ESG Securities Fraud

Abstract

As investors have become more concerned about the risk that corporate wrongdoing will impact a company’s stock price, the SEC and private plaintiffs are increasingly bringing cases alleging that a company misrepresented a risk relating to an Environmental, Social, and Governance (ESG) matter. The courts have been skeptical of such claims because of the perception that the scope of securities fraud liability would be too broad if it policed disclosure relating to the myriad of ESG risks facing public companies. They have thus often used the puffery doctrine to find that broadly worded statements concerning ESG risk are not misrepresentations.
This Article argues for a different focus in the evaluation of ESG securities fraud cases. The key question in such cases is whether the ESG risk at issue was sufficiently material so that the company’s disclosures that failed to acknowledge such risk were misleading. Courts should assess the materiality of ESG risk by applying the probability-magnitude test set forth by the Supreme Court in Basic v. Levinson. In doing so, they should consider facts relating to whether the probability of the risk at issue is subject to reasonable calculation or whether it is an uncertainty. Screening cases primarily based on the materiality of ESG risk would be a more effective way for courts to identify meritorious cases than rigid application of the amorphous puffery doctrine.

Keywords: securities regulation, securities enforcement, securities litigation, ESG