The rise in ESG-related lawsuits and settlements is driving many companies to adjust how they communicate about environmental, social and governance issues. It’s also driving a growing number to consult lawyers and other subject matter experts for guidance.
The concern is tangible. Lawsuits involving ESG-related issues have increased by 25 percent over the past three decades, according to research published earlier this year by the World Business Council for Sustainable Development (WBCSD).
Some examples cited in the analysis: companies being sued for supplier misconduct, such as illegal logging done by a contractor; preemptive due diligence related to policy and regulatory frameworks such as the non-binding Paris Agreement, which calls for keeping global warming below 2 degrees Celsius; and due diligence related to "soft law" policies that don’t have enforcement mechanisms but can be referenced in court, such the Task Force on Climate-related Financial Disclosures, which provides recommendations for reporting on material climate information.
Broadridge, a fintech company, also highlights regulator crackdowns on greenwashing and an increase in event-driven securities litigation — where lawsuits are filed over significant events that impact a company’s share price — as drivers of ESG-related securities and class action lawsuits.
Scrutiny by lawmakers is also intensifying. Last year, five Republican senators sent a letter to 51 law firms notifying them of their planned investigations into the ESG policies of their corporate clients. Last month, Sen. Tom Cotton (R-Ark.) sent those same 51 law firms another letter warning that their clients’ diversity, equity and inclusion initiatives could also be targets for investigation and litigation.
Both sides are staffing up
What does all this mean for corporations and investors?
For one thing, we will see more law firms become engaged with ESG litigation by expanding or launching ESG, sustainability and climate practices. Some law firms specializing in litigating corporate wrongdoing, as an example, are taking on climate litigation.
These firms are at the center of a growing number of lawsuits being brought against fossil fuels companies — more than two dozen cities and states have brought legal action against oil majors — along with the consulting and financial services firms that do work for them.
McKinsey, for one, was named in a $51 billion lawsuit filed by Multnomah County in Oregon against the fossil fuel industry for its role in the deadly June 2021 heat wave that killed 69 people.
And in February, three nonprofits filed a lawsuit against BNP Paribas over its financing of fossil fuel projects. The lawsuit was filed under France’s corporate duty of vigilance law, which was passed in 2017 and requires large corporations to manage their human rights and environmental risks or face court imposed penalties and civil liability. Coincidentally, BNP Paribas announced in May that it will stop its direct financing of new gas field projects.
These companies aren’t being left alone to defend themselves. Their partners in big law have staffed up to support corporate clients in navigating the changing ESG regulatory and litigation landscapes. Fifty percent of the U.S. and European Union law firms surveyed by Wolters Kluwer in 2022 reported creating an ESG practice area within the past three years.
Treading lighter with communications
One well-documented impact of ESG-related lawsuits is the trend of "greenhushing," where companies under-communicate their sustainability activities to avoid greenwashing accusations or political attacks. With regulatory agencies such as the Securities and Exchange Commission and the Federal Trade Commission taking action against corporations for misleading claims about corporate and product sustainability claims, the fallout related to greenwashing has expanded from reputational risk to compliance risk.
Greenhushing hasn’t only shifted what corporations are willing to say on their own behalf. It also has affected the dynamic of industry coalitions and alliances dedicated to taking action on climate change. The net effect is that some firms are uneasy to be part of these groups. Vanguard left the Net Zero Asset Managers (NZAM) initiative in December, claiming it wanted to separate its views on net zero from the positions held by NZAM.
Asset managers aren’t the only ones who have been spooked by anti-ESG crusades; at least seven insurers left the Net Zero Insurance Alliance this year as Republicans ramped up scrutiny. Among them, a letter from 23 U.S. state attorneys general claiming that NZIA’s membership requirements appeared to violate state and federal antitrust laws.
The worst may be to come
The rollout of ESG-related regulation such as the SEC’s planned climate-related disclosures rule and the EU’s Corporate Sustainability Reporting Directive will empower regulators and company shareholders to bring legal action against companies that fail to identify and address their material ESG risks.
On the flip slide, rhetoric fueled by the U.S. presidential campaign cycle is sure to bring more scrutiny and criticism by anti-ESG crusaders.
Just one thing is certain, especially with more companies lawyering up: We will see more ESG-related lawsuits, and your company would do well to be prepared.