Over the past decade, Environmental, Social, and Governance (ESG) factors have transitioned from being peripheral considerations to becoming central tenets of corporate strategy. This shift, driven by increasing awareness of climate change, social justice, and corporate governance issues, is reshaping the corporate world. However, as companies embrace ESG principles, they are also encountering a surge in ESG-related litigation. Understanding this evolving legal landscape is crucial for businesses to navigate the complexities of corporate responsibility.
We wanted to shed some light on how this is playing out and look at the potential difficulties through the lens of litigation.
The Origins of ESG Litigation
ESG litigation has its roots in the growing demand for corporate transparency and accountability. Investors, consumers, and regulators are no longer content with mere lip service in regards to sustainability and ethical practices. They are seeking tangible commitments and results, and when these are not forthcoming, legal action can often follow.
Environmental Litigation:
Firstly, climate change has been a significant driver of environmental litigation. Companies are being held accountable for their carbon footprints, pollution, and failure to disclose climate risks. Landmark cases, where major oil companies are being sued for their contributions to global warming are becoming more common, One such example is Milieudefensie v Royal Dutch Shell in 2021 where it was determined that Shell’s sustainability policy was insufficient and the court insisted that they reduce their global emissions by 45% before 2030. These cases show the evolving legal attitude towards climate change and these precedents are becoming increasingly likely to reverberate across industries in the years to come.
Social Litigation:
Additionally, social issues, including workers rights, diversity, and human rights abuses, have also come to the forefront. Companies are increasingly facing claims for discriminatory practices or failing to uphold fair employment standards in their supply chains. The #MeToo movement has further highlighted the legal repercussions of inadequate responses to workplace harassment and discrimination. A poll for a major national trade union in England and Wales suggested that 68% of people believe that the MeToo movement has allowed individuals to be more open about sexual harassment, illustrating the impact that social litigation can have on a modern society.
Governance Litigation:
Governance-related claims often involve issues of corporate mismanagement, lack of transparency, and breaches of fiduciary duty. Shareholders are becoming more vigilant, demanding higher standards of governance, and pursuing legal action when boards and executives fail to meet these expectations. The UK Corporate Governance Code was updated in January 2024 and will come into effect in 2025 with amended provisions designed to encourage companies to report on outcomes and activities. These incoming changes and the increasingly expressed desire for companies to be explicit about their contribution to human betterment and long-term value hint at the potential impact governance related litigation could have on businesses.
Key Drivers of ESG Litigation
We can see there has been a rise in ESG litigation and also a shift towards sustainable development as a whole, but what factors are contributing to this apparent rise?
Several factors seem to be driving the growth of ESG litigation:
- Regulatory Pressure: Governments and regulatory bodies worldwide are enacting stricter ESG regulations. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) and the U.S. Securities and Exchange Commission’s (SEC) increased focus on climate-related disclosures are examples of regulatory efforts pushing companies to adhere to ESG standards.
- Investor Activism: Investors, particularly institutional investors, are increasingly prioritising ESG criteria in their investment decisions. They are not hesitant to use litigation as a tool to enforce ESG commitments and drive corporate change.
- Consumer Awareness: Consumers are more informed and concerned about the ethical implications of their purchases. Companies that fail to align with consumer values on environmental sustainability and social responsibility risk not only reputational damage but also potential legal challenges.
- Judicial Precedents: Recent successful ESG cases have emboldened stakeholders to pursue similar actions. As courts become more receptive to ESG claims, the volume of litigation is likely to increase.
These factors contribute to the rising trend in ESG litigation, both individually and collectively. Consumer awareness provides an understanding of the issues at hand and offers a form of social mobility. As the saying goes, ‘the customer is king’ and in the legal profession, in particular, there is a significant impetus to maintain client satisfaction.
However, there are some who do not see the necessity of adapting to a new era of ESG litigation, claiming that the purported impact of legislation will be limited due to the complexity of court proceedings. Furthermore, the burden of proof is often placed on the disadvantaged party to suggest that they are personally affected. These parties are less likely to have the resources and mobility to successfully take on large companies and governments that joined together to seek change in that case. However, the general trend has alluded to the reality that those who are more disenfranchised are less likely to come out as victors in these types of cases. As the power usually lies in the hands of big corporations and governments, the question is: how likely would it be that these corporations adhere to corporate governance measures that impact them negatively? For these reasons, some might argue that the recent interest in ESG litigation is nothing more than a fad and does not have any real weight behind it.
But are we beginning to see more cases being decided in favour of ESG policies? Recently, the Supreme Court ruled against Surrey County Council, ruling that they should have considered the impact of climate-warming emissions in approving an oil well near Gatwick Airport. Friends of the Earth lawyer, Katie de Kauwe said that “This historic ruling is a watershed moment in the fight to stop further fossil fuel extraction projects in the UK and make the emissions cuts needed to meet crucial climate targets”. We can see from this verdict and the increasing presence of similar cases, that the future is likely to be one where ESG litigation could well be prevalent, and businesses should be concerned about how to adapt to be able to successfully navigate the changing landscape.
Navigating the Legal Landscape
To mitigate the risks associated with ESG litigation, companies must adopt proactive strategies:
- Robust ESG Policies: Develop and implement comprehensive ESG policies that are well-documented and aligned with best practices. These policies should be integrated into the core business strategy and regularly reviewed to ensure compliance with evolving standards.
- Transparent Reporting: Ensure accurate and transparent reporting of ESG metrics. This includes not only meeting regulatory requirements but also voluntarily disclosing relevant ESG information to stakeholders.
- Stakeholder Engagement: Engage with stakeholders, including investors, employees, and communities, to understand their ESG concerns and expectations. This dialogue can help identify potential risks and opportunities early on.
- Legal Preparedness: Work closely with legal experts to stay abreast of emerging ESG-related legal trends and ensure that the company is prepared to address potential litigation. This includes conducting regular ESG audits and assessments to identify and mitigate legal risks.
- Crisis Management: Develop a robust crisis management plan to address potential ESG-related incidents swiftly and effectively. This plan should include communication strategies to manage public perception and legal strategies to handle potential lawsuits.
One approach might be to plan a strategy to help companies navigate and ultimately mitigate these risks, but the only way to truly see change is to adopt an attitude of self-awareness. We have discussed the importance of ESG and the increasingly familiar lengths which some will go to in order to see these forms of litigation come to fruition. ESG litigation cannot simply become an afterthought to executives and decision makers within large organisations. To abide by this new way of operating, all behaviours that the company engage in need to be in accordance with the spirit of ESG; this is not a change that can be imparted overnight and will take time and, above all else, willingness to do so.
Additionally, many companies are likely to struggle with these changes when confronted with the reality that these developments are likely to damage their bottom line. The cases we have discussed tend to feature the idea that companies are failing to consider the effects of climate change or the negative impacts their practices could have on it.
The Future of ESG Litigation in the Legal Sector
As ESG principles continue to permeate the corporate world, ESG litigation will likely become a more prominent feature of the business landscape. The Wolters Kluwer Future Ready Lawyer Survey (2022) found that 50% of law firms across Europe and the US reported that they created an ESG practice area in the three years prior. Companies that fail to adapt to this risk significant legal and reputational damage, especially given that 67% of legal departments are now asking their law firms to provide their ESG policies and sustainability credentials, showing that this topic is deemed as important to clients as well as to those within the legal sector. Adrian Peyer the CEO of Impactvise stated that…
“Law firms need to get their own house in order if they do not want to run the risk of losing and not attracting new clients, “Until now, the ESG performance of a law firm has been ‘a nice to have’, but 2023 and beyond will move it to ‘a need to have”.
It is not far-fetched to imagine that those who proactively embrace ESG standards and demonstrate genuine commitment to sustainability and ethical practices will not only mitigate litigation risks but also position themselves as leaders in the new era of corporate responsibility.
To Summarise, the escalating trend in ESG litigation signals an imperative for companies to embed Environmental, Social, and Governance principles within their strategic framework. This integration is not merely a compliance exercise but a proactive manoeuvre to steer through the multifaceted landscape of corporate accountability. Companies that successfully align their operations with ESG imperatives are poised to not only mitigate legal risks but also build resilient, future-proof businesses, fostering sustainable growth that benefits both society and the environment. This foresight positions companies at the forefront of this transformative era, where corporate responsibility and sustainable value creation are fundamentally intertwined.
Increasingly, the ESG talent pool is becoming well defined. There is no single skillset that has enabled individuals to transition into ESG roles, in fact, the legislation captures a range of topics that means a degree of relearning needs to take place. Increasingly, ESG roles are determined by the reporting line of the function and can vary depending on the organisations internal structure. The role of a lawyer in the context of managing ESG related risk is undeniably an increasing priority for corporates.
If you would like to discuss your own career in ESG or the growth of your team, please reach out to Sershen Ingram – sershen@fidessearch.com