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 risks relating to Environmental, Social, and Governance (ESG) matters. 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 vaguely optimistic statements about a company’s ethics and culture of compliance are not misrepresentations.

This Article argues for a different focus in evaluating ESG securities fraud cases. Cases should not be arbitrarily dismissed mainly on the ground that commitments of ESG compliance are mere puffery. Instead, courts should recognize that the core question in such cases is whether the corporation through its managers knew of a material risk of an ESG problem but deceptively obscured that risk in its communications with investors. Courts should assess the materiality of ESG risk by applying the infrequently used 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 based on the materiality of ESG risk would be a more effective way for courts to identify meritorious cases.

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