ESG & litigation: a rising reputational risk

7 Jul 2021

The fast-growing rise of ESG has led to an increase in corporate litigation risk. However, in many cases these risks are not currently fully understood or on corporates’ radars.

DRD’s Chairman, Alasdair Douglas, and Associate, Anna Bailey, explore the issue of ESG in corporate litigation and how to manage the risk it brings.

A fast-evolving sector

For companies operating today, building out an ESG strategy is an increasingly attractive prospect – and rightly so. ESG bolsters investor confidence and attracts new prospective interest; consumers are increasingly savvy to social and environmental impact; and critically, a positive ESG approach by companies is demanded by staff, and is a key factor in recruiting and retaining the highest tier of employee talent. Equally, as we have written previously, as policy and regulation on these issues develop at pace, staying ahead of the game will, crucially, future-proof and protect the business further down the line.

But the rise of ESG has also increased the litigation risk for those engaging in it. This is a fast-evolving sector, and in many cases these risks are not currently fully understood or on corporates’ radars. This view was recently discussed at a webinar event hosted by Travers Smith LLP, which was attended by DRD. The session was chaired by international regulatory law grandee, Doug Bryden (Head of Travers Smith’s Risk & Operational Regulatory team), who highlighted the EU’s eye-catching proposal for an ESG & Human Rights Due Diligence regulatory liability regime.  Heather Gagen (Partner in the firm’s Dispute Resolution team), when reflecting on her recent work on two large-scale, cross border ESG, business and human rights-related disputes, also explained the English courts’ recent approach to these risks through the prism of UK parental company liability. As Bryden made plain, although the regulation of these ESG issues is fast-moving, it will be equally important to keep a careful eye on the Common Law (both in England and internationally).

Earlier this year, a Hague court found against Shell in a landmark case, ruling that its emissions harm the human rights of the claimants, led by Milieudefensie with six other organizations and more than 17,000 co-plaintiffs. The judge found that Shell’s current commitment to reduce emissions intensity by 20% by 2030 was insufficient to meet the Paris target of limiting global heating to 1.5℃ by the end of the century.

All indications point to further such actions down the tracks. A paper entitled Filling the Evidentiary Gap in Climate Litigation, published last week in the peer-review journal Nature Climate Change, suggests that further cases are more likely to be successful, as new science has made it possible to attribute the damages of climate breakdown more directly to companies’ activities. The increasing ease of building evidence in these cases will make it easier to bring similar claims, and will enhance their likelihood of success.

Companies that breach regulations or misreport are at a clear risk from class actions, but so too are any that profit from wrongdoing, whether or not it is a direct result of their own actions. For example, there has been a clear shift towards claims against holding companies or private equity management companies for the wrongdoing of subsidiaries or portfolio companies they control.

From a reputational point of view, it is important to note that damage inflicted by ESG-related litigation is higher than in many other more strictly legal circumstances. Questions around the treatment of employees, governance, contribution to social good and damaging the environment, are emotive topics, and scrutiny from all stakeholders is only increasing.  And for companies who have chosen to promote their ESG credentials, being found out is potentially worse than not having made the claims in the first place.

Knowing this, companies must take steps to minimise the risk – here is our key advice from a corporate reputation perspective:

Strategic Communications are central to managing risk

Legal counsel on these issues is, as we have seen, critical to building resilience – but so too is your communications team.  They can help craft a message which might otherwise be left unread with the rest of the legal boilerplate that we see so frequently in public documents. Good comms complements legal strategy, rather than detracting from it.

Managing the legal risk of all company output is important, so legal and communications counsel should be working closely together from the start. Communicating openly with your stakeholders about your circumstances and trajectory is a joint effort.

Building purpose, intent and planning into your corporate narrative will ensure your stakeholders feel they have the full picture.

Know your stakeholders

Understanding the needs and concerns of different stakeholders is central to your communications strategy. Those who are following your actions and successes on ESG are likely to be highly mobilised, and you should assume they will hold you to account – but they are not the only audiences that matter. C-suites should not lose sight of employees, investors, consumers, strategic partnerships, etc.

The board of your company must understand from their own perspectives the tremendous advantages of your ESG strategy, and the benefits it brings to business, investment, security, talent, and the broader community. Pursuing this strategy without broad company buy-in only amplifies the risk, or creates new ones.

Transparency around your direction of travel is as important as your successes

We know that it is vital to get your reporting right. The same focus must be turned to your company statements, corporate narrative, investor relations, employee communications and media handling. Any perception of greenwashing, anywhere in your corporate communications, can and will exacerbate the risk of claims, as well as their potential for success. Don’t do it.

Address your ESG weaknesses clearly by communicating transparently with your stakeholders about your ambition, and the journey you are taking to get there. Building purpose, intent and planning into your corporate narrative will ensure your stakeholders feel they have the full picture. Equally, transparency about challenges and failures, if positioned in the right way, will put credit in the bank and ensure that the charge of greenwashing cannot be levied against you.

To conclude, are we warning corporates off promoting their ESG strategy, on the basis that if they don’t say anything, there is no risk of misreporting? Certainly not. What we see is the need for care. Narratives and ambition need to be bold, but rooted in real data, up-to-date policies and accurate collection and reporting of data. A good ESG strategy can grow and develop as your reporting capability improves over time. State a bold vision, but get there in small steps – ultimately, you will be judged on what you do, not what you say.

Photo Credits: Saracen Fund Managers