ESG litigation is gaining momentum

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.  

Lofty ESG claims that turn out to be overblown may prove to be very expensive for companies.

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. 

The ‘S’ and the ‘G’ of ESG is coming to the fore, too.

And corporates are not the only ones at risk. Financial institutions and professional investors are also increasingly in the crosshairs of claimants and their lawyers, in a way that hitherto has been much less common.  

HSBC ran advertising campaigns in Australia promoting its support for protection of the Great Barrier Reef while also funding fossil fuel operations. It now faces an investigation by the advertising regulator.

The Commonwealth Bank of Australia was subject to action to disclose internal documents relating to a gas pipeline and other projects that potentially infringed the bank’s policies that required it to consider whether its funded projects are in line with the goals of the Paris Agreement.  

A UK pension fund for university staff is being taken to the High Court for failures of the fund’s directors “to create a credible plan for disinvestment from fossil fuel investments”.

While ESG as a buzzword may be dying, the litigation risk on the component parts of ESG is just coming to life.

Shareholders in the UK benefit from section 90 and 90A of the Financial Services Markets Act 2000, which allows them to claim for losses arising from action taken on the basis of misleading information provided by a listed company. Indeed, the regime also extends to omissions and delays in publication. 

Lofty ESG claims that turn out to be overblown may prove to be very expensive for companies. Shareholder litigation against Tesco was backed by litigation funders, who may also be prepared to back ESG-related shareholder litigation.

For fund managers, too, claims on the ESG credentials of their investments may prove similarly expensive. On May 31 the German police raided the office of asset manager DWS and Deutsche Bank, its majority owner, as part of an investigation into alleged greenwashing – the first, but certainly not the last, investigation into an asset manager.

We may also soon see asset managers themselves acting as claimants in litigation, meeting their responsibilities to investors by taking active steps to ensure companies are meeting the ESG standards they set themselves. 

While asset managers may not have much appetite or capacity to manage such litigation internally, litigation funders and law firms are poised to assist and remove the risk and cost of such actions.

Scrutiny and accountability and enforcement are here, and while ESG as a buzzword may be dying, the litigation risk on the component parts of ESG is just coming to life.

Ellora MacPherson is chief investment officer of Harbour Litigation Funding