This past month saw a potential new era ushered in across the pond regarding corporate funding of Environmental, Social, and Governance (ESG) programs. In the UK, an environmental law firm filed a lawsuit against 11 members of Shell’s board of directors alleging the mismanagement of climate risk and the failure to implement an energy transition strategy that aligns with the 2015 Paris Agreement.¹ The case was the first of its kind filed against individual company board members. The UK lawsuit follows a similar complaint filed earlier this month in the United States against Shell with the U.S. Securities and Exchange Commission (SEC). The complaint was filed by an international nongovernmental organization and accuses the company of misrepresenting its renewable energy investments.² As we watch to see how—or if—these lawsuits move forward, Congress has already taken notice. And the partisan congressional divide over how to deal with ESG continues to grow.

It’s no secret that congressional Democrats and Republicans hold almost diametrically opposed views on many top issues of the day. While many contested issues are framed in terms of “culture war,’ they pose very real challenges for businesses. Companies will need to be prepared for attacks and investigations from both sides of the aisle, though for opposing reasons. Republicans will target companies for ESG policies and investments, while Democrats will target the same companies failing to enact programs to meet those same goals.

Below we review what companies should expect from both parties and how recent lawsuits could preview what’s to come.

Republicans: Progressive Policies Drive ESG Investments

Multiple House Republican Chairs have stated it will be a top priority to investigate companies making investments based on ESG criteria. For example, the new House Chair of the Financial Services Committee Patrick McHenry (R-NC) has described ESG as “woke capitalism” and that companies are improperly driving public policy, and potentially committing antitrust violations through ESG collaborations.³

• House Republicans announced the formation of a Republican ESG Working Group. The Group will be led by Oversight and Investigations Subcommittee Chair Bill Huizenga (R-MI), who has access to a staff of lawyers who will be ready to recommend requests for information, testimony, subpoenas, hearing topics, and witnesses. The Working Group is designed to “coordinate Republicans’ response to the ESG movement … across the Committee’s jurisdiction and throughout the broader House Republican Conference.”⁴
• The House and Senate passed a bill to revoke a U.S. Labor Department rule on ESG investing. The regulation gives retirement plan providers more freedom to consider ESG factors when selecting investments. President Biden is expected to issue the first veto of his presidency after the Senate passed the bill on March 1, 2023.⁵ A group of 25 Republican attorneys general have also sued the Labor Department over the rule. The lawsuit claims the regulation violates ERISA and compromises protections for retirement savings.⁶
• A group of 19 Republican attorneys general sued the nation’s largest banks over climate pledges. A group of 19 Republican governors issued civil investigative demands to the six largest U.S. banks over their participation in the Net-Zero Banking Alliance, which is a global climate initiative. The governors have indicated they believe the result of the banks joining this Alliance will prevent companies engaged in fossil-fuel related activities from being able to obtain credit.
• Republicans are targeting a new SEC rule that would require climate-related disclosures. The rule proposed by the SEC would require companies to include climate-related disclosures in their registration statements and periodic reports, including how their operations affect the climate and contribute to greenhouse gas emissions. Republicans on the House Financial Services Committee and the top Republican on the Senate Banking, Housing, and Urban Affairs Committee (Sen. Tim Scott (R-SC)) have requested information about the proposed rule from SEC Chair Gary Gensler.

Republicans eager to flex their new oversight powers, and curry favor with a political base that is wary of ESG policies, could target any number of companies that they see as prioritizing ESG over shareholder value. While they have spoken specifically of investigating investment advisers, their concerns cut across industries.

Democrats: It's Time to Wake Up

On the other side of the aisle, Democrats have taken a similar approach to private sector investigations as the lawsuits against Shell. In December 2022, just before Democrats ceded control of the House to Republicans, the Democratic Chair of the House Oversight Committee released a memo and internal documents that asserted oil and gas companies had engaged in “greenwashing.” The term is used to describe companies making false claims about their transition to clean energy sources and climate-friendly pledges.

House Democrats have also launched their own caucus to advocate for sustainable investing. One of the caucus co-chairs, Representative Sean Casten (D-IL), has explained that the group would work to pass legislation that “provide investor protections and transparency of information to market participants.”

Senate Democrats, who maintain control of that chamber, have promised to continue House Democrats’ work in the current congress. Sen. Sheldon Whitehouse (D-RI), the chairman of the Senate Budget Committee, plans to continue the Oversight Committee’s probe into oil company greenwashing. In a recent interview, Sen. Whitehouse said he also wants to use his new perch as chairman to push for accountability on climate. He explained “[t]here are plenty of sector-specific areas for the committee to dive into where there is profound budget impact from climate change.”⁷

As Sen. Whitehouse’s comments make clear, Democrats’ focus on accountability for climate issues and greenwashing can ensnare companies across multiple major sectors of the economy. Democrats also nearly universally see climate change as one of the most urgent issues facing the country today, and it is likely that their investigative agenda will reflect that.

No good deed goes unpunished...

A company that is making investments in ESG is likely to find itself defending those decisions on multiple fronts: investor lawsuits; investigations by regulators; and requests from Democrats in the Senate and Republicans in the House, both of whom have subpoena power. Companies may receive requests for internal documents, depositions, or for senior executives to appear before Congress. It is important to have a strong, defensive strategy in place that takes a holistic view of the potential risks facing your company before responding to those requests. That is particularly true for an area like ESG investing in which data can be cherry-picked to serve specific political agendas.

Responding to Congressional Inquiries

Responding to congressional inquiries requires different strategic considerations from typical white-collar litigation or lobbying, and knowledge of House and Senate rules and practices is important to avoiding critical missteps that could expose firms to undue legal or public relations crises. Wilson Sonsini has the benefits of both a bipartisan practice and, as a tech-forward firm that routinely represents clean energy companies, we have a sophisticated understanding of the ESG space.

[1] The Guardian, “Shell Directors Personally Sued Over “Flawed” Climate Strategy” (Feb. 9, 2023).

[2] Bloomberg, “Shell Accused of Greenwashing By Climate Group in SEC Claim” (Feb. 1, 2023).

[3] Bloomberg, “Republicans Ready ESG “Attacks” With House Control” (Nov. 17, 2022).

[4] Press Release, “McHenry Announces Financial Services Committee Republican ESG Working Group” (Feb. 3, 2023).

[5] The Washington Post, “Biden Set for First Veto on Senate Bill Opposing Climate-Friendly Investing” (Mar. 1, 2023).

[6] Roll Call, “GOP Attorneys General Sue Labor Department Over ESG Rule” (Feb. 2, 2023).

[7] The Washington Post, “Sen. Whitehouse Wants the Budget Panel To Be a Climate Committee” (Feb. 17, 2023).