WHAT YOU NEED TO KNOW IN A MINUTE OR LESS
Increasingly, class action lawyers are using changing environmental regulations, new reporting requirements and corporate self-disclosures as the supposed basis of a legal obligation when filing wide-ranging putative class actions. These trends are part of the evolving landscape of ESG class actions, which have come into focus with a rapidly growing investment ethos that evaluates investment opportunities based on criteria that are not necessarily quantifiable.
Environmental factors, the “E” in ESG, are typically concerned with calculating a company’s direct and, in some cases, indirect impacts on the natural environment, which may include the company’s efforts to preserve or enhance the natural environment.
Here are two emerging trends in environmental ESG class action lawsuits filed:
Piggybacking on changing administrative estimates
The U.S. Environmental Protection Agency (EPA) conducted the National Air Toxics Assessment (NATA) in 2014 as a screening tool to help state, local, and tribal aviation agencies identify emission sources they may want to investigate further.1 Despite EPA’s disclaimer that NATA does not assess an individual’s risk and that NATA should not be used as a definitive means of determining specific risk levels or comparing risks at a local level or between states,2 A plethora of putative class actions are doing just that. Since the EPA released 2014 NATA results on August 22, 2018, plaintiffs across the country have filed hundreds of lawsuits (including multiple putative class actions) against defendants in multiple industries.
As the EPA explained, NATA is a screening assessment with uncertainties that vary by location, emission type and emission source, and uses rapidly changing modeling inputs and perceived health risks. This was quickly confirmed in the EPA’s 2017 Air Toxics Screening Assessment (AirToxScreen).3 published on March 2, 2022, which estimated risk levels in some locations orders of magnitude lower than NATA just a few years earlier.
Because NATA and AirToxScreen use EPA’s National Emission Inventory (NEI) as a starting point, companies with facilities whose emissions are bound by NEI should consider taking steps to ensure their emissions are as low as possible and reporting is accurate . For example, increased leak detection and repair (LDAR) testing may show that fugitive emissions are lower than estimated, thereby reducing fugitive emissions reporting.
Additional reporting requirements for the horizon
The Securities and Exchange Commission (SEC) established the Climate and ESG Task Force in its Division of Enforcement in March 2021,4 and the then-Chairman of the SEC directed its corporate finance division to “increase its focus on climate-related disclosures in corporate public filings.”5
Since then, the SEC has issued a proposed rule on “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”6 “intends to enhance and standardize climate-related disclosures to meet these investor needs,” in part because “many issuers are currently attempting to provide this information, but current disclosure practices are fragmented and inconsistent.”7
Additionally, on May 25, 2022, the SEC proposed amendments to existing rules and reporting forms that, if adopted, would amend the ESG-related disclosure requirements applicable to all investment companies and business development companies organized under the Investment Company Act of 1940 (as amended). amended version) are registered. , investment advisers registered under the Investment Advisers Act 1940 (as amended) and certain advisers who are exempt from regulation.8th
When these proposed disclosure requirements come into effect, the current trend of securities class action lawsuits based on sustainability disclosures is likely to accelerate. Over the past decade, consumer and investor complainants have focused on companies’ voluntary sustainability disclosures. With these additional disclosure requirements on the horizon, it is becoming increasingly important that a company’s disclosures are complete and accurate. Companies should evaluate their processes for gathering information relevant to disclosures and ensure that those processes are prepared to meet proposed disclosure requirements if they become effective.