Armed with knowledge and clear messaging risk managers can manage ESG litigation risks

A growing trend of litigation related to environmental, social and governance issues is challenging businesses to protect their organisations against a complex new risk. Risk managers are responding by bolstering their knowledge of the exposure and working with business partners to protect against claims and ensure that their ESG messaging reflects the true position of their company.

Business leaders are under increasing pressure to manage competing priorities and a growing number of risks – cyber, data privacy, pandemics, supply chain challenges, event-driven litigation and more – have consumed their time and added additional complexity to decision-making. Coupled with this, duties on decision-makers, along with pressure and scrutiny that companies find themselves under, is increasing.

The new evolution of climate-related and ESG-based risks are adding to these challenges.

What is often referred to as ESG risks – those related to the environmental, social and governance activities of an organisation – are beginning to drive litigation in new areas such as “greenwashing” and “socialwashing”’ which in their simplest form, claim that an organisation is not living up to its policies around environmental conservation and its goals to help improve society through its day-to-day activities.

Companies’ diversity policies are also under the microscope. It is one thing to promote a caring attitude about diversity, but not living up to diversity and equity pledges can attract litigants who claim the organisation is breaking its promises.

It is important to understand how ESG risk is evolving and find ways in which customers, brokers, insurers, and others can work together to understand and mitigate it. That has to be a business priority in the months, years and decades to come.

The scope of ESG litigation risk

Decision-makers in organisations are facing scrutiny from a wide range of stakeholders. The objectives of ESG litigation to date have tended to focus on changing the behaviour of organisations, seeking redress for alleged violations of ESG (particularly in relation to climate change), and/or remedying legal breaches. The mechanism to achieve these goals remains the same, through litigation.

Traditionally, fossil fuel companies have been the targets of ESG-related litigation around climate-related issues. However, the scope of this litigation appears to be expanding, taking aim at a variety of industries that produce products or engage in activities that could be seen to harm the environment.

Consultants who have assisted organisations, particularly around ESG strategies, have also found themselves embroiled in litigation. Community groups have become stakeholders in the ESG risk environment, in some cases filing suits against companies that opened local operations that the claimants feel is harmful to the environment around them or impacted their way of life.

Why now? ESG is not a new concept. However, the rise of social media as well as a growing focus on climate change has put this topic firmly at the top of the agenda. Social media has created an environment in which news of a company’s ESG activity travels fast and can be debated in real time. Once the news of a company’s actions goes viral, the consequences can be unpredictable but potentially serious.

Organisations need to consider the societal shift in attitudes and how their operations align with these values. ESG issues are increasingly considered to form part of standard governance concerns which organisations face, with shareholders, customers, regulators, and others scrutinising how decision makers are dealing with these issues when carrying out their duties. Decision-makers are under scrutiny to ensure they are not only considering these issues, but also embedding them as part of their culture. Some organisations have been perceived as utilising an ESG agenda to improve their position in a marketplace, community, or with regulators – put simply, organisations need to ensure they are not just saying, but doing. Failure to marry up the ESG strategy with actions will result in scrutiny and potential consequences beyond those seen historically.

Litigation spawned by ESG risk

So called “greenwashing” claims are becoming more prevalent, with actions taken against companies accused of not living up to their ESG obligations. Such claims generally state that a company has made statements about its environmental credentials which it then fails to uphold or evidence.

These claims can arise in different ways, such as in actions by consumer groups for alleged mis-selling or misrepresentation through breach of contract claims, breaches of consumer law, or breach of advertising regulations. In addition, cases are being brought by shareholders against decision-makers for share prices losses caused by adverse publicity as a result of the allegations, as well as regulatory proceedings.

Beyond this, there has been a dawn of shareholder activist claims, whereby individuals or groups purchase a number of an organisation’s shares and then seek to use derivative actions to effect change within an organisation, including changing strategy or even seeking the removal of key decision-makers. To date these have been limited in success but are indicative of some of the techniques which may continue to drive ESG litigation.

Beyond this, there has been a dawn of shareholder activist claims, whereby individuals or groups purchase a number of an organisation’s shares and then seek to use derivative actions to effect change within an organisation, including changing strategy or even seeking the removal of key decision-makers. To date these have been limited in success but are indicative of some of the techniques which may continue to drive ESG litigation.

Environmental claims get the most attention, but those related to social issues should not be ignored. This is particularly true in the U.S. where social justice advocates have been outspoken around issues related to diversity and inclusion, employee safety and health benefits, LGBTQ+ issues and racial justice.

Cases of “socialwashing”, with allegations that companies are allowing the public to believe that they are doing more than they actually are in regard to social issues are also beginning to emerge. As with greenwashing, organisations are under increased scrutiny to ensure that their statements and strategy are supported by their actions, and in some areas, this now extends to duties on decision-makers to have a complete understanding and oversight of their supply chain.

Addressing litigation risk

Risk managers and decision-makers need to regularly assess their organisation’s ESG strategy to ensure that the statements made to investors, consumers, and regulators are consistent and truly reflect the actions of the organisation. Messaging should carefully reflect the true values of the company and consider how the public will interpret that alignment.

Organisations need to determine who is responsible for external communications on ESG issues and should ensure consistency between what is projected on the company’s website and social media, in its financial disclosures, investor reports and other publicly available material.

The accuracy of ESG statements should be closely considered by organisations. Publicly listed companies should be familiar with public disclosure regulations and confident that they are in compliance in every arena in which they operate.

Risk managers should work closely with brokers, insurers and advisors to monitor developments in ESG litigation and stay atop of regulatory changes. These issues are ever-evolving, and will require constant view and analysis over the years to come.

Managing the risk of ESG litigation has to be a central focus for any organisation. It goes beyond simply telling the world that the organisation cares about ESG issues. It is an opportunity to examine strategies and messaging, and to ensure they are embedded within the culture of the organisation. Public messaging should always reflect the organisations’ actions.

Originally published in Commercial Risk on November 15, 2023.