This opening sentence of Charles Dickens’ ‘A tale of two cities’, full of paradoxes, well describes my mood of late. The discussion on sustainability seems to become more polarized by the day. Two recent litigation cases against financial companies illustrate this phenomenon. You could say it has become ‘A tale of two court cases’ in how to navigate this situation.

In recent years, we have seen companies being sued because of their lack of sustainable practices. Direct impacts like addictive medication, fraud and environmental spills are common topics. The case from Friends of the Earth Netherlands¹ against Shell was on another level, when they held the company responsible for climate change.

The group demanded that Shell set CO₂ emissions targets not only on Scope 1 and 2 (emissions from operations), but also Scope 3 emission from the use of its products, such as the use of oil and gas in cars. Under the Dutch law’s ‘duty of care’ obligation, the courts ruled in Friends of the Earth’s favor.

Now it’s the financial industry’s turn. The NGO is suing ING Bank in the Netherlands for financing companies with poor climate plans. According to Friends of the Earth, under the same duty of care obligation, ING must ensure that its climate policy is in accordance with the 1.5°C target of the Paris Agreement, reducing its absolute emissions of CO₂e by at least 43% in 2030 compared to 2019 levels.

And in addition, ING must not only ensure that all large corporate clients provide a good climate plan, but also cease financially supporting large corporate clients who do not have one within a year. This specifically includes clients who continue fossil fuel expansion, or who do not have a solid phase-out plan.

In another case, the roles are reversed, with ExxonMobil taking an investor and an NGO to court. The oil giant filed a lawsuit in Texas against Follow This, an activist shareholder initiative, and Arjuna Capital, an investment manager in Massachusetts, after a shareholder proposal asked Exxon to set the same kind of Scope 3 emission reduction targets, that Shell had been told to adopt by the Dutch court.

Exxon sought to have the shareholder proposal excluded from its proxy statement, because it “deals with a matter relating to the company’s ordinary business operations” and because it addressed the same issue that was previously filed in 2023 and in 2022. The company claimed it was not in line with the resubmission criteria of the SEC, and that the proposal “does not seek to improve Exxon Mobil’s economic performance or create shareholder value”. Its objection succeeded, as the resolution was withdrawn, but Exxon is continuing with the lawsuit.

Regardless of the outcome of the court case against ING Bank, it seems clear that at least in the Netherlands, having a good climate policy that also covers Scope 3 emissions is no longer just ‘nice to have’.

And regardless of the outcome of the lawsuit against Follow this and Arjuna, the practice of bypassing the SEC and taking direct legal action via a court might make shareholders hesitate to exercise their rights.

ESG topics over the last two years have become increasingly politicized. Taking shareholder cases to court might further escalate the debate on already sensitive topics. And even though this has happened before, it exhibits poor governance practices.

On the surface, it seems that ESG expectations toward portfolio companies in Europe and in the US might further move apart rather than move closer together. In reality, a recent ESG survey from Cerulli² among US institutional investors shows a different picture. According to this survey, 68% of US institutional investors are integrating material ESG issues into their investment decision-making process. It is good to mention that this ESG integration is being done for purely financial reasons (the ‘pecuniary factor’), so it does not mean that portfolios will become more sustainable. It is about better pricing of externalities.

Asked about the impact of the anti-ESG movement, 40% of respondents said they would continue to integrate ESG and invest in sustainable and impact strategies, and 30% indicated it would have no impact on their business. No participants selected ‘We will stop incorporating ESG considerations into investment decisions’ or ’We will no longer offer ESG/sustainable investment products’.

When it comes to active ownership, nearly half of the responding institutions (46%) are active owners and another 33% plan to become so in the next 24 months. Of those, 69% are engaging with the management teams of underlying portfolio companies on ESG-related issues, and an additional 20% plan to expand their efforts through a range of methods: shareholder resolutions (31%), collaborative engagement (30%) and proxy voting (25%). Let’s hope these investors take this seriously, because institutional investors trying to make use of the shareholder rights should now be aware of potential legal action.

What has changed is the fact that institutional investors will become more cautious about their communications around sustainable investing. After greenwashing, ‘greenhushing’ is now becoming an issue. Therefore, we believe that the anti-ESG movement in the US should not be underestimated. It will get worse before it gets better.

At Robeco, sustainable investing will remain a key strategic pillar of our strategy. As was so elegantly expressed by Charles Dickens, sustainability is complex and can be paradoxical at times. That is why we will stick to our research-based approach toward ESG integration and sustainable investing to help our clients achieve their sustainability and their financial goals.

Footnotes

¹ A Dutch environmental organization also known as ‘Milieudefensie’.
² The Cerruli Edge: US Institutional, the ESG Edition: Q1 2024