Investments  

ESG litigation is gaining momentum

Ellora McPherson

Ellora McPherson

The term 'ESG' first appeared in a 2004 UN report calling for investment decisions to be made with environmental, social, and governance factors higher in mind.

Since then, ESG has become somewhat of a buzzword. The term is only growing in popularity, but many business leaders have become concerned that ESG is now so all-encompassing a description as to have become meaningless. 

Using ESG as a convenient shorthand means it is easy to gloss over the nuance with which companies and investors must engage.  

So from a risk perspective, the concerns of those business leaders are not unfounded. Glib statements in marketing brochures on the ESG credentials of a company or a fund are easily made to appeal to a wider base of customers, but such promises create accountability, and are attracting increasing scrutiny.

Environmental

By way of example, take the ‘E’ of ESG. Climate change litigation began with cases brought by environmental activists and NGOs against governments, who made grand statements on the world stage about their plans to limit temperature rises, but their policies failed to do enough to reduce carbon emissions so that they could meet those objectives.

Climate change litigation has doubled in the past few years, and now carbon-emitting companies are being sued by regional governments for the costs of improving sea wall defences because of sea level rises.  

Numerous car manufacturers are currently in litigation brought not by NGOs but by their customers for – it is claimed – lying to them about the levels of harmful emissions from their diesel vehicles. Volkswagen have just settled such a case in the UK for £193m plus a contribution towards the legal costs of the claimants, and they have already paid out €30bn (€25.4bn) worldwide.  

Companies know that civil litigation is expensive for claimants to mount, particularly in the UK. Well-resourced corporates and their insurers can afford large legal bills, and frequently outspend claimants in order to defeat a claim. But customers and activist claimants are taking steps to reduce this David versus Goliath dynamic. 

Most diesel emissions cases are supported by litigation funders, who provide capital to progress the litigation in exchange for a share of recoveries achieved in successful litigation. The trend of funder-backed litigation is on the rise. 

The list of claims against corporations goes on, and the risk is not just from civil litigation.

On June 10 the UK’s law reform body, the Law Commission, proposed a list of new “failure to prevent” corporate offences. 

If the proposals are taken forward by government, companies may find themselves guilty of a criminal offence if they fail to take sufficient steps to prevent human rights abuses overseas (for example in their supply chain), or if they fail to prevent the neglect and ill-treatment of vulnerable people.