Nota Bene Podcast Ep. 164

Navigating the ESG Conundrum with Ray Marshall and Melissa Eaves

Thank you for downloading this transcript.

Listen to the original podcast released June 7, 2023 here:

In this episode, Sheppard Mullin attorneys Melissa Eaves and Ray Marshall join host Scott Maberry to explore how the best companies in the world are navigating between directly conflicting regulatory guidance on Environmental, Social and Governance initiatives.


About Ray Marshall

Ray Marshall is Of Counsel in the Governmental Practice in Sheppard Mullen’s San Francisco office, where his practice focuses on White Collar and Investigations, Fiduciary Duties, and Environmental, Social & Governance issues.

Ray represents clients in both complex business litigation and white-collar defense. He has conducted a wide array of internal investigations and company inquiries, including cases alleging insider trading, stock options backdating, securities fraud, accounting irregularities, antitrust violations, public corruption, FCPA and other corporate and individual wrongdoing. He has represented clients in civil, criminal and administrative proceedings brought by governmental authorities, including the Department of Justice and the offices of various U.S. Attorneys, State Attorneys General and District Attorneys.

In addition to serving on Sen. Dianne Feinstein’s Judicial Advisory Committee for the Northern District of California, Raymond also serves as an adviser to the American Law Institute on the Model Penal Code Sentencing Project. He is past-President of the ABA Retirement Fund Board of Directors, a past member of the ABA Standing Committee on Federal Judiciary, and former president of both the State Bar of California and the Bar Association of San Francisco. In 2004 and 2007, he was appointed by Chief Justice Ronald M. George to chair the California Supreme Court’s Advisory Task Force on Multijurisdictional Practice.

In addition to his professional affiliations, Ray is extremely active in community affairs, serving on the boards of the Giffords Law Center, the Equal Justice Society, the United Negro College Fund, and HomeBase/The Center for Common Concerns. In March 2009, he argued on behalf of five of the leading civil rights groups in the country (Asian Pacific American Legal Center, California State Conference of the NAACP, Equal Justice Society, Mexican American Legal Defense and Educational Fund, NAACP Legal Defense and Educational Fund) before the California Supreme Court, arguing that allowing Proposition 8 (a proposition which sought to outlaw gay marriage) to stand could be detrimental to other minority groups who could easily become the targets of initiative campaigns seeking to take away their rights.

About Melissa Eaves

Melissa Eaves is Special Counsel in the Governmental Practice in Sheppard Mullen’s Los Angeles office. Melissa currently focuses her practice on complex civil litigation, fraud, investigations white collar criminal defense and False Claims Act litigation. She has substantial experience in compliance investigations, fiduciary counseling, ESG, American with Disabilities Act, FTC, SEC and TVPRA/human trafficking litigation.

Melissa has successfully represented numerous individuals and entities in connection with a wide range of federal and state investigations and prosecutions. In civil litigation, she has successfully represented both clients in both state and federal court.

In addition to complex litigation and white collar defense work, Melissa handles internal investigations for companies. She is an experienced and skilled investigator, handling investigatory matters involving whistleblower claims, harassment and workplace misconduct, criminal misconduct, and healthcare fraud. She has also worked with governmental agencies such as the OIG, DOJ, FTC, SEC, and HHS in connection with such investigations.

Melissa was part of the team that recently won a complete defense victory in a human trafficking case, and she has also obtained complete defense verdicts in trials involving ADA claims. In addition, she has represented the California Insurance Commissioner in the Executive Life Insurance Company, First Capital and Mission Insurance Group insolvencies and reinsurance litigation, involving over 300 reinsurers worldwide, representing recoveries in excess of $1.3 billion. Melissa has substantial litigation experience in both state and federal courts, including the U.S. Supreme Court, enforcing judgments abroad and supervising of domestic and foreign outside counsel.

About Scott Maberry

As an international trade partner in Governmental Practice, J. Scott Maberry counsels clients on global risk, international trade, and regulation. He is also a past co-chair of the Diversity and Inclusion Working Group for the Washington D.C. office, serves on the firm's pro bono committee, and is a founding member of the Sheppard Mullin Organizational Integrity Group.

Scott's practice includes representing clients before the U.S. government agencies and international U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC), the Department of Commerce’s Bureau of Industry & Security (BIS), the Department of Commerce Import Administration, the Department of Homeland Security (DHS), the Department of State Directorate of Defense Trade Controls (DDTC), the U.S. Department of Justice (DOJ), the International Trade Commission (ITC), and the Committee on Foreign Investment in the U.S. (CFIUS). He also represents clients in federal court and grand jury proceedings, as well as those pursuing negotiations and dispute resolution under the World Trade Organization (WTO), North American Free Trade Agreement (NAFTA) and other multilateral and bilateral agreements.

A member of the World Economic Forum Expert Network, Scott also advises the WEF community in the areas of global risk, international trade, artificial intelligence and values.


Scott Maberry:

Welcome to Sheppard Mullin's Nota Bene, a twice monthly podcast for the C-suite where we tackle current, national and international headlines affecting multinationals doing business without borders. I'm your host, Scott Maberry. Let's get started.

Welcome to episode 164 of the Nota Bene podcast. I'm your host, Scott Maberry. My guests today are Melissa Eaves and Raymond Marshall of the law firm of Sheppard Mullin. We're talking about how the best companies in the world are navigating between directly conflicting regulatory guidance on ESG initiatives. Before I introduce our guests, I'd like to thank our listeners in over 100 countries worldwide. We're glad you're tuning in and please do keep the feedback coming. It definitely influences our programming. You can email me directly with your comments and suggestions. My email address is in the program description. My guest, Raymond Marshall, is a lawyer in the Governmental Practice in the firm of Sheppard Mullin. His legal focus is on Government Investigations and White Collar Enforcement. His Juris Doctor degree is from Harvard.

My guest, Missy Eaves, is a lawyer in the Governmental Practice, also in the law firm of Sheppard Mullin. She focuses on White Collar Defense and Corporate Investigations. Her JD is from Pepperdine Caruso School of Law. Both Ray and Missy are key members of the law firm's ESG and sustainability practice team, and they are very well positioned to give us insights on those issues today. For more than two decades, it's been a widely accepted principle of investment that investors might decide to take into account certain environmental, social and governance factors when deciding whether to buy shares. Those principles, boiled down to the acronym ESG, were endorsed by 181 top CEOs in the Business Roundtable in 2019, stating that the purpose of the corporation is to serve all stakeholders, including those in five different groups, customers, employees, suppliers, communities, and shareholders. As of today, according to the New York Times, more than $18 trillion are held in investment funds that follow ESG investing principles.

Politics has taken note and taken sides as we are all seeing in the run-up to the 2024 US elections, but so have market regulators. Our discussion today looks at how the regulators are putting companies and investors in a tight spot by coming at ESG principles from both sides and how the world's best companies are addressing this conundrum. Specifically, there's regulatory risk if your company is not fulfilling ESG principles well enough and there's regulatory risk if you are doing it too well. So, Missy, could you set the stage for us? What is the main US federal regulator, the Securities and Exchange Commission, doing on ESG right now?

Melissa Eaves:

Well, the SEC has created an ESG enforcement task force and is stepping up its examination function and other enforcement mechanisms. But they're focusing on client disclosures and whether companies are adequately and accurately informing investors of what they're doing, basically what their approach is to consider ESG and investing. The task force is primarily focusing on greenwashing. Are people saying what they're doing and doing what they're saying? Because sometimes companies promise to be sustainable or biodegradable or environmentally conscious or divesting themselves of certain aspects of ESG, such as coal or oil and gas, and they sometimes fail to meet the promises they make to consumers. There has been an emphasis by the SEC and enforcement, and we fully expect to see more.

In terms of the examinations, they have been doing these incredibly detailed examinations that include 80 to 90 questions, a trade-by-trade analysis, and also looking at proxy voting. The effort has become division-wide, it's across the country and there are even specialized units that have been formed. They're looking at companies’ disclosures, their marketing materials, their compliance plans, and internal controls. And of course the difficulty is that because there's such a lack of uniformity in ESG standards and internal ESG scoring for each company, it's very inconsistent. It makes it hard for an investor, consumer to know what's true. So bottom line is it creates a very fertile ground for enforcement.

Scott Maberry:

That is an important development for our listeners, and so we'll try to unpack that a little bit. The first thing to think about enforcement, Ray, maybe I'll turn to you, what does this mean for federal enforcement? I know the SEC got a settlement with Goldman Sachs Asset Management in 2022, because two mutual funds marketed as ESG investments failed to follow their own ESG policies. Tell us what that means and what it means particularly for companies and investors.

Raymond Marshall:

Well, at the bottom line is what Missy has started talking about and will be a theme throughout this discussion, which is truth in this disclosure. The SEC has always demanded and insisted by their rules and regulations, that in making public disclosures, material information that investors use to make investment decisions, that those disclosures in fact be accurate, honest, truthful, transparent and open. What's happening in the ESG space is that we use the term greenwashing of companies who have made representations along the way with regards to what it is they are doing with regards to environmental sensitivity and their oversight and how they structure, manage and process those decisions. Oftentimes or too often, the SEC would say investors are reliant upon information that turns out not to be true. There've been a number of different actions. I'm just going to speak to one or two by way of example.

The one that we'll start with is the Goldman Sachs case. And that was a matter last year in 2022 where the SEC looked at Goldman and found that Goldman had two significant failures in terms of omissions. One was that they failed as advertised to have written policies and procedures in place with regards to how they did their oversight in making their recommendations and investment decisions for their clients and customers. Their second big failure was that even when they had in place those policies, practices and procedures, they failed to follow them in any consistent way. Specifically, what they were supposed to be doing was to have done an equity and investments oversight, filling out questionnaires, doing the study and then making decisions based upon that determination. What took place in reality was a complete failure, in fact, to make those decisions before investing, and instead they completed a number of these surveys after the investment was made. Result was a resolution with the SEC, but it resulted in Goldman paying a fine of $4 million and a consent decree saying, basically, cease-and-desist.

Scott Maberry:

Right. Then if that's not bad enough, you've got another one last year where the SEC obtained a settlement with BNY Investment Advisory charging that the advisor misled investors saying that ESG quality reviews were prepared for all investments for certain funds. What happened in that case and what does that mean?

Raymond Marshall:

Similar, again, this notion and terminology that we use, brainwashing, we're not talking about washing laundry, we're talking about the whole notion of are you making representations saying one thing and doing something else or saying that you're doing certain activity and in fact, not doing it. In the Mellon case, again, Mellon had made material representations with regards to the types of investments that they were making, and they touted that they had a proprietary process by which they would go out prior to making any investment in terms of green investments and that they would be looking and doing a deep dive analysis with regards to the type of securities and bonds that were going to be purchased for their clients. Lo and behold, when the SEC examined that, they found that 25% of the investments had not undergone this quality review.

As a result, Mellon did cooperate in the investigation. But nevertheless, what it resulted was, again, basically a cease-and-desist order, $1.5 million dollar penalty, and the mea culpa of, "Geez, we knew what we were doing and we did it wrong." One of the rules to take away from all this, and again, it'll be a constant theme, if you say you're doing it, you better be doing it. And if you say you're doing it before you make the investment, you better be able to document it and show it because the SEC is looking and they will take enforcement action simply and apart from any action that you might have with regards to private litigation.

Scott Maberry:

That's just amazing and that's clearly a risk. What we're picking up from this is there's clearly a risk if you say you are following certain ESG principles, but the government thinks you're not doing it well enough. So what should companies be doing to mitigate that risk? Missy, maybe you could start.

Melissa Eaves:

Well, I would say at this point in terms of best practices, the first thing would be to keep abreast of the ever-emerging guidelines and cases that are coming out of the SEC and other regulatory bodies. And to pay particular attention to the fact that regulators have the capacity at this point, to look at a highly detailed level of information and are able to drill down really to individual investments and identify specific themes. It's important to have very clear and thorough disclosures about your approach to ESG investing, and that includes both disclosures and marketing materials.

It's important to have a clear and consistent investment strategy. Have clear policies and procedures with respect to ESG. A compliance plan that makes sure that you are doing what you're saying in all these disclosures and marketing materials. Make sure that that compliance program is robust and includes things like personnel that are sufficiently knowledgeable about ESG, to permit them to look specifically at the research that's going into the selection of the investments, what type of due diligence and how thorough the company's being in doing their due diligence, what goes into the ultimate selection of the investment. Then the ongoing monitoring to make sure that those invested funds are actually maintaining the ESG principles that they represent that they're doing.

Scott Maberry:

Yes, certainly. I suppose that in your area as in mine, that might involve periodic self-assessments, it might involve periodic self-audits, it might involve getting an outside eye to come in and look at how you're doing, judging your program very specifically against your actual outcomes.

Melissa Eaves:

Yes, indeed.

Scott Maberry:

And what about with advertising and disclosure and all that stuff?

Melissa Eaves:

Yeah, same kind of thing. Close monitoring of the advertising, whether or not you're making broad statements about what you're doing versus being specific.

Scott Maberry:

So that's interesting to me because it not only says as an investment advisor, let's say, if I've got a fund where I'm making some kind of ESG claim, it's not just whether I'm following my own procedures on what investments I'm making, but it's also very much about what I say to the outside world about that fund.

Melissa Eaves:

Absolutely. That's really the key. And also in exercising your due diligence you want to be looking at, is the company that is being invested in doing what they're saying?

Scott Maberry:

Exactly. That's right. So I need to at least have some standards and follow them for, I'm not merely taking the word of one of my investment targets that they're green or environmentally conscious or whatever I'm selling, but I've got to have some standards for determining that they actually are.

Raymond Marshall:

Scott, we don't even need to make it as complicated for our clients and those listeners who say, "Well, geez, I'm just not familiar with the SEC. I'm not familiar with rules and regs. It seems so complicated." You can really break it down into a very simple concept, which is tell the truth.

Scott Maberry:

Tell the truth, say what you do-

Raymond Marshall:

And so it's a very basic concept-

Scott Maberry:

... and do what you say.

Raymond Marshall:

... that even if you did not have the SEC out there. I made reference earlier to private party litigation, which is that whether it's a shareholder or whether it's another stakeholder, in terms of public, where if you are out there misrepresenting, you don't even have to have the SEC, it's just the fact that you are seeing something that is materially affecting stock or a purchase, that is not true. And someone makes a determination that is material, and that was a basis for why they made the purchase. So even if the rules and regs weren't statutory, it's a very simple concept, if you say you're doing something, then you ought to be doing it.

Scott Maberry:

That's interesting too, and we ought to highlight this. In addition to being a regulatory issue ministered by the Securities Exchange Commission, there is a possibility for private litigants to come after you. And the bottom line is any theory by which you could get sued for not saying what you do or doing what you say, anytime you're not telling the truth, you could have liability on ESG under a greenwashing theory.

Raymond Marshall:

That's right. Think of just garden-variety of fraud and admission or misrepresentation. It need not be statutory nature or it could be statutory state law, need not be securities law. It's basically the concept of you made a representation, I relied upon that representation, I acted on it, I was damaged by it, and that damage could be monetary or quantified in some other manner. That opens the door with a very litigious society. And so whether you are part of the C-suite as management, whether you're on the board, whether you are the investment grouped for your company, you just need to be sure that what you're representing is truthful and accurate.

Scott Maberry:

That's a great headline for this program. Now that sketches out in very broad terms, one side of this dilemma. We talked about it at the opening. The dilemma is if I'm doing ESG, I better be doing it correctly, and that's what that's all about. And the other side of this dilemma is where some states and local governments do not want us to do ESG investing at all. So what about US state regulatory initiatives? There's legislation in several US states attempting to prohibit ESG investing or limited, and that's going to increase the degree of difficulty in complying with rules around ESG. So there appear to be several flavors of this. First, we understand that some states are placing limits but not outright prohibitions on promoting ESG. So Missy, maybe you could help us understand that first category.

Melissa Eaves:

Sure, yes. Some states are not expressly prohibiting it, but they are limiting consideration of it. In that, they're prohibiting investing based on ESG to the extent ethical considerations play a greater part than financial. In other words, they're saying, "It's okay, you can consider it, but return on investment still has to be the priority." And then of course, there are other states that tend to fall on party lines that promote consideration of ESG. And then there are other states that say you can only consider financial factors. And that's particularly true when it comes to state investments, for example, state pension funds. There are some states that do not want public funds invested in ESG related investments as the primary goal. They want the primary goal to be investment returns. And so there's a lot happening right now in this general area.

Scott Maberry:

Yeah. Now this is getting more complicated, as you say. Some states are prohibiting ESG based investment limitations or prohibiting ESG consideration at all. So what does that look like?

Raymond Marshall:

What we have is a damned if you do, damned if you don't situation. We're in 2023 and we know that we're a divided country. Everyone is split sometimes in political lines, and those political lines have sifted into the law, and the law has shifted into investments and investment, as you said Scott, goes to the situation. You have some states, and we'll talk about a few of those, who have taken the position in terms of ESG, that ESG is basically code word for bias and discriminatory behavior and investments. And you have some states who say that by definition, when you're advocating ESG, what you're really doing is saying, "Don't buy my products or stay away from my industry." And so you have industries now that are fuel, energy, fossil fuel, oiling, gas, it may be manufacturing weapons, guns, or it may be countries that you do business with that should be, in some people's views, on the boycott list because of their social, political factors.

And what subjects are saying, all of that is political and it has nothing to do with, as Missy said, return on investment. And to the extent that you, as either an advisor or as a proxy source, are making recommendations and statements that go to those social issues, then what you are doing is reflecting your personal values as opposed to the value of the company, the value and the dollars and the rate of return for my people who only care about, at the end of the day, return on investment. And so we are going to prohibit because it's discriminatory and it's unlawful. It's a breach of state contracts, state law, and your fundamental duty, fiduciary duty to the beneficiaries of pension funds, especially public pension funds at states.

Scott Maberry:

Okay. And that brings us to Texas. What does the Texas legislation do on this front?

Raymond Marshall:

Texas is one of those states that I just described. Texas AG, along with a number of others, Texas and Utah specifically, wrote a letter to two companies. One, Institutional Shareholder Services Inc. and then Glass, Lewis and Company. Interesting, because these are not financial advisor companies. These are companies that provide proxy voting advice to many state pension funds, including Texas and Utah.

They took a position as saying, "Look." And the AG letter was actually an opinion letter from their office saying that, "You all, as we read your materials, are in violation of state law with regards to your duties, to our pension fund holders. Because you are essentially making decisions based upon your values and your activist political bent as opposed to," as Missy says, "looking solely at the rate of return and the economic value. And in doing that, basically what we want you to do is to stop and we want you to stop it now or you're going to be liable for losses that are out there." So they were very aggressive in terms of their shot across the bow and staking out what their position was, which is, we don't want you considering ESG because what that is, that's a more social statement as opposed to an economic statement.

Scott Maberry:

What was the response from the addressees of that letter?

Raymond Marshall:

Well, it's interesting because both responded, and I would say in a very deliberate and in a very frontal way. The response that came in from ISS was to one, make clear that what their job was, not to indicate what their individual personal company views were on factors like ESG, but they tried to make clear in their letter that their role was simply advisory, professional, independent and was within their fiduciary responsibility to be able to describe all the risk factors, not just the return on investment, in excluding all factors that are material. So they took a position one, of trying to explain what their role was, two, say that it was not a breach of any contract law and no breach of any basic principles of investment policy.

What I liked about Glass Lewis response, they went actually further, because they took head on all of these letters that were coming in from state AG saying that ESG considerations was both unlawful and purely political. What they said was that companies like theirs had a duty to be able to identify all the risk and opportunities associated with all of these ESG factors, including climate change as well as the composition of board and workforce as being material issues with regards to short and long-term investments. And that their role was simply to provide information to the clients, and it was the client's decisions as to how they made those investments based upon the client's own investment policies, their own investment structure, their own culture and their own priorities. And so they rejected this concept that they were acting in some political manner and in breach of their fiduciary responsibilities. In fact, they said that would be irresponsible, essentially not to consider these factors because they did have the potential of affecting market price and valuation.

Scott Maberry:

So just staying with that one for a minute, the fight is on it seems like, and it remains to be seen how it's going to come out with several attorneys general writing letters to a couple of prominent investment entities and the two entities really defending themselves on a couple of different theories. What can happen next? What can this turn into between the AGs and these two companies?

Raymond Marshall:

Well, ultimately it's probably going to end up in some form of litigation as between the two sides. And you would expect that at some point, suits might be filed by the AGs and they'll be aggressively defended. What you have is a situation, for example, whereby one person looks at the same set of facts and they call them political values, and another person looks at the same facts and say they're economic values. And what we have tried to tell our clients is that we can lay out the guardrails for you as Missy has, and you discussed in the beginning. But in terms of being able to have total protection against being sued or the issue not rising, that is not likely or probable because as I said, you're damned if you do and damned if you don't. And so what we try to do is to say, what you need to do is lay out those best practices that Missy has talked about, in terms of being able to defend objectively the process that you use. Keep it in mind that at the forefront is in fact rate of return and return on investment.

These other factors, the argument would be, that issues such as climate change or ESG or whatever the fact of it might be, affects the valuation on rate of return. And so in terms of the business judgment rule, you're then just defending your judgment, but you're not saying that you're in violation of the law, with the exception of arguing as to what a particular jurisdiction, a particular state's law is. So from my standpoint, I know this is very long, is what does the law say? How does the law apply to your facts? Looking at a system that looks at the law as well as looks at those factors that you would objectively with regards to rate of return, maximizing that with whatever the client's particular investment portfolio policy is, whatever their particular culture is, whatever the client's priorities are, and then the client is left to make that best decision as to what it wants to do with eyes wide open.

Scott Maberry:

I think that's the main message that comes out of this, is that just because there are a bunch of moving parts, and just because there are regulators telling us to do opposite things, doesn't mean we can't have investment priorities. What it means is we better be willing and ready to defend them. And what that boils down to is good procedures and following the good procedures, or as you put it earlier, you say what you do and you do what you say and you be ready to document that. I want to stick with AG letters for a minute. I know there was another situation where multiple AGs, again, including Arizona, wrote a letter to BlackRock accusing them of harming investors by prioritizing ESG principles over return on investment. So it's the same type of issues but tell us about that letter and where that one stands.

Melissa Eaves:

Yeah, that was last year where 19 attorney generals accused BlackRock of compromising return on investment by considering ESG and abandoning prudent investment principles, particularly with respect to public pension funds. And BlackRock pushed back on that and pointed to its robust department that has analysts and researchers and very, very detailed procedures and follows those in its investment decisions. And then more recently, AGs from 21 states sent a letter to 53 of the largest financial institutions threatening to take legal action if the firms push ESG over investment returns. And comparing them to political and social activists and claiming that they're violating state and federal securities laws and violating fiduciary duties. They seem to be suggesting that those investment managers are driving out fossil fuels and the result is weakening the global US position and that their goal is to protect their home state industry. So it's definitely an evolving situation and it's probably not going away anytime soon.

Scott Maberry:

No. And in additionally, last year there was a letter from the Kentucky Attorney General and a letter from the DC Attorney General and several of those. Could you just describe those briefly?

Raymond Marshall:

Yeah, I can jump into those, Scott. What you have is literally polar opposite worldview, literally. People looking at the same facts and one sees red and one sees green. And the Kentucky letter first. Kentucky in May of last year wrote a letter, an opinion, actually. It was a legal opinion from their office, essentially saying that investment managers now are using basically the assets that they manage other people's money, they would say, to enforce their own preferred partisan political sensibilities and seeking to use the investment money of the good folks of Kentucky for these companies own desired societal and political change. And they go on to say that that is, we noted before, completely unlawful contrary to their fiduciary duty and that what they ought to be doing and need to do, to comply with the law, as Missy said they have, a single-minded purpose should only be returns and their beneficiaries’ investments.

And they coined this phrase, which I had not heard until I read the letter from Kentucky, stakeholder capitalism. And what they would argue, as you in the beginning, Scott, you talked about the various stakeholders. I think you mentioned several, made five that started with the concept of customers, employees, suppliers, communities, and shareholders. Kentucky says, no, no, no, no, no, no, no, not at all. There's a singular stakeholder and that's the shareholders. Everything else dealing with customers, employees, suppliers, communities, has nothing to do with economic return and valuation. And for you to consider those is unlawful and a breach of your duty. That's where they laid their ground post.

Scott Maberry:


Raymond Marshall:

In return, and the response was a letter by the District of Columbia Attorney General, signed on by others, who took just the opposite view. They said to the contrary, ESG is nothing more than any other material factor in the investment decision-making process. To overlook it, in fact, is a breach of your fiduciary duty and responsibility to your clients. And that that in fact is a milestone post with regards to valuation. So your lack of looking at such factors that would impact supply chain, impact rate of return, and for you to overlook it and to ignore it because of politics, in fact is doing just the opposite. You're imposing your political view by not looking at it.

So the client, of course throws up their hands and said, "Do I prefer to be sued by those states who promote this as a factor that should be looked at? Or do I want to wait and be sued by those states who say, 'No, looking at it in fact is going to be political.'" I can understand the client's position and frustration with the law and saying, "I just want to do business. I want to be out of this politics."

Scott Maberry:

So it's got to be infuriating because taking together these initiatives and the Kentucky and DC ones are just two examples where you are definitely where your team has been calling the rock and the hard place and regulators are actively pursuing both pro-ESG and anti-ESG investment priorities. What steps should companies, investors take to mitigate the risk in this overall really complicated environment?

Melissa Eaves:

Well, I think the main points are to be very clear in both their disclosures and their marketing materials. Have a clearly defined process in place. Follow the process and the procedures that they establish. And then have a knowledgeable compliance staff to ensure robust compliance with procedures. And regardless of where each company comes out on their investing, make sure that the process that's in place objectively demonstrates that everything that went into the decision-making process. If they want to consider ESG, that's fine, treat it as a material factor along with any other material factors that you would traditionally consider in making choices. You want to make sure that you're true to the business judgment rule and exercise of your fiduciary duties while still trying to be faithful to their own corporate values and choices.

Scott Maberry:

And that is an excellent place to end because I think that's the main message to our listeners. We have an environment now where we're polar opposites across this country. We're divided in ways we've never been before and to an extreme degree that we've never been before. And now governments and regulators and state attorneys general and state houses and federal regulators are all weighing in and asking our clients to do things that are diametrically opposed to each other. And the only way to navigate that is to have really thoughtful policies, really thoughtful procedures, and really careful documentation of how you're going to walk the walk and talk the talk no matter what your investment priorities or investment principles are. So with that, I want to thank you both very much for being with us today. It's been really helpful and I'm sure that we'll get lots of follow-up questions about this and can't wait to have you on again as some of these issues develop. Missy and Ray, thank you very much for being with us today.

Contact Information:  

Melissa Eaves

Raymond Marshall

Scott Maberry


Goldman Sachs SEC Settlement (2022)

BNY SEC Settlement (2022)

Texas AG Letter

ISS Response

Glass Lewis Response

BlackRock Letter

Kentucky AG Opinion

Kentucky AG Letter

Washington DC AG Letter

ClientEarth Lawsuit Against Shell

BNP Paribas Case

* * *

Thank you for listening! Don’t forget to FOLLOW the show to receive every new episode delivered straight to your podcast player every week.

If you enjoyed this episode, please help us get the word out about this podcast. Rate and Review this show in Apple Podcasts, Amazon Music, Stitcher or Spotify. It helps other listeners find this show.

Be sure to connect with us and reach out with any questions/concerns:




Nota Bene Website

Sheppard Mullin Website

This podcast is for informational and educational purposes only. It is not to be construed as legal advice specific to your circumstances. If you need help with any legal matter, be sure to consult with an attorney regarding your specific needs.

Jump to Page

By scrolling this page, clicking a link or continuing to browse our website, you consent to our use of cookies as described in our Cookie and Advertising Policy. If you do not wish to accept cookies from our website, or would like to stop cookies being stored on your device in the future, you can find out more and adjust your preferences here.