Regardless of a company’s stance on ESG (Environmental, Social and Governance), the current political climate brings unique risks for parallel investigations. There are clear signals that congressional investigations coupled with state attorney general investigations are on the horizon. On their own, congressional investigations are convoluted blends of political theater, litigation-style witness preparation and testimony uninhibited by federal rules of evidence. Couple a congressional investigation with a parallel state attorney investigation—which carries its own brand of theatrics boosted by the potential for civil penalties—and companies should take stock of the risk of parallel ESG investigations.
For starters, there is already parallel action between congressional Republicans and Republican attorneys general. Twenty-five states sued the Biden administration to stop a new U.S. Department of Labor (DOL) rule surrounding ESG investing. DOL’s rule allows (not mandates) retirement plans to consider ESG when making investment decisions. DOL’s rule explicitly notes, “the intent of the final rule is simply to remove barriers to the fiduciary’s consideration of all financially relevant factors, which may include ESG, as part of a prudent and loyal process of investment decisionmaking.” DOL’s rule acknowledges that in some cases, ESG will be relevant to a risk analysis; in some cases, ESG will not be relevant. Republican attorneys general filed a lawsuit claiming, among other things, that the rule injects nonfinancial ESG factors into the investment decisions and violates the major questions doctrine (which precludes agencies from using rulemaking to address questions of vast economic and political significance without a clear mandate from Congress). On a parallel track, congressional Republicans took action against the rule on Feb. 28, 2023, by voting to block it. To be explicit, congressional Republicans voted one month after Republican attorneys general filed a lawsuit assailing the same rule—this is the epitome of parallel action.
Democrats are also communicating with Congress surrounding ESG. Seventeen Democratic state attorneys general sent a letter to Congress arguing that ESG factors are material to investment decision-making. Hinting at their consumer protection authority (which generally carries the potential for civil penalties, restitution and injunctive relief), those Democratic state attorneys general warned, “[t]oo many companies have falsely marketed and promoted themselves as deploying ESG-related strategies, while not being transparent about whether or how they are using or weighting ESG considerations or achieving their advertised impacts.” In other words, Democrats are in communication with Congress about their position on the appropriate uses of ESG while simultaneously voicing consumer protection concerns around marketing ploys and fraudulent representations.
The foregoing communication between Congress and state attorneys general foreshadows future parallel ESG investigations. Companies faced with a congressional investigation into their ESG practices (or the lack thereof) should consider the possibility of a forthcoming state attorney general investigation. Companies facing a state attorney general investigation should prepare for Congress to investigate. While there are many nuances to parallel investigations, we provide three considerations below.
1. Determine the True Motive.
The basis for a state attorney general investigation is often difficult to uncover. While most states require that a state attorney general list on an investigatory subpoena (e.g., a civil investigative demand) the statute being investigated, this statutory cite is often broad and subject to many factual interpretations. Yet, state attorneys general will rarely voluntarily disclose the actual motive behind an investigation at the outset (e.g., whether and how many consumer complaints exist). Nevertheless, it’s prudent to have a conversation with an attorney general’s staff about a rolling production of documents, which may help uncover the office’s priorities. On the other hand, the basis for a congressional investigation is often more obvious. Media reports often help shed light on the motive behind a congressional investigation. Other times, a conversation with congressional staff may help shed light on the political objectives behind a congressional investigation. In sum, conversations surrounding the motive of an investigation can help narrow and expedite document production, thereby saving a company money and time associated with a parallel investigation.
2. Prioritize Discerning Privileges and Confidentiality Agreements.
Negotiating privileges and confidentiality agreements can be critical when producing documents. Congress is not required to recognize common law privileges1 although committees will typically negotiate. On the other hand, state law surrounding privilege varies depending on which state attorney general is investigating. Therefore, a company should retain experienced counsel to negotiate surrounding privileges attached to, for example, the information, communication, findings and reports generated from a supply chain ESG investigation.
3. Prepare for Disposition Early and Often.
Preparing for a congressional hearing is not dissimilar from preparing for a 30(b)(6) deposition (a deposition of a corporate representative). In both scenarios, the witness will need to review: (a) the substantive areas of questioning that may arise, (b) the key documents that may form the basis for questioning, (c) prior statements from the witness or the company on the subject areas, (d) the testimony of other witnesses on the subject areas, and (e) relevant news reports and social media reports. Of course, under both scenarios, the witness should undergo mock questioning from experienced counsel that understand the likely forms and style of questioning the witness will face.
The ESG political climate is increasingly polarized and signs indicate it may only get worse in the near term. While there are some state-level exceptions (Wyoming and North Dakota recently both voted down anti-ESG bills that would have restricted consideration of ESG factors in investments and Indiana amended an anti-ESG bill after analysis found it could cost over $6.7 billion in lost returns over the next decade), members of Congress and state attorneys general are largely divided by party lines surrounding ESG. Moreover, Congress is communicating with the state attorneys general. If the past is any indication of the future, expect to see future parallel congressional investigations and state attorneys general investigations. Companies should prepare for this possibility by consulting counsel with a substantive understanding of ESG combined with experience navigating state attorneys general and Congress.
1 Brownstein has written extensively about preparing for congressional investigations. For a more in-depth analysis, take a look at this article authored by William Moschella.
This document is intended to provide you with general information regarding parallel state and federal ESG-related investigations. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.