Fragmentation in the U.S. ESG Landscape
The ESG (Environmental, Social, Governance) landscape in the United States has become a tale of contrasts, with states sharply divided between pro- and anti-ESG initiatives. This fragmentation is evident at the state level, where various actions, policies, and legal frameworks are emerging. On one hand, states endorsing ESG principles are pushing for robust climate disclosure regulations; on the other, some states are implementing measures to counter these trends, reflecting a heated national conversation around sustainability and corporate responsibility.
The state of California has long led the charge for climate accountability, evidenced by its ambitious climate reporting and disclosure laws. However, a recent ruling by the U.S. Court of Appeals for the Ninth Circuit has temporarily put the brakes on California’s SB 261. This law sought to compel companies with over $500 million in annual revenue operating in California to disclose financial risks posed by climate change starting in January 2026. Alongside this, SB 253, requiring companies with annual revenues exceeding $1 billion to report their greenhouse gas emissions by June 2026, also faces legal challenges. As litigation unfolds, many companies are caught in a limbo, investing heavily in compliance while keeping a close watch on the evolving case dynamics. A decision from the Ninth Circuit is anticipated soon, which will ultimately determine the fate of these two pivotal laws.
Amidst these developments, 23 state Attorneys General have united to challenge the Science Based Targets initiative (SBTi) over its “Financial Institutions and Net-Zero Standard.” Their letter to SBTi highlights concerns about potential antitrust and consumer protection violations, underscoring the contentious climate of regulatory scrutiny surrounding ESG frameworks. In Texas, state officials have launched investigations into proxy advisory firms for allegedly promoting “radical political agendas,” including aggressive climate policies that lack financial backing. These moves indicate a growing bifurcation as states critically assess the sociopolitical implications of ESG provisions.
In response to the rising tide of anti-ESG sentiment, Democratic officials from 17 states have reached out to major asset managers, emphasizing the long-term financial risks that climate change poses. Their communications stress the need for active engagement in governance and investment decisions, contending that neglecting ESG factors endangers the retirement funds of American citizens. This political tug-of-war plays a pivotal role in shaping the future of how ESG principles influence investment strategies across the country.
Litigation Growth
The landscape of greenwashing litigation in the U.S. is also on the rise, particularly as consumer class actions increasingly target deceptive marketing practices. By early 2025, watchdog groups had already tracked over 150 greenwashing class actions, primarily in California and New York—the jurisdictions leading the charge in holding companies accountable for misleading sustainability claims.
While many private litigations face challenges—often dismissed for having aspirational or generalized statements—others gain momentum, especially those targeting specific claims about products. When plaintiffs challenge terms such as “recyclable” or “sustainable,” lawsuits can survive early motions to dismiss, provided there is evidence of misleading claims. However, securities class actions related to ESG disclosures have seen more muted progress, often tied to broader claims rather than core “greenwashing” issues.
Moreover, novel legal theories linking oil companies to personal harm have emerged in court. For instance, a unique lawsuit in Washington alleged that deceptive practices by oil companies contributed to climate change, directly affecting the health of an individual during an extreme heat event. Similarly, another case filed by Washington homeowners claims rising insurance costs from climate-related disasters are due to the negligence of major oil firms. These cases signal a burgeoning trend toward linking corporate accountability for environmental damage to personal injury claims.
What to Expect Over the Short, Medium, and Long Term
As the ESG landscape continues to evolve, organizations must navigate a complex regulatory terrain. In the short term, businesses face the challenge of managing legal uncertainty. Mapping potential legal exposures within the patchwork of federal and state rules is essential. Companies should ensure that their messaging aligns with reliable financial risks and opportunities while maintaining a litigation-aware approach to claims and marketing strategies.
Looking ahead to the medium term, businesses should prioritize building or refining reporting frameworks that can accommodate diverse regulatory requirements. Adjusting strategies to incorporate energy security into climate transition plans will be crucial as companies navigate the shifting expectations and assurance processes surrounding ESG disclosures. Organizations also should prepare for potential inquiries and enforcement actions by establishing clear protocols for escalation and compliance.
Over the long term, it’s vital for organizations to actively manage climate-related risks while balancing their sustainability efforts with broader financial considerations. Engaging various stakeholders—including shareholders, clients, and regulators—will enhance compliance and governance. As scrutiny from regulators intensifies, and as societal expectations shift, businesses will need to proactively manage reputational risks tied to sustainability initiatives. Successfully navigating this landscape will require organizations to align their strategies with their obligations to stakeholders and evolving legal standards.