A Class-Action Wave Is Coming for ESG Claims

As corporate disclosure requirements tighten around the world, lawyers are bracing for an increase in ESG-related cases.

Source: Bloomberg | Published on January 25, 2023

Risk Managers and ESG

As corporate disclosure requirements tighten around the world, lawyers are bracing for an increase in ESG-related cases.

According to a survey conducted by the law firm Norton Rose Fulbright, 28% of more than 430 general counsel and in-house litigation leaders said their so-called ESG dispute exposure increased in 2022, and 24% expect it to worsen in the coming year. The lack of clear environmental, social, and governance metrics and requirements, as well as increased regulatory scrutiny on the importance of ESG, are the primary reasons.

The issue has joined employment and labor disputes, cybersecurity, and data protection as “class-action areas of future concern,” according to Norton Rose.

‘The increasing focus of corporate litigators in industries ranging from financial services to technology corresponds with the rising tide of class actions related to greenwashing. This is due in part to the plaintiffs’ bar in California having “figured out the blueprint for how to bring these cases,” according to Norton Rose. In a nutshell, this means that companies that issue broad ESG statements may find themselves as targets in product-specific cases.

“Our clients are feeling pressure from customers, shareholders, and regulators, among others, to increase their disclosures of their ESG goals and performance across industries,” said Rachel Roosth, disputes partner at Norton Rose. “Litigation may ensue if these disclosures are perceived to be false, misleading, or insufficient.”

According to the Norton Rose report, while only 8% of those polled said they were involved in ESG-related class actions last year, roughly 37% of those who are wary of future class actions see ESG as a “major driver.”

While the types of litigation risk may differ across industries, Roosth believes that companies of all sizes can benefit from assessing their ESG-related litigation risks and determining how to mitigate them.

The problems differ depending on the industry. According to Norton Rose, while a senior lawyer at an unidentified science and technology company is focused on topics such as supply-chain management and fair labor, the general counsel of a large nonprofit health system is concerned about health disparities among different community groups.

“Many people associate ESG with climate change and the energy industry,” Roosth said. “However, the physical and transition risks of climate change are not limited to one industry, and stakeholders are calling for more information on a wide range of other ESG topics, such as waste management, [diversity, equity, and inclusion] efforts, and risk-management practices.”

According to Roosth, the food and beverage sector has the highest proportion of respondents (40%) who expect increased exposure to ESG disputes in the coming year.

She believes this reflects litigation concerns related to recycling and single-use plastics.

The Securities and Exchange Commission is still reviewing thousands of comments on its proposal to require publicly traded companies to disclose more about the risks they face as a result of climate change, as well as greenhouse gas emissions in their manufacturing and supply chains. The proposal is expected to be finalized by the end of March by the market regulator.

The rule is almost certain to be challenged by industry groups before it can be implemented, which means that many publicly traded companies in the United States will continue to set their own parameters for climate-related disclosures for some time.

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