Defense Counsel Journal

The United States Environmental Protection Agency defines sustainability as: 

 

Sustainability is based on a simple principle: Everything that we need for our survival and well-being depends, either directly or indirectly, on our natural environment. To pursue sustainability is to create and maintain the conditions under which humans and nature can exist in productive harmony to support present and future generations.¹1United States Environmental Protection Agency, Learn About Sustainability (Oct. 1, 2024), available at https://www.epa.gov/sustainability/learn-about-sustainability#what (last accessed June 13, 2025)).

 

 

Depending on where companies are based and do business, they may face legal requirements that drive disclosure and investment obligations in the areas of environmental, social, and governance (ESG), the metrics used to evaluate an organization’s impact and sustainability practices. 

In the United States, ESG regulations originate primarily from three sources: (a) the U.S. Securities and Exchange Commission (SEC), (b) the U.S. Department of Labor (DOL), and (c) state legislatures and agencies. Specifically, the SEC monitors company disclosures, not only in required filings but also in marketing materials, on websites, and in investor documents. On March 6, 2024, the SEC issued a final rule that requires registrants to provide climate-related disclosures in their annual reports and registration statements.²2United States Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors, 89 Fed. Reg. 25804, codified at 17 C.F.R. §§ 210, 229, 230, 232, 239, 249 (Mar. 28, 2024). The prior year, the SEC imposed a $19 million penalty on an investment advisor accused of making materially misleading statements about its ESG investment process.³3In the Matter of DWS Inv. Mgmt. Am., Inc., Admin. Proc. File No. 3-21709, SEC Release No. IA-6432  (Sept. 25, 2023).  Numerous litigants challenged the new rule in court.⁴4Clark Mindock, “Republican led states sue US SEC over climate risk disclosure rules,” Reuters (Mar. 6, 2024), available at https://www.reuters.com/sustainability/climate-energy/republican-led-states-say-they-will-sue-us-securities-regulator-over-climate-2024-03-06/ (last accessed June 13, 2025).   Under the second Trump Administration, the SEC has announced that it will no longer defend the rule.⁵5“US SEC votes to stop defending climate disclosure rules,” Reuters (Mar.27, 2025), available at https://www.reuters.com/business/environment/us-sec-votes-stop-defending-climate-disclosure-rules-2025-03-27/ (last accessed June 13, 2025).  While the climate-related disclosure rule remains in place, it is not being enforced by the SEC, and its future remains uncertain.

The DOL, which oversees the Employee Retirement Income Security Act (ERISA), has been active in regulating whether fiduciaries can consider ESG in investment decision-making for private retirement plans. In 2020, the agency introduced a rule viewed by some as “anti-ESG”⁶6United States Department of Labor, Financial Factors in Selecting Plan Investments, 85 Fed. Reg. 72846 (Nov. 13, 2020).  and then shifted course under the Biden administration, deeming ESG an acceptable factor in investing decisions.⁷7United States Department of Labor, “US Department of Labor announces final rule to remove barriers to considering environmental, social, governance factors in plan investments” (Nov. 22, 2022), available at https://www.dol.gov/newsroom/releases/ebsa/ebsa20221122 (last accessed June 13, 2025).  That action was recently upheld by a Texas federal district court,⁸8State of Utah v. Micone, No. 2:23-cv-016Z (N.D. Tex., Feb. 14, 2025). and while DOL has not yet made any formal announcements about the rule, it may reverse course again in the second Trump Administration.

Between 2021 and 2024, 41 states have proposed or enacted ESG-investing laws.⁹9Mana Behbin, Kelly L. Gibson, and Elizabeth S. Goldberg, “ESG Investing: The US Regulatory Perspective,” Morgan Lewis (Mar. 12, 2024), available at https://www.morganlewis.com/pubs/2024/03/esg-investing-the-us-regulatory-perspective (last accessed June 13, 2025). While some states have enacted “pro-ESG” laws that allow ESG factors to be considered in investment decisions, most states have done the opposite, disincentivizing or prohibiting the consideration of ESG factors in investment decisions.¹⁰10Navigating State Regulation of ESG, Ropes & Gray LLP (June 6, 2025), available at https://www.ropesgray.com/en/sites/navigating-state-regulation-of-esg (last accessed June 13, 2025).   

While the second Trump Administration in the United States will alter, and likely narrow significantly, the regulatory focus on ESG at the federal agency level, many companies will continue to focus on ESG disclosures and investment decisions because of regulations in certain states and other countries where they do business. But, the legal requirements companies face are not the sole drivers of their focus on sustainability.

 

 

Sustainability is, at its core, an effort to produce products as efficiently as possible, with as little impact as possible, while returning the highest value the market will support. Certain branded products that promote their sustainability may cost more to produce, but can command higher prices in the marketplace. For example, Unilever’s Sustainable Living Brands, such as Seventh Generation, Dove, and Ben & Jerry’s, are priced above competitors, but are growing 69% faster than the rest of the business and delivering 75% of the company’s growth.¹¹11Ralph Tathagata, “Unilever's purpose-led brands outperform,” Marketing Edge (June 11, 2019). Customers are enthusiastic about the growth of sustainable product availability in the market. According to a study published in the Harvard Business Review, customers who prefer sustainable products may be more loyal than other customers, serving as “super promoters” who recommend products to 10 or more people.¹²12Leah Johns, Harry Morrison, Jenny Davis-Peccoud, and Daniela Carbinato, “How Brands Can Sell to Environmentally Conscious Nonconsumers,” Harvard Bus. Rev. (June 5, 2023).

 

 

Companies know the value of a strong talent pool. Making sustainability a priority can expand an employer’s talent advantage. A 2023 Deloitte survey found that 69% of employed adults want their companies to invest in sustainability efforts, such as reducing carbon, using renewable energy, and reducing waste.¹³13Jennifer Steinmann, Kathryn Alsegaf, Derek Pankratz, David R. Novak, and Nirmal Kijur, “Engaged employees are asking their leaders to take climate action,” Deloitte Ctr. Integ. Research (Nov. 9, 2023), available at https://www2.deloitte.com/us/en/insights/environmental-social-governance/importance-of-sustainability-to-employees.html (last accessed June 13, 2025). The workforce is also being more selective about companies’ sustainability positions in deciding whether to accept jobs: 27% will consider a potential employer’s position on sustainability before taking a job.¹⁴14Id.  It is unsurprising that employee activism is motivating corporate leaders. Fifty-nine percent of corporate leaders say that employee activism has driven their sustainability efforts.¹⁵15Id.   

 

 

More than 95% of S&P companies issue a sustainability report.¹⁶16Jay Gelb, Rob McCarthy, Werner Rehm, and Andrey Voronin, “Linking ESG initiatives to financial performance,” McKinsey (Sept. 15, 2023), available at https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/investors-want-to-hear-from-companies-about-the-value-of-sustainability (last accessed June 13, 2025).  Investors are using ESG factors—particularly those related to governance and climate change—to reduce risks associated with investments.¹⁷17Alexander Gelfand, “Big Investors Say They Use ESG to Reduce Risk (But Mostly Focus on the E and G) | Stanford Graduate School of Business,” Stanford Business (May 2, 2024), available at https://www.gsb.stanford.edu/insights/big-investors-say-they-use-esg-reduce-risk-mostly-focus-e-g (last accessed June 13, 2025).  Likewise, investors believe that strong ESG practices can lead to higher returns, an opinion that is growing. According to a Morgan Stanley report, 77% of investors say they are interested in investing in companies and funds that consider positive social and/or environmental impact; 57% say that their interest has increased over the last two years; and 54% plan to grow allocations in sustainable investments in the coming year.¹⁸18“Sustainable Investment Interest on the Rise in 2024,” Morgan Stanley (Jan. 26, 2024), available at https://www.morganstanley.com/ideas/sustainable-investing-on-the-rise (last accessed June 13, 2025).  

 

Regardless of whether laws mandate a focus on sustainability, customers, employees, and investors appear to be strong forces in setting sustainability as a high priority for companies.