The 2024 US election results are set to create significant impacts on the regulatory landscape surrounding environmental, social, and governance (ESG) issues. With widespread anticipation of changes in administrative priorities, ongoing litigation, and regulatory challenges, the corporate legal landscape for ESG is on the cusp of a profound transformation. The implications for various elements, from SEC regulations and state-level requirements to federal developments and the interplay between US and EU ESG policies, promise to reshape the future of corporate governance and compliance.
Administrative Changes and the SEC’s Role in ESG
A change in administration often triggers shifts in the priorities of regulatory bodies, and the Securities and Exchange Commission (SEC) is no exception. Being an independent agency within the executive branch of government, the SEC’s chair is appointed by the US president, and currently, SEC Chair Gary Gensler has announced his departure set for January 20, 2025. This gives way to new leadership that could steer the agency’s approach toward ESG initiatives in a different direction.
The SEC’s climate-related disclosure rules are currently under the microscope, as they mandate publicly traded companies to include climate-specific information in their registration statements and annual reports. These rules, adopted in March 2024, were temporarily put on hold in April due to pending judicial review regarding their legality. The US Court of Appeals for the Eighth Circuit is handling consolidated cases challenging the rules based on the major questions doctrine, the First Amendment, and administrative law principles. As strong defenses for these rules persist, a post-election leadership transition could potentially result in a more lenient defense or even a rollback of the rules.
President-elect Donald Trump’s nomination of Paul Atkins, a former SEC commissioner under President George W. Bush, as the next chair hints at a possible rescission. Atkins has been outspoken against climate-related disclosure rules, criticizing them for overlooking financial materiality and exceeding the agency’s statutory authority. Despite these possible changes, companies are advised to maintain compliance with the existing guidance, including the SEC’s 2010 interpretative guidance on climate disclosure, and evaluate whether they need to disclose any material climate risks.
Human Capital Management and Shareholder Proposals
The 2024 election outcome introduces considerable uncertainty regarding human capital management (HCM) disclosure requirements for public companies. SEC Chair Gensler had been a proponent of enhanced and consistent HCM disclosures, yet these efforts are anticipated to stall under new leadership, keeping the current requirements under Regulation S-K unchanged.
An area likely to experience transformation is shareholder proposals, governed by Exchange Act Rule 14a-8. Critics have often argued that the existing process for including shareholder proposals in proxy materials is excessively burdensome. In 2022, the SEC proposed amendments to Rule 14a-8 to make it harder for companies to exclude shareholder proposals, but these changes are unlikely to be pursued by the incoming administration. Future reforms may focus on streamlining the process for obtaining no-action relief to exclude shareholder proposals, potentially resulting in fewer ESG-related proposals being presented at annual shareholders’ meetings.
California Climate Disclosure Laws
California continues to lead in climate legislation with the enactment of three new laws: SB 253 (Climate Corporate Data Accountability Act), SB 261 (Climate-Related Financial Risk Act), and AB 1305 (Voluntary Carbon Market Disclosures Act). These laws impose stringent climate disclosure requirements on companies operating within the state. For example, SB 253 mandates that companies generating $1 billion or more in revenue must report Scope 1 and Scope 2 greenhouse gas emissions starting in 2026, and Scope 3 emissions by 2027. SB 261 applies to companies with $500 million or more in revenue, requiring them to disclose climate-related financial risks beginning in 2026. In comparison, AB 1305 demands reporting on net-zero claims and carbon offset transactions starting in 2025 for all companies operating within California.
These regulations have already sparked litigation on First Amendment grounds, with initial court rulings favoring California. Regardless of ongoing legal battles, the implementation of these laws continues, and noncompliance could lead to significant financial penalties, federal scrutiny, and reputational damage. Companies must enhance their data collection and reporting systems to meet these rigorous requirements effectively.
Voluntary Carbon Markets
Voluntary carbon markets play a pivotal role in corporate greenhouse gas (GHG) reduction strategies, yet they face intensified scrutiny due to concerns about the permanence, additionality, and verification of carbon offsets. The Commodity Futures Trading Commission (CFTC) has brought attention to the risks of fraud within these markets. New UN-backed standards for global voluntary carbon markets present opportunities for US companies to align with international frameworks, although federal guidance remains sparse.
Businesses should be vigilant of legal risks, including potential fraud allegations or antitrust scrutiny, and ensure their carbon offset strategies are robust and transparent to mitigate vulnerabilities effectively. Aligning with international standards, coupled with rigorous internal audits, can help safeguard against potential legal threats.
DEI Strategies and Federal Oversight
The new administration is expected to increase scrutiny on diversity, equity, and inclusion (DEI) programs. EEOC Commissioner Andrea Lucas, likely to head the agency, has openly criticized race- and gender-based initiatives. Under her leadership, the EEOC might step up investigations into DEI programs, such as diverse candidate slates and executive compensation tied to representation goals.
Furthermore, the Office of Federal Contract Compliance Programs (OFCCP) could also renew its stance on DEI under the incoming administration. President Trump previously issued an executive order restricting DEI training for federal contractors, and similar measures might resurface, targeting aspirational diversity commitments as discriminatory. Public companies must meticulously manage the risks linked to their DEI-related public disclosures. An alignment between public statements and internal practices is crucial to mitigate potential legal and reputational jeopardies. Conducting DEI audits and reviewing publicly accessible documents for consistency with actual practices will be essential for businesses to navigate the forthcoming challenges.
The EU’s ESG Framework and Implications for US Companies
The EU’s Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) place extraterritorial sustainability disclosure requirements even on non-EU companies with extensive EU operations. The phased implementation of the CSRD will begin affecting US multinationals from 2028, while the CSDDD will impose due diligence obligations from 2027.
US companies must evaluate their exposure to these EU directives and prepare for the demanding reporting requirements. Although some US legislators criticize the extraterritorial scope of EU ESG mandates, pressures from investors and the necessity of private ordering might compel companies to comply with these standards. Noncompliance could result in reputational harm and enforcement actions, underscoring the tension between US and EU ESG regulations.
Impact on US State and Federal Investing Rules
The regulatory landscape for ESG investing at the state level is marked by division, with Democratic-leaning states mandating the consideration of ESG factors for state-managed funds, while Republican-leaning states, such as Texas and Florida, prohibit ESG considerations or require divestment from industries like fossil fuels. This polarized environment poses challenges for asset managers navigating conflicting state policies.
On the federal level, the US Department of Labor (DOL) might revisit the Biden-era rule allowing ESG factors in retirement investments. New leadership could pave the way for stricter regulations limiting ESG considerations to those solely pecuniary in nature. Simultaneous efforts in Congress aim to amend ERISA, potentially restricting ESG integration in private retirement plans. Private litigation challenging ESG factors under ERISA’s fiduciary duties is on the rise, with a significant case under review potentially setting a precedent. This could lead to more lawsuits and create a chilling effect on ESG integration. Asset managers must find a balance between compliance with restrictive US regulations and addressing international ESG mandates.
Congressional and Regulatory Investigation Outlook
The new administration is expected to amplify congressional scrutiny of ESG policies. Republicans in key committees, such as the House Financial Services and Senate Banking Committees, are poised to investigate US regulators’ alignment with international ESG frameworks. Concerns about the CSRD unfairly disadvantaging US companies have already prompted probes into ESG-driven investment practices.
Potential legislation aiming to curtail perceived overreach by financial and consumer regulatory agencies may emerge. Moreover, antitrust investigations could expand, focusing on alleged collusion in advancing climate initiatives or restricting fossil fuel investments. State attorneys general are likely to challenge corporate ESG policies and advocate for increased oversight of asset managers’ ESG practices.
Looking Ahead
The outcome of the 2024 US election is poised to significantly influence the regulatory framework governing environmental, social, and governance (ESG) issues. With heightened expectations of shifts in administrative priorities, the corporate legal landscape for ESG stands on the brink of considerable transformation. This transformation will be driven by ongoing litigation and emerging regulatory challenges that businesses must navigate.
The anticipated changes promise to impact various aspects, from Securities and Exchange Commission (SEC) regulations and state-level requirements to federal developments. Additionally, the evolving interplay between US and EU ESG policies will play a critical role in shaping the future of corporate governance and compliance. Companies will need to stay informed and adapt to an evolving landscape marked by new rules and guidelines.
This shift in the regulatory environment could lead to more stringent reporting requirements and greater accountability for corporations, compelling them to prioritize sustainability and responsible governance practices. As a result, the election outcomes could usher in a new era where ESG concerns take center stage in policymaking and corporate strategy, ultimately influencing how businesses operate and how they are perceived by stakeholders.
