This year, two of the trendiest terms in the environmental lexicon are “environmental justice” and “environmental, social and governance” management principles, or ESG. Thoughtful and strategic corporate commitments to both, however, require holistic integration—in operations, supply chains and boardrooms—as the only path toward market differentiation.
Domestically, federal and state regulators are calling for companies to improve their ESG performance while simultaneously prioritizing and advancing environmental justice efforts. The days of “single-issue focus” are no more.
ESG has evolved from a peripheral social movement to the center of corporate decision making. Federal agencies including the Securities and Exchange Commission and the Federal Trade Commission are playing a pivotal role in ushering in this change. In the past year, the SEC has proposed two rules to ensure clarity and to support reliable ESG-related disclosure and investment. Two years ago, it also created a Climate and Environmental, Social and Governance Task Force to address ESG-related misconduct and has already announced high-profile investigations against publicly traded companies (Brazilian mining concern Vale was one prominent example) resulting in multimillion-dollar fines and permanent injunctions. The stakes are high for public companies as the SEC begins to weigh in on the things businesses need to share in their disclosure statements.
Initiating meaningful engagement before environmental or social problems arise or project development begins is sound practice."
Similarly, in late 2022, the FTC hinted at its intention to crack down on companies that misrepresent their ESG bona fides through “greenwashing”—a neologism that describes marketing practices that rely on environmental benefit claims that are misleading, deceptive or unsubstantiated by data. The FTC announced a plan to revise its Guides for the Use of Environmental Marketing Claims (known as “Green Guides”) for the first time in over a decade to catch up with current science, consumer expectations and marketing campaigns. The Green Guides are the leading federal interpretations of the advertising and marketing of environmental benefit claims, and the FTC is contemplating a rule to make them legally binding.
The risks of greenwashing encompass all three letters of the abbreviation: They fall under the “E” given that companies face significant liability for misrepresenting the climate change effects associated with their products; under the “S” because business practices that involve discrimination or forced labor will result in misleading claims or disclosures; and under the “G” because misleading or deceptive ESG disclosures will likely result in a materiality violation of securities laws.
Environmental justice, according to the Environmental Protection Agency, is “the fair treatment and meaningful involvement of all people regardless of race, color, national origin or income with respect to the development, implementation and enforcement of environmental laws, regulations and policies.” Since 2021, the Biden administration has committed to instituting a “whole of government” environmental justice approach through a raft of new programs: the Justice40 Initiative, the Environmental Justice Scorecard and the Climate & Economic Justice Screening Tool. The federal Council on Environmental Quality has also directed agencies “to incorporate environmental justice principles into their programs, policies, actions and activities” as part of their consideration of the effects associated with greenhouse gases and climate change as they evaluate proposed major federal actions.
Environmental justice falls between the “E” and the “S” of ESG, and a transparent and ethical governance strategy requires management of environmental justice risks. Much like the substantiation of environmental benefit claims, measurable data exists to assist companies with tracking how their decisions may affect the vulnerable and environmentally overburdened: EJScreen is the EPA’s primary online tool for this purpose, and it contains socioeconomic data to identify such vulnerable communities.
Thus far, heightened government enforcement and oversight on ESG and environmental justice have been met with a rash of litigation—particularly consumers bringing forth accusations of greenwashing related to recyclability of consumer products and utility services. The moment is ripe, however, for increased litigation involving intersecting environmental justice and ESG claims. As the country begins its transition to cleaner energy, there will be conflicts over which communities should bear the nuisances associated with new and relocated project developments. The EPA has already indicated interest in derailing the plans of project proponents on environmental justice grounds. Other agencies will soon follow suit under new and revised federal agency guidance issued by the Biden administration. How should companies prepare?
The answer lies partly in the boardroom. A recent international study by researchers at England’s University of Portsmouth, Brunel University and Loughborough University found that companies with a gender-diverse board and female directors are less likely to misrepresent their ESG credentials and commit greenwashing. Diversity in the boardroom will be key to avoiding unintentional blind spots concerning ESG goals and management of environmental justice risks.
Management of those risks requires consistent community engagement. Initiating meaningful engagement before environmental or social problems arise or project development begins is sound practice.
Much like the federal “whole of government” approach, publicly traded companies cannot have corporate governance strategies that focus solely on climate change. These days, a company’s overall mitigation strategy must also factor in potential ESG and environmental justice risks.
Tanya C. Nesbitt is a partner in Thompson Hine’s environmental practice and a member of the firm’s ESG Collaborative. Tanya’s practice includes representing clients in highly regulated industries with an emphasis on greenwashing, environmental permitting, cost recovery, natural resources and land management and wildlife management. She collaborates with her clients to find the best business solutions, whether it involves providing detailed strategic advice and tactics, counsel on the advertising and marketing of environmental benefit claims, or fighting for her clients in litigation.