.
  • Social: Information related to, inter alia, labor standards and practices; wages and benefits; equal pay; Diversity, Equity, and Inclusion (“DEI”) policies and initiatives; supply chain and sourcing integrity (e.g., anti-human trafficking and anti-slavery policies and procedures); community impact; data protection; or product safety and quality.
  • Governance: Information related to, inter alia, board diversity, corporate integrity, bribery and corruption, shareholder rights, or executive compensation.[1]

Although ESG-type disclosures are generally voluntary for companies in the United States,[2] newly proposed regulations may change that as early as later this year. For example, the SEC is currently formulating a regulation that would require publicly traded companies to disclose their greenhouse gas emissions and climate-related risks.[3] Until such a regulation takes effect, however, why would (or should) a company provide voluntary ESG disclosures that are not legally mandated?

The answer, as determined by the country’s preeminent investment firms, relates back to the bottom line.[4] While there are plenty of non-economic reasons to focus on ESG, the business case for ESG is well established. Companies and investors incorporate ESG principles because they understand that long-term financial performance and sustainability may be impacted by business practices that are materially different than short-term return-on-investment. Thus, companies choose to make disclosures related to ESG factors because many investors and consumers want to understand whether the companies in which they invest or from whom they purchase products and services are taking actions—either beneficial or harmful—that may impact corporate stakeholders[5] and, in turn, have an effect on present and/or future shareholder value.

Companies making ESG disclosures need to ensure their statements are open, transparent, and honest in order to avoid potential liability for making false statements (i.e. no “greenwashing” allowed).[6] Similarly, investors—including investment funds and advisers—representing that they consider ESG-related factors when making investment decisions, must have in place systems for conducting ESG diligence on their investment targets. As we have seen time and again across our Governmental Practice teams, companies can help avoid costly penalties, litigation, and legal fees in the face of a government inquiry or investigation by acting early to make informed and honest disclosures, and creating tailored policies and procedures that are diligently followed.

2. Federal Regulatory Environment for ESG

Since the SEC announced the creation of a Climate and ESG Task Force within its Division of Enforcement (the “Task Force”) in 2021, the agency has been stepping up its ESG examination function as well as other enforcement mechanisms.[7] Because there is no single ESG disclosure scheme, it can be difficult for investors and consumers to understand the true impact of ESG factors for specific companies.[8] The Task Force therefore specifically focuses on whether disclosures adequately and accurately inform investors of the firm’s approach to ESG.

The SEC, in other words, scrutinizes whether companies accurately say what they are doing and actually do what they are saying when it comes to ESG. For example, the Task Force may investigate a company that markets itself as “sustainable,” claims its products are “biodegradable,” or says it is divesting from oil and gas, to ensure those disclosures or claims are in fact truthful. The SEC may also conduct an “examination,” which involves a thorough review of a company’s disclosures, marketing materials, compliance plans, and internal controls to determine whether they are aligned with actual business practices.[9] The SEC similarly will “assess whether ESG products are appropriately labeled and whether recommendations of such products for retail investors are made in the investors’ best interests.”[10]

When an investigation or examination reveals a company is failing to meet the promises it makes to investors and consumers in the form of greenwashing or other types of deceptive disclosures, the SEC may initiate an enforcement action. For example, in March 2023, the SEC entered into a $55.9 million settlement with Vale S.A., a publicly traded Brazilian mining company, to resolve charges related to the company’s “allegedly false and misleading disclosures about the safety of its dams prior to the January 2019 collapse of the Brumadinho dam that killed 270 people.”[11] In a statement, Mark Cave, Associate Director of the SEC’s Division of Enforcement stated that the settlement, if approved, will “demonstrate that public companies can and should be held accountable for material misrepresentations in their ESG-related disclosures, just as they would for any other material misrepresentations.”[12]

Given the SEC’s stated interest in ESG, we expect to see more matters like these in the coming months and years.[13] 

3. Recent ESG-Related Actions at the State Level

While ESG continues to grow in prominence as an investment framework, a number of state legislatures, governors, and attorneys general have taken steps to limit ESG considerations in investment and spending decisions—particularly with respect to public investments (e.g., state pension funds) and government contracts. Although these types of laws, regulations, and opinions may not expressly prohibit ESG investing, they do seek to limit the consideration of ESG factors at the believed expense of profits or return-on-investment. State representatives and officials implementing these types of measures often take the position that ESG is codeword for politically motivated, biased, and discriminatory behavior in investments. They also voice concern that including ESG as a factor in investment decisions may result in investors and consumers avoiding certain industries such as fossil fuels or firearms due to political—rather than financial—considerations.

Three recent letters written by state attorneys general encapsulate these efforts. First, in August 2022, nineteen state attorneys general[14] wrote a letter accusing BlackRock—the world’s top asset management fund—of compromising return-on-investment by considering ESG factors and abandoning prudent investment principles, particularly with respect to public pension funds.[15] Attorneys general from seventeen different states[16] responded in opposition, explaining ESG factors are like any other material factors that inform investors when they are deciding how to invest.[17] The letter explained that consideration of ESG risks and opportunities does not amount to an imposition of one’s values, but rather is in line with legal duties and part of an overall prudent investment strategy that leads to better value for the beneficiaries of an investment.[18] BlackRock also responded, pointing to its robust department of analysts and researchers dedicated to following well-defined procedures for considering ESG in investment decisions.[19]

Second, in January 2023, the attorneys general of Texas, Utah, and 19 additional states,[20] wrote an opinion letter to Institutional Shareholder Services, Inc. (“ISS”) and Glass Lewis & Co. (“Glass Lewis”), two companies that provide proxy voting advice to state pension funds.[21] The opinion letter claimed these companies were in violation of state law regarding the duties they had to their pension fund holders because, rather than looking solely at the rate of return and economic value of investments, they were allegedly making decisions based on their “opinion of society’s environmental needs,” diversity, equity, and inclusion issues, and “activist” political motivations.[22] In response, ISS denied any breach of contract or law and stated their role was not to advance personal or company views with respect to ESG factors, but was strictly advisory, professional, and independent.[23] ISS stated they had a fiduciary duty to consider all material risk factors—including ESG factors—not just return on investment.[24] Glass Lewis also responded that companies like theirs had a duty to be able to identify all risks and opportunities related to all ESG factors when considering short- and long-term investments—and that their role was to provide relevant information to allow the client to make investment decisions based on their own policies, investment structure, culture, and priorities.[25]

Third, in July of this year, thirteen[26] state attorneys general sent a letter to “Fortune 100 CEOs” shortly after the U.S. Supreme Court issued its opinion in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, Case Nos. 20-1199, 21-707 (June 29, 2023) (“SFFA”), which held that race may not be used as a factor in college admissions decisions. The letter seeks to apply the Supreme Court’s ruling to employment and contracting decisions, suggesting companies’ DEI programs and contracting preferences are discriminatory and illegal.[27] Attorneys general from twenty-one[28] different states swiftly responded in an attempt to reassure companies that their corporate diversity efforts are lawful, and that SFFA’s application is limited to college admissions systems.[29] This directly conflicting messaging underscores the challenges—both legal and non-legal—companies face as they walk the politically fraught, yet unavoidable, ESG high-wire in 2023 and beyond.[30]

4. Best Practices to Mitigate ESG Risk

The debate over ESG likely will end up in some form of litigation between the two sides at a future date. In the meantime, while it is possible to identify potential risks companies will face, it is unlikely that a company will be able to avoid the issue altogether. Accordingly, companies must have in place clearly defined policies, procedures, and practices related to ESG so they are prepared to defend their business judgment and demonstrate how ESG considerations in their business affect valuation and return-on-investment. The following list provides a number of best practices that can be implemented to mitigate ESG-related risk:

  • Document clear, tailored, and robust ESG policies and procedures, keep them up-to-date, and follow them;
  • Maintain accurate and thorough disclosures regarding corporate approach to ESG, including public statements, advertising, and marketing materials;
  • Establish and document a clear and consistent investment strategy grounded in research;
  • Conduct (and document) thorough due diligence of the ESG practices of investment targets;
  • Hire personnel sufficiently knowledgeable about ESG to look into the research and due diligence that goes into the selection of investments;
  • Engage in ongoing monitoring to ensure invested funds are maintaining their represented ESG principals, including periodic self-assessments and self-audits;
  • Establish best practices to be able to defend processes, including that ESG is a component of return-on-investment;
  • Stay true to the business judgment rule and exercise of fiduciary duties;
  • Keep abreast of laws, regulations, cases, and guidelines coming out of the SEC, states, and other regulating bodies.

Sheppard Mullin’s ESG Team will continue to monitor and report on developments in this evolving landscape.


[1] See relevance, complexity, legal implications, and emotional attachment to ESG factors vary across companies, industries, and audiences.

[2] An exception to this is that companies seeking to contract with the federal Government have long been required to disclose ESG-type information related to labor practices, organizational integrity, supply chain integrity, executive compensation, and environmental considerations, among others, in order to qualify for federal contracts.

[3] Federal Register :: The Enhancement and Standardization of Climate-Related Disclosures for Investors. Similarly, the Federal Acquisition Regulatory Council (“FAR Council”) is currently drafting a final rule that would amend the Federal Acquisition Regulation (“FAR”) to require all companies (whether public or private) bidding on federal contracts over a certain dollar threshold to disclose data on climate-related risks and greenhouse gas emissions. Federal Register :: Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk

[4] Larry Fink, chairman and CEO of BlackRock, has stated: “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.” Larry Fink’s Annual 2022 Letter to CEOs | BlackRock

[5] In 2019, the Business Roundtable released a Statement on the Purpose of a Corporation that was signed by 181 CEOs and defined corporate stakeholders to include “customers, communities, suppliers, employees, and shareholders.” Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’ | Business Roundtable

[6] The SEC defines greenwashing as:

the act of exaggerating the extent to which products or services take into account environmental and sustainability factors. Funds and advisers that engage in greenwashing may exaggerate or overstate the environmental and sustainability practices or factors considered in their investment products or services, while labeling and marketing themselves in a manner that makes it difficult for investors to distinguish them from funds and advisers that are truly using environmental and sustainability strategies.

Other entities or industry professionals may also engage in greenwashing. For example, companies may exaggerate or overstate the environmental and sustainability aspects of their products or services or make unsupported claims about taking environmental or sustainability actions.

Greenwashing |

[7] | Enforcement Task Force Focused on Climate and ESG Issues

[8] | Statement on Proposed Rule Requiring Enhanced Disclosure by Certain Investment Advisers and Investment Companies on ESG Investment Practices, discussing a proposed rule for investment companies and investment advisers requiring enhanced ESG disclosures.

[9] | SEC Division of Examinations Announces 2023 Priorities

[10] Id.


[12] Id.

[13] The SEC is also increasing ESG-related comments in its 10-K comments letters. See Compliance Matters: SEC’s Increasing Focus on ESG-related disclosures, Intelligize Report, 2023.

[14] These states included Alabama, Arizona, Arkansas, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, Utah, and West Virginia.

[15] BlackRock Letter.pdf (

[16] These states included the District of Columbia, California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, Oregon, Rhode Island, Washington, and Wisconsin.

[17] ESG Letter_Final_11.18.22.pdf (

[18] Id.

[19] BlackRock Response (09.06.2022)

[20] Other states signing on to the letter included: Alabama, Alaska, Arkansas, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, Ohio, South Carolina, Virginia, and West Virginia.

[21] Utah & Texas Letter to Glass Lewis & ISS FINAL.pdf (

[22] In a similar letter, Kentucky’s attorney general wrote a legal opinion claiming that investment managers are using the assets they manage to enforce their own preferred partisan political sensibilities and are seeking to use investment of “other people’s money” for desired societal and political change. According to the letter, shareholders are the only relevant stakeholder in investment decision-making, and other stakeholders such as customers, employees, suppliers, and communities have nothing to do with economic return. OAG 22-05.pdf (

[23] iss-ag-response-31jan23.pdf (

[24] Id.

[25] 6Ay (

[26] These states included Kansas, Tennessee, Alabama, Arkansas, Indiana, Iowa, Kentucky, Mississippi, Missouri, Montana, Nebraska, South Carolina, and West Virginia.

[27] SFFA Letter to Fortune 100 CEOs (

[28] Fortune 100 Letter – FINAL.pdf ( These states included Nevada, Arizona, California, Colorado, Connecticut, Delaware, D.C., Hawai’i, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington.

[29] Id.

[30] On July 18, 2023, U.S. Senator Tom Cotton sent letters to 51 law firm leaders claiming the DEI programs of those firms and their clients may now be violating federal law. See Senator Cotton Letters to Law Firms re DEI.pdf ( The letter warns the addressees that firms who continue to advise clients on DEI programs and/or operate their own DEI programs should preserve relevant documents—and advise their clients to do the same—“in anticipation of investigations and litigation.”