ESG disputes the what the why and the where

ESG disputes: what are they?

At some point in the last five years three little letters took over the worlds of corporate and finance: ESG. Google Trends suggests that the turn of the decade was when ESG – as a synonym for - and measure of - sustainability began to gather unstoppable momentum. And sure enough it was not long before people began to talk about "ESG disputes" and "ESG litigation" as a distinct phenomenon.

Of course many of the things that we characterize as ESG disputes are not new. Lawyers have been advising on environmental litigation for years; bribery and corruption investigations have a long, lurid history; businesses have been challenged on the compatibility of their operations with human rights standards across a variety of jurisdictions. But today there is a sense that "ESG disputes" are somehow different from more conventional corporate litigation. Disputes inspired by, or consistent with, society's focus on sustainability create their own dynamics. Yes, lawyers advise their corporate clients on legal obligations, and process, and the availability of damages and injunctions, but often as relevant is the reputational or PR perspective. ESG disputes call for a broad strategic awareness of how the law interacts with a corporate's brand, capital-raising, reputation, and talent acquisition and retention agenda.

Why have ESG disputes proliferated?

Why is there such a focus on ESG, and in turn such an appetite for ESG related disputes? A number of factors seem to have coincided in the late 2010s: the social and financial impact of climate change became clear, and undeniable. There was a marked rejection of the status quo, amidst the wreckage of the global financial crisis. And there was a questioning of society's expectations of the role of business, which had prevailed since the 1980s. Social media has served as a further platform for these concerns, ensuring that companies, and governments, remain focused on ESG.

The most prominent form of ESG related dispute has been the waves of climate change litigation, from the mid-2000s onwards, initially in the United States, but subsequently across other jurisdictions. But other issues are featuring increasingly, from environmental to human rights issues. Litigation against companies often generates the most headlines, but governments have frequently found themselves the target of claims. Social trends, such as the focus on diversity and inclusion and sexual abuse have driven investigations within companies and financial institutions.

And just as companies have moved to address ESG disputes in a coordinated way, drawing on legal, PR, and strategic advice, so have ESG claimants coordinated their approach. It is not uncommon for claimant law firms to team up with NGOs or other civil society organizations and litigation funders to bring claims. Again, this also creates its own dynamic, with defendant companies sometimes facing a coordinated challenge of formal legal proceedings, public reports into their conduct from NGOs and litigation funders seeking to advance claims by exerting influence on investors in companies.

Much of what is said above relates to disputes arising from allegations that a company, or individual, has done something wrong (or, put another way, not ESG friendly). But claimants also seek fertile ground in allegations that a company has not done enough, for instance in relation to mitigating climate change. A further spin on this is claims arising from allegations that companies have represented that they are doing something, when they are not, or are more ESG friendly than they actually are. This is the world of greenwashing (misleadingly representing that the company, or its products, are "greener" than they are) or greenwishing (described by one author as the "hope that voluntary sustainability efforts are closer to achieving the necessary change than they really are"). Such claims often arise first in the misleading advertising arena, and are a focus for consumer protection agencies. Securities claims abound in the United States, with the SEC's Climate and ESG Task Force recently issuing its first complaint. Significant developments in UK securities ESG litigation – long anticipated – are yet to emerge.

Where do ESG disputes arise?

A quick look at one of the climate change litigation databases confirms that climate change litigation is not confined to any one jurisdiction. The same is true for ESG disputes more broadly, with novel, legally inventive, claims issued in both common law and civil law jurisdictions. The US, with its litigation friendly culture and particular political dynamics, has seen the lion's share of cases, but much activity is occurring in the rest of the world.

And it is not just national courts which have provided the battleground for these disputes. Claimants have filed suit at the European Court of Human Rights, alleging that European governments have breached their fundamental human rights by failing sufficiently to act on climate change. The distinguishing feature of this case – the reliance on fundamental human rights in ESG litigation – reflects a growing body of "rights based" disputes.

Nor when we talk about ESG disputes are we talking exclusively about litigation before courts. Some of the activity in this area takes place before arbitration tribunals – with claimants looking to enforce contractual ESG obligations or investment treaty rights in arbitration. Bespoke arbitration rules for business and human rights arbitration have been produced, and contain much useful drafting which can be borrowed for contractual ESG dispute resolution mechanisms.

The bottom line

Despite the occasional instance of a backlash against ESG and its increasing dominance of the business world, it is clear that the prominence of sustainability, and of businesses being held to account for their actions, and activities within their value chains, will continue. Equally clear is that disputes arising from the ESG agenda, be it in the form of litigation, arbitration, investigations or other complaints are here to stay.

ESG disputes: like conventional corporate litigation in many ways. But inspired by, and subject to, their own ever-evolving dynamics.

Author: Tom Cummins, Partner