The battle over whether ESG belongs in investment decision-making, and whether failure to adhere to ESG principles can lead to litigation against companies, has created some very curious legal situations. The two below are wholly unrelated, but also illustrative of what it looks like in the weeds of ESG sensibilities.
Last month, Congress actually agreed on something: they sent to the president a bill that would not permit the US Department of Labor to allow regulated funds to take ESG into investment considerations. The presumable argument is that ESG may have a downward pressure on profits, hurting worker beneficiaries. President Biden used his first veto to strike down the law, leaving ESG as a permitted investment consideration in regulated plans.
Two days ago, Wells Fargo moved to dismiss a class action lawsuit brought on behalf of current Wells Fargo shareholders. Bear with me here.
*In 2020 WF adopted a policy requiring that diverse candidates constitute at least half the interviewees for high-paying jobs; the definition of diversity was broad and included women also.
*It is alleged that some WF employees conducted interviews after some slots were filled so as to reach the 50% level of interviewees.
*The suit complains that WF propped up the price of its own stock by such practices, and failed to report that WF was not complying with its own DE policy; during this time of allegedly propped-up stock prices, WF repurchased its own shares.
*When it became clear that the WF policy was allegedly not being followed, the share price fell. SO—the claim is that if WF had not lied about complying with its own policy, the price of the stock would have dropped earlier and then the price of redeeming the stock at inflated valuation cost the company an extra $4.1 billion dollars. A breach of fiduciary duty by management is alleged.
Putting aside what appears to be a clever basis for the claim and putting aside whether alleged facts are true, this case demonstrates another subtle way in which ESG can become relevant in the securities markets– all without regard to the question of whether ESG outside of investment practices is or is not a social benefit.