Anti-ESG cases could end up before Supreme Court, warns former DC attorney general

Karl Racine, now a partner at Hogan Lovells, warns of chilling effect from antitrust investigations despite 'far overstated' nature.

Anti-ESG litigation in the US could end up before the Supreme Court, according to the former attorney general of Washington, DC.

Karl Racine, now a partner and chair of the state attorney general practice at Hogan Lovells, told Responsible Investor that many disputes over ESG will be resolved by legal action and judicial resolutions.

“I expect the ESG efforts in legislatures throughout the country will continue,” he said. “I also expect you’ll see local banking associations, local insurance associations and Republican legislatures resisting that change because they don’t want to hurt taxpayers.

“While that front is being fought in state legislatures, I anticipate an increase in potential investigations and eventually an increase in lawsuits.”

He added, however: “We’re not anywhere near that point yet.”

Racine became attorney general for the District of Columbia in 2015, the first time the position was up for election, and left office at the start of this year. He spent much of his career as a partner at law firm Venable, and has also held roles as associate White House counsel and a financial adviser to UBS.

Asked about the influence of partisan leanings on decision-making by judges in the US, Racine said that laws around antitrust activity and consumer protection are “really well stated”, so that regardless of the judge, anti-ESG campaigners will have an uphill struggle to bring their claims.

“At the end of the day, while there may be judges and courts and even federal circuits that rule in favour of the anti-ESG perspective, there will be [others] that rule against it. Ultimately, what we could be looking at in the coming years is some kind of resolution from the Supreme Court.”

Racine noted that lawsuits had already been filed on both sides.

In New York, in a case he describes as “very important”, three of the city’s pension funds have been challenged over their decision to divest from fossil fuels, with a suit alleging a breach of fiduciary duty. The funds filed a motion to dismiss this week calling the claims “baseless” and the arguments made against divestment “meritless”.

On the other side, the Kentucky Bankers’ Association filed a suit in November last year against state attorney general Daniel Cameron after he issued subpoenas and civil investigation demands to six lenders, accusing him of acting outside his jurisdiction and authority.

Racine said that political deadlock and the engagement of special interests meant the courts would be the most likely place for some kind of actual resolution.

“Once the political process gets engaged in the US you’ve got well-financed contributions and donations going to politicians to encourage them to take on a harsher tone against ESG,” he said. “There’s an economic and business incentive and now politics is at play, and that means this is likely to continue until a legal resolution.”

Chilling effect

However, the drawn-out legal process and the fact that even existing cases may be more than three years away from a Supreme Court resolution mean continuing uncertainty for businesses and investors.

Racine said Hogan Lovell’s own research and other work carried out had shown that broad claims of antitrust, collusion and anti-competition breaches from companies joining pro-sustainability organisations are “far overstated and will be very, very difficult to maintain”.

On the consumer protection side, he said it would be “very difficult” to maintain a consumer protection action against some of these asset managers because there “really is a strong case that ESG is simply a responsible investor approach to considering important material fact”.

Researchers from the Columbia Center on Sustainable Investment and Columbia Law School’s Sabin Center for Climate Change Law said in July that there were “weak antitrust grounds” for a collective boycott case against financial institutions and that financiers don’t fit traditional notions of collective boycotts. They noted, however, that there was no existing case law dealing with the question.

The researchers also warned of a chilling effect from the “spectre of antitrust litigation”, given companies do not typically have the appetite for a lengthy and visible legal process.

Racine agreed. While the reality is that antitrust and competition claims are “really speculative” and the legal risk to businesses exercising a reasonable business decision is slight, he said, “businesses want to just go ahead and do their business every day and not be distracted by needless investigation, litigation or being called to a state legislature or to Congress to testify”.

He added: “I think it’s perfectly responsible and reasonable for businesses to decide that opting out of broad organisations may be worth it if it keeps them from receiving the kind of letters and scrutiny and potential litigation from the anti-ESG actors.”

Lost liability

Some anti-ESG legislation at state level which provides for divestment of financial firms deemed to be boycotting fossil fuels also carries a liability waiver for pension funds and state officials. Texas’s SB13, for instance, bans claims for breach of fiduciary duty against state entities for divestments of financial companies, among other banned claims.

Racine said such clauses could end up backfiring.

“Clauses like that are important for residents and citizens of various states to know that your state legislature is willing to craft a law that may very well hurt residents financially and not be held accountable for that,” he said.

“I think that kind of self-serving law may actually backfire against those states because they’re saying that it’s okay if we hurt our residents financially and we’re not providing them with any kind of recourse.”