I have noted for some time now in posts on this site the development of an ESG backlash, which has taken a variety of forms, including through both political action and litigation. For example, I recently noted two ESG backlash lawsuits that had been filed against major U.S. airlines. Now in the latest example of an ESG backlash lawsuit, a plaintiff shareholder has filed a securities suit against the retailing giant Target Corporation and certain of its directors and officers based on allegations that the defendants “betrayed both Target’s core customer base … and its investors by making false and misleading statements concerning Target’s Environmental, Social and Governance (ESG) and Diversity, Equity, and Inclusion (DEI) mandates that let to its disastrous children-and-family themed LGBT-Pride campaign.” A copy of the complaint in the new Target lawsuit can be found here.
On August 8, 2023, a plaintiff shareholder filed a lawsuit in the Middle District of Florida against Target and its executives in which the plaintiff alleges that the defendants violated Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. Although it is an action for damages, the lawsuit is not brought as a class action.
The lawsuit alleges that Target’s board “for years spent Target’s valuable financial and reputational capital on the pursuit of ESG and DEI mandates behind the façade of Target’s classic middle-class brand, all the while falsely and misleadingly portraying the risks of its strategy to Target’s shareholders in order to secure re-election and insulate itself from accountability.”
The “bill came due” for this conduct in May 2023 when Target “faced an unprecedented customer backlash to a campaign Target undertook as a result of its ESG and DEI initiatives – Target’s now infamous children-and-family themed LGBT-‘Pride’ marketing and sales campaign – which embroiled Target in the culture war and caused Target to experience the biggest stock decline in the company’s history.”
The complaint alleges that in its 2022 and 2023 annual proxy statements, the board assured investors that “it was monitoring for social and political risks created by the ESG and DEI mandates that the Board and management had imposed on the company.” However, the “reality,” the complaint alleges, is that the board “only acknowledge risks it perceived from failing to achieve the self-imposed ESG and DEI mandates.” The adoption of these goals and the board’s oversight of the goals was not “a good faith oversight of the social and political risks of adopting” the ESG and DEI policies and the company’s disclosure did not account for “the risk of backlash in the oversight and political risks to their ESG and DEI mandates.”
The complaint alleges that the executives’ years of “failing to oversee the risks of its adoption of ESG and DEI mandates (and misleading investors both as to their failure and to the risks of those mandates” had made Target a “house built on sand – liable to catastrophe.” As a result of the company’s “aggressive ESG and DEI programs unchecked by Board oversight,” Target developed the LGBT-“Pride” campaign. After an “immense customer backlash” to the program resulted in customer boycotts, Target lost $10 billion in market valuation.”
There can be little doubt that ESG has increasingly become a topic that reflects the political polarization within the U.S., with companies caught in the middle. Different constituencies can and will bring lawsuits alleging either that companies had not done enough or that they have done too much. It should come as no surprise then that in the current circumstances some companies have resorted to “greenhushing” – that is, taking a lower profile on what have now become hot button issues. Given the sequence of events at Target, as well as other companies such as Disney and Bud Lite, it is hardly surprising that many companies might choose to say less about potentially divisive topics – of which ESG itself now appears to be one.
As should by now be apparent to anyone who is paying attention, ESG is turning out to be a very different kind of risk than many in the D&O insurance field assumed even just a short time ago. The ESG risk, it was until recently thought, was that companies might become involved in claims because they had done too little to demonstrate their commitment to ESG or to meet their stated ESG goals. To be sure, there has always been an awareness that some companies, in the eagerness to establish their ESG credentials, might overstate the company’s accomplishments, a phenomenon known as “greenwashing,” It is only recently emerged that companies can face D&O claims risk from their success in meeting ESG goals.
The misrepresentation alleged in this case is that while the company disclosed the risks the company could face in failing to meet its ESG goals, it failed to disclose the supposed political and social risks the company faced if it fulfilled its goals. This lawsuit does bring to mind Bloomberg reporter Matt Levine’s often repeated quip that “everything everywhere is securities fraud.” It does seem to be the case that as ESG increasingly reflects this country’s polarized politics, anything a company does with respect to ESG can be alleged by someone to be securities fraud.
DEI efforts in particular are drawing attention at least from particular points on the political spectrum, and in particular since the U.S. Supreme Court’s decision at the end of June declaring the use of affirmative action in college admissions to be unconstitutional. Among other things, a group of red states’ attorneys general in July 2023 sent a letter to the CEOs of the Fortune 500 companies “threatening legal consequences” over race-based employment preferences and diversity policies.
As this new lawsuit against Target shows, and as the lawsuits filed earlier this summer against the airlines that I mentioned at this post also show, these activists and other intend to use litigation as a tool to wage a war on policy.
Indeed, the Wall Street Journal reports (here) that this lawsuit was brought by the plaintiff shareholder at the initiative of a group called the Free Enterprise Project – a group that is also responsible for the lawsuit filed last year against Starbucks’ board of directors accusing the them of breach of fiduciary duty for supporting corporate diversity policies.
It is worth noting that on August 11, 2023, just three days after the new lawsuit against Target was filed, the federal district court judge presiding over the Starbucks’ action granted Starbucks’ motion to dismiss, saying (according to Reuters), “If the plaintiff doesn’t want to be invested in ‘woke’ corporate America, perhaps it should seek other investment opportunities rather than wasting this court’s time,”
It is also worth emphasizing, as was underscored in the recent Delaware decision involving Disney (discussed here), that while boards may be questioned about their actions, boards that follow careful procedures and keep their focus on what is the best interests of their companies and of their shareholders can both withstand scrutiny and escape liability.
In the meantime, D&O underwriters likely are going to have to continually adjust their perception of the D&O risk, as the culture wars have clearly come to the ESG arena. Notwithstanding the outcomes of the Starbucks and Disney actions, the likelihood is that there will be further of the ESG backlash lawsuits to come.