ESG litigation is now a buzzword in disputes. Legal Business turned to litigators and funders to examine the market – and what we can expect moving forwards
‘If we accept the wider definition that is so popular in everyday usage, you’d probably say that ESG litigation has exploded in the last three to five years and is not really showing any signs of stopping.’
This is the opinion of Slaughter and May disputes partner Peter Wickham. And many in the market share his view of ‘ESG litigation’ as a term with a slippery and imprecise definition.
‘ESG could encompass many kinds of disputes,’ says Clare Connellan, a partner in White & Case’s international arbitration practice and head of the firm’s business and human rights specialty practice. ‘How the term is used is broadening.’
And, as is often the case when a particular term becomes popular, there is a temptation to treat it as a bandwagon. ‘I come down on the side of debate that thinks that ESG is a bit of a buzzword,’ admits Adrian Chopin, co-founder and managing director of litigation funder Bench Walk Advisors. ‘I don’t think it’s incapable of having any meaning. But, as it’s currently used, frequently it has no meaning.’
‘Activists and NGOs are using litigation as activism, which can be dangerous if it is going beyond the bounds of the current legal framework – the courtroom is not necessarily the right place for those battles.’
Peter Wickham, Slaughter and May
Firms and funders alike may be keen to brand their work as ESG-focused. But if all sorts of litigation can be considered ESG litigation, the term becomes denuded of all meaning.
Maurice MacSweeney, director of legal finance and sales planning at litigation funder Harbour, makes a similar point. ‘ESG has developed as something of a byword in recent years, and it’s part of how lawyers sell their services to clients, and how boards think about risk.’
And that is the point. ESG is an ever-more pressing concern for clients. And the market is united in the view that, however it is defined, ESG litigation is on the rise.
‘Clients are becoming increasingly concerned about ESG litigation,’ says Wickham. Viewed in the light of increased consciousness among boards and stakeholders, noted elsewhere in our overview, this is unsurprising.
Wickham continues: ‘Clients are much more aware of these issues and the impact on their businesses generally, not least because many of them are putting huge amounts of investment into energy transition, which really matters to them.’
Indeed, the higher level of attention corporates pay to ESG issues is itself a factor driving a rise in litigation. ‘Many, if not most, businesses produce human rights reports, sustainability reports, and so on, and they make public statements about what they’re doing,’ notes Julianne Hughes-Jennett, partner at Quinn Emanuel Urquhart & Sullivan. ‘The consequence of that is that you do draw scrutiny.’
Many predict that more stringent disclosure requirements will lead to a growth in greenwashing claims over the next few years. In March, the EU proposed a directive that would regulate companies’ green claims. In the UK, meanwhile, the proposed Digital Markets, Competition and Consumer Bill would introduce steep fines for companies that make misleading environmental claims. In the meantime, the Competition and Markets Authority, the Advertising Standards Authority, and the Financial Conduct Authority have already stepped-up activity in this area.
For Lawson Caisley, London head of commercial disputes at White & Case, the link between regulation and litigation is clear. ‘Any time you have changes to rules, that leads to allegations that companies are not doing what they should now to comply, and that fuels litigation.’
Greenwashing claims loom just over the horizon. But other types of ESG litigation are already with us. The Grantham Institute’s 2021 Global Trends in Climate Change Litigation Policy Report found that the number of climate change-related cases worldwide has more than doubled since 2015. Just over 800 were filed between 1986 and 2014. From then to the report’s publication, more than 1,000 more were filed.
Many of these claims rest on established principles of tort law. But there is novelty here. In particular, cases like Vedanta – a claim brought by nearly 2,000 Zambian villagers over damages caused by a subsidiary of UK mining company – and Okpabi – a claim by Nigerian communities against Shell – have seen the Supreme Court extend the scope of parent company liability. Even with decisions on the merits yet to come, many in the market believe that the English courts’ accepting jurisdiction here will present opportunities for litigators in a range of areas, from environmental harms to human rights abuses.
These decisions have, in Wickham’s words, ‘resulted in parent companies being targeted in a way that they weren’t before’.
Still, these sorts of cases have only a limited impact on the wider litigation market. Claimants in climate litigation generally seek declaratory relief – changes in corporate behaviour rather than financial compensation. ‘A claim for declaratory relief is not something, really, that a commercial funder can support,’ explains MacSweeney. Firms and even some funders may run such cases pro bono – the sort of behaviour that Chopin characterises as ‘unambiguously ESG’. But without a strong commercial incentive, there is little to fuel the fire of litigation.
More notable, and more controversial, are claims that straddle the boundary between public and commercial law. ‘We’re seeing a convergence of human rights law, commercial law, and public law, in a way that hasn’t happened before’, says Wickham. ‘There’s a specialist claimant Bar that’s grown up.’
Some note an increase in damages claims for losses allegedly due to climate change, or for the cost of preparing for climate change. But the market is divided on the viability of these claims, with many highlighting the difficulty of establishing causation. Notes Chopin: ‘It’s very difficult to see how any individual defendant has really contributed in a causally relevant way to the harm that you claim to have suffered.’
Neil Purslow, co-founder and chief investment officer at funder Therium, expands on this point. ‘The way we invest and the way we bring cases reflects the way in which the law values harm. At the moment, the law values harm when it’s a financial loss, but it can’t get its head around it so easily when it’s things like CO2 emissions.’
Here, shareholder claims become crucial. The market has seen a rise in claims brought on behalf of shareholders, targeting companies for failures of governance, including alleged failures to adopt workable climate transition strategies.
These sorts of cases are, in the words of Natasha Harrison (pictured), founder and managing partner of Pallas Partners, ‘extremely novel’. For this reason, the law remains uncertain. The High Court recently declined ClientEarth, represented by Pallas, permission to proceed with its derivative action claim against Shell, though the case awaits an oral hearing. Still, for Caisley: ‘The fact that that case didn’t succeed, at least not yet, does not do away with the threat of such action. That sort of case can generate a lot of publicity, and that can achieve the aims of those bringing the action.’
It is on this issue that opinion is most fiercely divided. For Wickham, corporates can find themselves caught ‘between a rock and a hard place, and sometimes forced to consider whether to fight on and risk their reputation in the court of public opinion or to settle a claim that may be without any legal foundation.’
If activists and NGOs are bringing claims with the aim of changing corporate behaviour through public pressure, with less regard to whether the claims succeed, Wickham argues that this is a misuse of the litigation process. ‘They’re using litigation as activism’, he says, ‘which can be dangerous if it is going beyond the bounds of the current legal framework – the courtroom is not necessarily the right place for those battles.’
‘I’m firmly with the defendant firms on that point,’ says Chopin. ‘Why would you use an extremely expensive, slow mechanism, incur adverse costs, and waste your donors’ money? It doesn’t seem like the right way to do it.’
Harrison, however, takes an opposing view. ‘As a litigator, I use the law to drive solutions and results. It’s a tool. And what we’re seeing now is using that tool to drive change in wider society, particularly in the climate and governance space.
‘There’s wider question of, what is the role of law in our society? Law and the courts need to evolve to meet the issues of the present day. This is an evolution, and a very necessary evolution. Put frankly, if corporates are not being held accountable, what other route is there?
‘There will be claims which are weak, and frivolous – that’s a feature of litigation – and in those circumstances, there’s a very well-oiled machine whereby you can strike it out.
‘The fact that weaker claims may be initiated is not a policy reason to prevent broader litigation of this type going forward.’
Commentators are divided, too, on the role of funding. ‘Funding has transformed the type of claims that can be brought,’ argues Wickham. And, for some in the market, some of those claims are of questionable merit.
Funders, though, are keen to stress that they will not bring a case without a strong commercial imperative. Moreover, they argue that their role in the market is to provide access to justice – to rectify what MacSweeney calls an ‘inequality of arms’ between major corporates and potential claimants.
For clients, these debates about the role of the courts and the impact of funders are less important than the brute fact that these claims are being brought. In this sense, litigation is unavoidably, inevitably, also about public relations.
‘As a litigator, I use the law to drive solutions and results. It’s a tool. And what we’re seeing now is using that tool to drive change in wider society, particularly in the climate and governance space.’
Natasha Harrison, Pallas Partners
Caisley sums up the dynamic: ‘If you have a situation where you are likely to have a number of shareholders and market commentators raising questions about your strategy, it is in your interest as a company to be on the front foot and to engage with shareholders.’
Preparing for and pre-empting ESG litigation will become an increasingly important part of firms’ advice to corporate clients. It already is. Corporates will likely benefit from what Caisley calls ‘proactive engagement with shareholders’.
Claimants, claimant firms, and funders, meanwhile, will continue to explore potential avenues for litigation. And, where they succeed, they will open routes down which others will travel. In Harrison’s view, funders are reluctant to back ‘marquee cases where no loss has been suffered’. But, if ESG litigation can be shown to be a safe bet, with potential returns for investors, funders will not hesitate to back it. LB