Environmental, Social and Governance (ESG) litigation has become dominated by climate lawsuits, most notably filed against global energy companies like Shell Plc and Exxon Mobil Corp. The scope of ESG litigation is expanding, as regulatory developments pose new potential risks for a wider range of organizations. These broadening risks can largely be attributed to the demand for mandatory reporting requirements coupled with current legislation in the area. Now, we are witnessing an influx of lawsuits against both governments and corporations based on ESG statements in securities filings.
According to Nneka Chike-Obi, a director for sustainable finance at Fitch Ratings, “Climate is obviously the most pressing existential threat to the environment, but a lot of other topics are now getting more targeted regulation.” Chile-Obi explains there is now much more scrutiny of both supply chains and labor conditions, which is resulting in increased disclosure related to these areas. Because of this, discrepancies between disclosure and actual behavior can be discovered by prying stakeholders.
In the United States, investors have an obvious path to litigation because of information found in securities documentation. The current trend in risk to credit issuers is more strategic than financial, as a significant amount of ESG lawsuits aim for structural changes as opposed to financial redress.
Social factors are also growing in significance, which will be reflected in the expected increase in ESG litigation. Society’s changing expectations of corporate responsibilities to the communities in which they live is becoming more strident, leading consumers and investors to pinpoint chasms between disclosures and practices. The prevalence of social litigation cases is often related to meaningful societal events like we recently saw with COVID-related lawsuits.
As disclosures and sustainable bond issuances increase, more scrutiny is applied, and the door opens to other forms of litigation. Most prominently, a recent landmark case involving a contractor for Tesla was awarded $137 million after he alleged mistreatment and racism at the company. Misrepresentation in bond documentation as it relates to minority-owned suppliers and/or training programs for under-represented minorities can lead to claims if failing to adhere to disclosures. “Essentially the more sustainable bond issuance, the more sustainability information is subject to securities law,” said Chike-Obi.
As increased disclosure becomes more common, the scope of information forming the basis of lawsuits related to ESG is broadening. Included is any type of sustainability information associated with the appeal for investment. While some ESG information isn’t mandatory, companies are still including it to appeal to shareholders and burnish their image as forward-thinking. Prior to the emergence of ESG as a framework, filings included financial, operational and strategic data.
False or misleading disclosures that can financially harm an investor can lead to civil claims under securities law, which represents a litigation risk for businesses. To put it simply, as companies expand their disclosures to include ESG coverage, they will face more litigation as investors likely find more discrepancies.
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