I was struck by the recent statements of Chubb CEO Evan Greenberg quoted an insurance industry publication that a colleague circulated to me last week. In the article, Greenberg said that when it comes to ESG commitments, many companies – particularly insurance companies – may be over-promising. What made Greenberg’s remarks particularly interesting to me was his suggestion that companies’ commitment to net-zero goals and other lofty-sounding climate aspirations could lead to shareholder lawsuits. It is worth thinking about this litigation possibility in the context of current regulatory action focused on so-called “greenwashing” in the investment fund industry. In both cases, the concern is that companies may tried to take on an ESG aura that the actual facts may not support.


I had occasion to re-consider all of this over the weekend, after I read an article in Saturday’s Wall Street Journal that the SEC is investigating Goldman Sachs’s asset-management arm over its funds that aim to invest based on environmental, social and governance standards. The SEC’s civil investigation reportedly is focused on the firm’s mutual fund business. The article said that regulators are concerned in general that for some firms the ESG label is a superficial way for them to market financial products to shareholders’ desire to address subjects such as climate change or diversity in the workplace. The article noted that in recent years Goldman Sachs has renamed funds to adopt more climate-friendly sounding names, while at the same time the investments in the fund have remained largely unchanged.


There is important context for the reported Goldman Sachs investigation; the reports of the Goldman investigation follow news that in late May German police raided the Frankfurt offices of asset manager DWS and its majority owner Deutsche Bank as part of a probe of greenwashing at DWS. The raid reportedly involved the public prosecutors from Frankfurt, federal police, and officials from the German financial regulator, BaFin. According to news reports, the investigators are reviewing statements in DWS’s 2020 annual report that over half of the firm’s $900 billion assets under management were invested using environmental, social, and governance criteria.


The DWS raid itself followed shortly after the SEC announced that it had settled an enforcement action against BNY Mellon Investment Adviser, Inc. As discussed here, the investment adviser agreed to pay a $1.5 million penalty to settle charges that its fund investments had undergone ESG quality review, even though that was not always the case. The BNYMIA enforcement action was the first initiated by the SEC’s ESG Task Force, which the agency formed in 2021. The recent news about the Goldman Sachs investigation discussed above suggests that the Task Force remains active and that, regardless of the outcome of the Goldman Sachs investigation itself, is likely to pursue other ESG-related enforcement actions on greenwashing charges and other related grounds.


In his remarks referenced above about possible shareholder litigation, Greenberg, the Chubb CEO, specifically addressed risks within the insurance industry. He noted that companies in the industry have been declaring that the companies aim to reach a net-zero carbon footprint. The net-zero commitment, Greenberg said, “sounds great at the beginning, but you’re going to have to disclose quickly, what’s your progress?” The challenge is particularly significant for insurance companies, Greenberg noted, because the insurers must show their shareholders how their underwriting portfolios are ultimately reaching the promised net-zero carbon footprint. The problem is that the tools to make that showing “don’t exist today,” and, Greenberg added “at some point that’s going to be called out in [shareholder] suits.” He also added that as of today, no insurance company can accurately measure the carbon footprint of its portfolio.


From my perspective, what Greenberg said about the insurance industry could also be said about companies in many other industries as well. Many companies are stating lofty carbon-neutral goals or declaring other supposedly climate-friendly aspirations or other socially virtuous targets. As Greenberg pointed out, it will be very hard for these companies to demonstrate their progress toward their stated goals, which could in turn lead claimants (including, for example, activist investors or government regulators) to challenge the companies on their statements, for example, concerning their climate goals.


This specific concern, about potential risks involved with company’s claimed climate-friendly credentials when the companies’ actual practices cannot be shown to match their aspirations, is one of several concerns I have about ESG-related issues.


My biggest concern about ESG is that it is a verbal expression that is thrown around rather carelessly without there being any common agreement about what the expression means. Just to cite one example, there are several Wall Street firms that are trying to market and sell various kinds of ESG ratings tools; it is no secret that these firms’ ESG ratings are wildly inconsistent with each other because the tools rate very different things. The fundamental reason that the tools measure such different things is that no one agrees on what ESG actually means.


The real danger of the promiscuous use of the ESG label is that it leads to very imprecise thinking and communicating. The ESG label is used in social discourse as if everyone knows what it means when in fact the speaker and the audience may have very different understandings of what the label represents. And this is true not only of the ESG label itself, but also of each of the constituent parts with the ESG expression – that is, the “E,” the “S,” and the “G” mean very different things to different people. For my own part, I try to make it a practice not to use the expression ESG. In my mind, it is the source of a lot of very sloppy thinking.


I think about these kinds of things when I see various assertions in the insurance industry press (or at least in the advertisements published in the industry press) about how companies that can demonstrate supposed SEC credentials can hope to achieve better D&O insurance underwriting results. I wonder whether what the companies involved and the insurance underwriters involved actually have a common understanding of what ESG means and what good ESG practices might actually look like.


And, to get back to Greenberg’s remarks and the “greenwashing” cases referenced above, I wonder whether companies that are trying to hoist themselves on their lofty ESG credentials could wind up having their claims of ESG-related virtues shoved back in their faces, as prospective claimants question the companies’ actual practices? I also wonder whether these companies could find themselves the target of claims precisely because of their ESG focus – the companies’ executives, the claimants might argue, breached their duties by not putting their shareholders’ interests first, instead sacrificing those interests on the altar of vague notions of public good and virtue signaling.


At a minimum, Greenberg’s remarks and the greenwashing cases discussed above show that companies that attempt to promote themselves or burnish their public image through lofty ESG claims could wind up facing a sort of reckoning based squarely on the very ESG credentials the companies sought to establish. Could there, in fact, be, as Greenberg asserted, shareholder lawsuits based on these kinds of ESG claims? It is certainly possible. This possibility is just one more way that ESG is a multi-layered proposition, and a proposition that should be treated with much more care than it often is.