Insight

The 2024 US Election: What’s Next for ESG in the Corporate Legal Landscape?

17 décembre 2024

The 2024 US election results are likely to reshape the regulatory landscape for environmental, social, and governance (ESG) issues. Shifts in administrative priorities, coupled with ongoing litigation and regulatory challenges, will have far-reaching implications for ESG strategies, disclosure requirements, and corporate compliance.

This piece explores the key areas of change, from the US Securities and Exchange Commission’s (SEC’s) recently adopted climate disclosure rules impacting public US companies to evolving state-level requirements, potential federal developments, and the intersection of US and EU ESG policies.

Administrative Changes and the SEC’s Role in ESG

With the change in administration, the SEC will likely pivot on its ESG initiatives. As an independent agency under the executive branch of government, the SEC chair is appointed by the US president, which makes the agency’s direction susceptible to political shifts. Current SEC Chair Gary Gensler has announced he will step down on January 20, 2025, clearing the path for leadership changes that may reshape the SEC's priorities. Division directors, who are often selected by the chair, may also face turnover.

These changes come at a critical juncture for the SEC’s climate-related disclosure rules, which require public companies to disclose certain climate-related information in registration statements and annual reports. Adopted in March 2024, the SEC voluntarily stayed implementation of the rules the following month due to pending judicial review of the challenges regarding the rules’ legality. The cases, now consolidated in the US Court of Appeals for the Eighth Circuit, are predicated on a number of legal theories, including the major questions doctrine, the First Amendment, and administrative law.

While the SEC has defended the rules strongly, a post-election leadership shift could lead to a softer stance and less vigorous defense of their legality, or even rescission of the rules. Notably, President-elect Donald Trump has selected Paul Atkins, a former SEC commissioner under President George W. Bush, to serve as the next chair. Atkins has publicly opposed the climate-related disclosure rules, including in a public comment letter submitted with other former SEC commissioners during the rulemaking process that argued the rule disregarded longstanding concepts of financial materiality and was beyond the agency’s statutory authority. Regardless, companies must continue to adhere to existing guidance, including the SEC's 2010 interpretative guidance on climate disclosure, and continue to consider whether disclosure, if any, would be necessary regarding material risks related to climate.

Human Capital Management and Shareholder Proposals

The election also casts uncertainty over potential revisions to human capital management (HCM) disclosure requirements for public companies. SEC Chair Gensler had advocated for more quantitative and consistent HCM disclosures, and HCM disclosure rulemaking was included as part of the agency’s rulemaking agenda. However, under new leadership, these efforts are expected to stall, leaving existing HCM disclosure requirements under Regulation S-K unchanged.

Shareholder proposals, governed by Exchange Act Rule 14a-8, are another area likely to face heightened scrutiny. Critics argue that the process for including proposals in proxy materials is overly burdensome. In 2022, the SEC proposed amendments to Rule 14a-8, which would have made it more difficult for companies to exclude shareholder proposals under certain substantive basis, and it is not expected that the new administration will seek to adopt the amendments as proposed.

Future reforms may streamline the no-action relief process or rescind current staff guidance, making it less challenging for companies to receive no-action relief to exclude shareholder proposals, which could result in fewer ESG-related proposals being presented to shareholders at annual meetings. Additional reforms could emerge, with an emphasis on promoting transparency, accountability, and alignment of voting decisions with retail investors' economic interests.

California’s Climate Disclosure Laws

California continues to lead the nation in climate legislation with the enactment of three pivotal laws: SB 253, the Climate Corporate Data Accountability Act; SB 261, the Climate-Related Financial Risk Act; and AB 1305, the Voluntary Carbon Market Disclosures Act. These laws impose extensive climate disclosure requirements on companies conducting business in the state, regardless of their primary headquarters or operational focus, and carry significant compliance and reputational implications.

SB 253 requires companies with $1 billion or more in revenue to report Scope 1 and Scope 2 greenhouse gas (GHG) emissions starting in 2026 and Scope 3 emissions by 2027. SB 261 applies to businesses with $500 million or more in revenue, requiring them to disclose vulnerabilities to climate-related financial risks beginning in 2026. AB 1305, the farthest reaching of the three laws, applies universally to companies operating in California, regardless of revenue. It mandates detailed reporting on net-zero claims and carbon offset transactions starting in 2025.

Litigation has already emerged, with the US Chamber of Commerce and others challenging the laws on First Amendment grounds. Early court rulings have favored California, but several legal battles remain, raising questions about the broader enforceability of such mandates. These challenges, however, have not delayed the implementation of the laws, which carry steep penalties for noncompliance—up to $500,000 annually under SB 253 and SB 261, and $50,000 under AB 1305. Businesses must act swiftly to enhance their data collection and reporting systems, as noncompliance risks significant financial penalties, federal scrutiny, and reputational damage.

Voluntary Carbon Markets

Voluntary carbon markets, a key mechanism for corporate GHG reduction strategies, face growing scrutiny. Concerns about the permanence, additionality, and verification of carbon offsets have sparked regulatory scrutiny. The Commodity Futures Trading Commission (CFTC) has flagged potential fraud in these markets, ranging from double counting offsets to manipulating prices through conflicts of interest.

Recent developments, including the adoption of UN-backed standards for global voluntary carbon markets, provide opportunities for US companies to align with international frameworks. Despite limited federal guidance on voluntary carbon markets, businesses should remain vigilant against legal risks such as fraud allegations or antitrust scrutiny.

DEI Strategies and Federal Oversight

Diversity, equity, and inclusion (DEI) programs are also likely to face heightened scrutiny under the new administration. EEOC Commissioner Andrea Lucas, expected to lead the agency, has criticized race- and gender-based initiatives. Based on Commissioner Lucas’s previous statements, the EEOC will likely increase investigations into DEI initiatives, including programs such as diverse candidate slates, executive compensation tied to representation goals, and race- or gender-exclusive professional development programs.

Similarly, the Office of Federal Contract Compliance Programs (OFCCP) is likely to revisit its stance on DEI. In his first administration, President Trump issued an executive order restricting “divisive concepts” in DEI training for federal contractors and established a hotline for reporting perceived violations of the order. Around the same time that the executive order was issued, OFCCP launched investigations into companies with ambitious DEI goals. Similar measures, including new restrictions on federal contracts, could be implemented, targeting aspirational diversity commitments and other DEI programming as discriminatory.

Public companies will also need to manage risks tied to their DEI-related public disclosures. Advocacy groups have increasingly used statements from sustainability reports, websites, and regulatory filings to challenge DEI programs, and federal agencies may adopt similar tactics. Misalignment between public commitments and internal practices can create significant legal and reputational risks, underscoring the importance of ensuring consistency and accuracy in external communications.

To navigate this shifting landscape, companies should consider conducting DEI audits to assess potential areas of risk and adjust their strategies to mitigate any risk. Reviewing public-facing documents, such as sustainability reports, DEI statements, and Form 10-K disclosures, can help ensure they align with actual practices. By proactively addressing these issues, businesses can reduce the chance of litigation or an anti-DEI social media attack and maintain stakeholder trust in an increasingly challenging regulatory environment.

The EU’s ESG Framework and Implications for US Companies

The extraterritorial application of EU laws, such as the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD), poses challenges for multinational corporations. These directives require detailed sustainability disclosures, even from non-EU companies with significant EU operations.

The CSRD’s phased implementation will require US-based multinational corporations to adhere to European sustainability standards starting in 2028. Similarly, the CSDDD, from 2027, imposes due diligence obligations for human rights and environmental impacts. US companies must evaluate their exposure and prepare to navigate these complex reporting requirements.

While some US legislators have raised concerns about the extraterritorial nature of EU directives like the CSRD and CSDDD, compliance pressures from investors and private ordering may outweigh regulatory pushback. The SEC’s historical resistance to extraterritorial ESG policies could shape future debates, with policymakers potentially advocating for studies to assess the economic impact of these EU requirements on US interests. However, noncompliance with these directives could lead to reputational damage and enforcement actions, highlighting the broader friction between US and EU approaches to ESG regulation and the imperative for companies to prepare for these evolving standards.

Impact on US State and Federal Investing Rules

The divide between pro- and anti-ESG approaches in investment regulation is expected to intensify at the state level. Certain Democratic-leaning states have either mandated the consideration of sustainability and other ESG factors for state-managed funds or taken other legal actions to push such ESG investment considerations. On the other hand, certain Republican-leaning states, such as Texas and Florida, have enacted rules prohibiting ESG considerations or requiring divestment from industries like fossil fuels. This fragmented landscape highlights the challenges asset managers face when navigating conflicting state-level policies.

At the federal level, the US Department of Labor (DOL) is likely to revisit the Biden-era rule allowing ESG factors in retirement plan investments. Under new leadership, the DOL may implement stricter regulations prohibiting the use of ESG considerations unless they are solely pecuniary in nature. Efforts in Congress to amend ERISA could further restrict ESG integration in private retirement plans, reflecting a broader federal push against ESG-driven investing.

These regulatory shifts coincide with a rise in private litigation challenging the use of ESG factors under ERISA’s fiduciary duties. A significant case currently under review could set the precedent for limiting ESG considerations, potentially triggering more lawsuits and creating a chilling effect on ESG integration. For asset managers and companies, navigating this polarized regulatory environment will require balancing compliance with restrictive US rules while addressing international ESG mandates, like those from the EU mentioned above.

Congressional and Regulatory Investigation Outlook

The change in administrations is expected to amplify congressional scrutiny of ESG policies, with Republicans leveraging ESG as a political tool. Committees such as the House Financial Services and Senate Banking Committees are poised to investigate the perceived alignment of US regulators with international ESG frameworks, particularly the aforementioned CSRD. Lawmakers have voiced concerns that these standards unfairly disadvantage US companies and have already begun probing ESG-driven investment practices, including proxy voting and asset allocation by major asset managers.

As a result, the US Congress could introduce "guardrail legislation" to curtail perceived overreach by financial and consumer regulatory agencies. Additionally, antitrust investigations by the US Department of Justice and Federal Trade Commission could expand, focusing on alleged collusion in advancing climate initiatives or restricting fossil fuel investments. State attorneys general are also expected to play a role, using litigation to challenge corporate ESG policies and pushing for greater oversight of asset managers.

This increased scrutiny underscores the importance for companies and asset managers to fortify their ESG strategies and ensure alignment between internal policies and public disclosures. As investigations and legislative challenges grow, proactive compliance measures and robust governance frameworks will be essential to mitigate risks and navigate this increasingly polarized environment.

Looking Ahead

As ESG remains a focal point for investors, regulators, and legislators, the post-election landscape signals both opportunities and challenges. Businesses must remain agile, adapting to regulatory shifts while managing compliance risks across jurisdictions. The interplay between federal and state laws, coupled with global ESG frameworks, will continue to shape corporate strategies in this dynamic environment. Ultimately, proactive engagement with evolving legal standards is essential for navigating the complex ESG regulatory landscape in the years to come.

HOW WE CAN HELP

Morgan Lewis has assembled a cross-disciplinary bipartisan team of lawyers who are former government agency officials and regularly represent clients before all federal agencies, including executive agencies (the US Departments of Justice and Education, Consumer Financial Protection Bureau, Federal Trade Commission, Equal Employment Opportunity Commission, and US Securities and Exchange Commission), and congressional committees and inquiries. Our team is primed to help clients navigate the post-election landscape by providing executive order analyses and updates on key agency developments and regulations and will develop programming and guidance regarding legal and business developments in the weeks and months to come.

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Authors
Celia A. Soehner (Pittsburgh / New York)
Erin E. Martin (Washington, DC / New York)
Levi McAllister (Washington, DC)
Elizabeth S. Goldberg (Pittsburgh)
Sharon Perley Masling (Washington, DC)
Amanda B. Robinson (Washington, DC)