The rise in ESG-related lawsuits and settlements is driving many firms to regulate how they impart about environmental, social and governance points. It’s additionally driving a rising quantity to seek the advice of attorneys and different material consultants for steering.
The priority is tangible. Lawsuits involving ESG-related points have elevated by 25 % over the previous three a long time, in accordance with analysis printed earlier this yr by the World Enterprise Council for Sustainable Improvement (WBCSD).
Some examples cited within the evaluation: firms being sued for provider misconduct, reminiscent of unlawful logging accomplished by a contractor; preemptive due diligence associated to coverage and regulatory frameworks such because the non-binding Paris Settlement, which requires holding world warming under 2 levels Celsius; and due diligence associated to “gentle regulation” insurance policies that don’t have enforcement mechanisms however might be referenced in courtroom, such the Job Drive on Local weather-related Monetary Disclosures, which offers suggestions for reporting on materials local weather info.
Broadridge, a fintech firm, additionally highlights regulator crackdowns on greenwashing and a rise in event-driven securities litigation — the place lawsuits are filed over vital occasions that impression an organization’s share value — as drivers of ESG-related securities and sophistication motion lawsuits.
Scrutiny by lawmakers can be intensifying. Final yr, 5 Republican senators despatched a letter to 51 regulation companies notifying them of their deliberate investigations into the ESG insurance policies of their company purchasers. Final month, Sen. Tom Cotton (R-Ark.) despatched those self same 51 regulation companies one other letter warning that their purchasers’ variety, fairness and inclusion initiatives is also targets for investigation and litigation.
Either side are staffing up
What does all this imply for firms and buyers?
For one factor, we are going to see extra regulation companies turn into engaged with ESG litigation by increasing or launching ESG, sustainability and local weather practices. Some regulation companies specializing in litigating company wrongdoing, for example, are taking up local weather litigation.
These companies are on the middle of a rising variety of lawsuits being introduced towards fossil fuels firms — greater than two dozen cities and states have introduced authorized motion towards oil majors — together with the consulting and monetary providers companies that do work for them.
McKinsey, for one, was named in a $51 billion lawsuit filed by Multnomah County in Oregon towards the fossil gasoline business for its position within the lethal June 2021 warmth wave that killed 69 individuals.
And in February, three nonprofits filed a lawsuit towards BNP Paribas over its financing of fossil gasoline initiatives. The lawsuit was filed below France’s company obligation of vigilance regulation, which was handed in 2017 and requires massive companies to handle their human rights and environmental dangers or face courtroom imposed penalties and civil legal responsibility. Coincidentally, BNP Paribas introduced in Might that it’ll cease its direct financing of latest fuel discipline initiatives.
These firms aren’t being left alone to defend themselves. Their companions in huge regulation have staffed up to help company purchasers in navigating the altering ESG regulatory and litigation landscapes. Fifty % of the U.S. and European Union regulation companies surveyed by Wolters Kluwer in 2022 reported creating an ESG observe space throughout the previous three years.
Treading lighter with communications
One well-documented impression of ESG-related lawsuits is the development of “greenhushing,” the place firms under-communicate their sustainability actions to keep away from greenwashing accusations or political assaults. With regulatory companies such because the Securities and Trade Fee and the Federal Commerce Fee taking motion towards companies for deceptive claims about company and product sustainability claims, the fallout associated to greenwashing has expanded from reputational threat to compliance threat.
Greenhushing hasn’t solely shifted what companies are prepared to say on their very own behalf. It additionally has affected the dynamic of business coalitions and alliances devoted to taking motion on local weather change. The web impact is that some companies are uneasy to be a part of these teams. Vanguard left the Internet Zero Asset Managers (NZAM) initiative in December, claiming it needed to separate its views on internet zero from the positions held by NZAM.
Asset managers aren’t the one ones who’ve been spooked by anti-ESG crusades; no less than seven insurers left the Internet Zero Insurance coverage Alliance this yr as Republicans ramped up scrutiny. Amongst them, a letter from 23 U.S. state attorneys normal claiming that NZIA’s membership necessities appeared to violate state and federal antitrust legal guidelines.
The worst could also be to come back
The rollout of ESG-related regulation such because the SEC’s deliberate climate-related disclosures rule and the EU’s Company Sustainability Reporting Directive will empower regulators and firm shareholders to deliver authorized motion towards firms that fail to determine and deal with their materials ESG dangers.
On the flip slide, rhetoric fueled by the U.S. presidential marketing campaign cycle is bound to deliver extra scrutiny and criticism by anti-ESG crusaders.
Only one factor is definite, particularly with extra firms lawyering up: We are going to see extra ESG-related lawsuits, and your organization would do nicely to be ready.
