As businesses and regulators work to align economic growth with sustainable practices, environmental, social, and governance (ESG) disclosure and reporting standards are evolving from voluntary guidelines to more specific, mandatory regulatory requirements. At the same time, corporate actors are increasingly coming under scrutiny for “greenwashing,” that is, making their business practices or products seem more environmentally friendly or less damaging than they are.
ESG reporting in the United States is a blend of emerging federal and state regulations and voluntary frameworks such as the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), the Sustainable Development Goals (SDGs), and those published by the International Sustainability Standards Board (ISSB). These frameworks each provide different metrics and focus areas, but the lack of uniform enforcement and standardization makes comparability and consistency challenging.
Under Securities and Exchange Commission (SEC) Regulation S-K, public companies and significant federal contractors must disclose material nonfinancial risks, including environmental risks. While these regulations do not apply to private companies, many voluntarily adopt ESG practices driven by market demands from investors, consumers, and employees who prioritize corporate responsibility and sustainability. The recent SEC rules on climate disclosures indicate a move toward mandatory reporting, although implementation is on hold. Continued uncertainty is expected as a new regulatory landscape unfolds under the Trump administration.
The approach in the United States contrasts sharply with the European Union's under the Corporate Sustainability Reporting Directive (CSRD), which mandates detailed sustainability reporting to enhance transparency and provide stakeholders with more reliable and comparable ESG data. The CSRD requires large and all listed companies, except listed micro-enterprises, to report on environmental, social, human rights, and governance issues.
While new regulations like the SEC’s rule on climate disclosures have garnered much attention, federal securities laws have long encompassed aspects of ESG, primarily through mandatory disclosures about environmental risks. Under the SEC’s Regulation S-K, 17 CFR Part 229, public companies are required to disclose environmental risks if they are “material” to financial status or operational results. Traditionally focused on financial impact, materiality in the ESG context guides companies in prioritizing and reporting issues that can substantially affect their financial health and operational performance and are critical to investor decision-making. Double materiality broadens the traditional scope by considering both the impact of ESG issues on a company and the impact of the company on these issues. This dual perspective compels companies to evaluate how ESG issues affect the company's financial status and how the company's operations influence environmental and social impact. The SEC has not adopted double materiality in its disclosure regulations.
The SEC’s Enhancement and Standardization of Climate-Related Disclosures for Investors rules require public companies to provide extensive climate-related information in their registration statements and annual reports. Specifically, they require any company registered with the SEC to disclose material climate-related physical and transition risks and explain how the company intends to manage those material risks. They must provide information about how severe weather events and other natural conditions affect the financial statement, certain carbon offsets and renewable energy certificates, and any material impacts on financial estimates and assumptions caused by severe weather events, other natural conditions, or disclosed climate-related targets or transition plans. These disclosures are subject to existing financial audit requirements, including how they were prepared.
Large accelerated and accelerated filers must also disclose material Scope 1 (emissions from fuel burned in owned or controlled assets) and Scope 2 (emissions from purchased electricity, steam, heat, and cooling in buildings and production processes) greenhouse gas (GHG) emissions. GHG emissions are considered material if the data would help investors understand a registrant’s transition risks and progress toward achieving a disclosed target or goal. Notably, the rules do not require Scope 3 disclosures (emissions from upstream and downstream indirect sources) from any filers.
Originally, the rules would have become effective 60 days after publication in the Federal Register, with reporting on 2025 information beginning in 2026. However, because of legal challenges, the SEC halted implementation of the rules in April 2024, pending judicial resolution.
When the rules were finalized, various businesses, industry groups, and 25 states challenged their legality. Amidst the controversy and legal challenges, the SEC issued an administrative stay of the rules.
Those challenging the rule argue the SEC doesn’t have statutory authority to adopt the climate rules, didn’t adhere to procedural requirements, and violated the First Amendment. Specifically, they contend the rules implicate the major questions doctrine––a judicial principle that states courts presume Congress doesn’t delegate issues of major political or economic significance to federal agencies. Iowa v. SEC, Nos. 24-1522 et al. (8th Cir. filed 2024). In turn, the SEC maintains the petitioners mischaracterized the climate rules, and the major questions doctrine is reserved for “extraordinary cases” and doesn’t apply here. Contrary to petitioners’ assertions, the SEC maintains the “case is not about [regulating] climate change or environmental policy; it is about protecting investors.”
In the absence of a uniform federal framework for ESG issues, individual states are developing their own policies. This has led to a diverse landscape of regulatory approaches across the country and concomitant challenges. As of November 2024, 20 states have restricted or prohibited, and five states have promoted or permitted, ESG considerations. Federal regulations limit state efforts to regulate ESG. For example, while states can bar state-chartered banks from considering ESG in lending decisions, they have minimal control over decisions made by federally chartered banks.
ESG regulation is related to greenwashing lawsuits in the United States alleging fraud, deception, misrepresentation, or worse. Lawsuits against corporations for greenwashing public disclosures have largely failed. For example, in Jam v. International Financial Corporation, the plaintiffs sued IFC for greenwashing its public disclosure requirements, especially in ways that would deceive investors in other countries. IFC argued that punishing it for this “puffery” would have the effect of reducing or abandoning its sustainability efforts. The U.S. Supreme Court didn’t reach the issue, finding IFC is entitled to immunity to the extent a foreign sovereign is. 586 U.S. __ (2019).
In Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, Goldman Sachs was accused of greenwashing its corporate disclosures. The Society for Corporate Governance wrote in support that corporate disclosure requirements should include a range from “traditional corporate governance concerns to broader social issues, including sustainability, the environment, diversity, sexual harassment, worker safety amidst the Covid-19 pandemic, and other issues of pressing social concern.” The corporation succeeded.
In Nestle USA, Inc. v. Doe, the plaintiff claimed Nestle greenwashed its corporate disclosures. The World Cocoa Foundation filed a “friend of the court” statement in support of defendant Nestle USA claiming their “shared objective is to promote sustainable and responsible cocoa-farming practices around the world.” Brief for the World Cocoa Foundation et al., as Amici Curiae Supporting Reversal, 141 U.S. 1931 (2021). You can guess the result––the corporation succeeded.
It is well established that oil and gas companies have both denied and long known their products cause and contribute to climate change. Multiple states and local jurisdictions have brought fraud cases against oil and gas producers for misleading the public about climate change. The lawsuits are based on state laws and filed in state court. None have reached the merits but instead have bounced around procedurally between federal and state courts. Thus far, federal courts have rejected every attempt by the oil and gas industry to litigate such cases in federal court. For example, in Massachusetts v. Exxon, the state sued oil and gas giant Exxon alleging it “systematically and intentionally . . . misled Massachusetts investors and consumers about climate change” as part of a “greenwashing campaign” in violation of the Massachusetts Consumer Protection Act. 462 F. Supp. 3d 31 (D. Mass. 2020). The federal court declined Exxon’s removal request and returned it to state court. Likewise, in Delaware v. British Petroleum, the state sued British Petroleum under state law for negligent failure to warn, trespass, common law nuisance, and violations of the Delaware Consumer Fraud Act. The federal court rebuked BP’s attempt to remove the case, remanding it to state court. Federal courts elsewhere returned cases to state court at every turn, including Connecticut v. Exxon, District of Columbia. v. Exxon, Hoboken v. Exxon, and City of New York v. Exxon. None of these cases have reached the merits as to whether a company has violated state anti-greenwashing laws.
With regulatory shifts anticipated under the Trump administration, ESG regulation is at a critical juncture. The evolution from voluntary to mandatory reporting in the United States aligns with global transparency trends. However, differing state and federal approaches, along with increasing greenwashing litigation, highlight inconsistencies and the need for vigilance and adaptability in response to potential policy changes.
