ESG Claims Face Class-Action Wave

As corporate disclosure requirements around the world become stricter, lawyers are preparing for an increase in cases related to environmental, social, and governance (ESG) issues. ESG reporting is becoming increasingly important to investors, and companies that fail to meet disclosure standards may face legal action.

A recent survey by law firm Norton Rose Fulbright found that 28% of more than 430 general counsel and in-house litigation leaders said their exposure to so-called ESG disputes increased in 2022, and 24% expect it to deepen over the next 12 months. The key reasons cited were the absence of clear environmental, social and governance metrics and requirements, and the heightened regulatory scrutiny on the importance of ESG.

Norton Rose has identified employment and labor disputes, cybersecurity and data protection as areas of future concern for class action lawsuits. These issues have joined together to create a potential minefield for businesses.

As more and more corporate litigators turn their attention to industries like financial services and technology, we're seeing a corresponding increase in the number of class action lawsuits related to greenwashing. This is partly due to the fact that California's plaintiffs' bar has "figured out the blueprint for how to bring these cases," according to Norton Rose. In other words, companies that make general statements about their commitment to ESG (environmental, social, and governance) principles can sometimes find themselves targeted in lawsuits that focus on specific products.

"Many of our clients are feeling pressure from customers, shareholders and regulators to increase their disclosures of their ESG goals and performance," said Rachel Roosth, disputes partner at Norton Rose. "If these disclosures are perceived as false, misleading or insufficient, litigation may ensue."

The Norton Rose report found that while only 8% of those surveyed said they were actually involved in ESG-related class actions last year, roughly 37% of those who said they are wary of future class actions view ESG as “a major driver.” This suggests that many companies are concerned about the potential for ESG-related class action lawsuits in the future.

ESG-related litigation risks can vary across industries, but all companies can benefit from assessing and mitigating these risks, according to Roosth. By taking steps to identify and address potential ESG-related litigation risks, companies can protect themselves from a variety of legal challenges.

The issues that lawyers focus on vary depending on the industry. For example, a senior lawyer at a science and technology company may be focused on topics such as supply-chain management and fair labor. In contrast, the general counsel of a large nonprofit health system may be concerned about health disparities among different community groups. This information comes from Norton Rose.

Many people think of climate change and the energy industry when they think of ESG, but there are other important aspects to consider as well. Roosth said that stakeholders are pushing for more information on a variety of topics, like waste management, diversity, equity and inclusion efforts, and risk-management practices. This shows that the physical and transition risks of climate change are not limited to one industry, and that there is a need for more information on a variety of ESG topics.

The food and beverage sector is expected to see an increase in exposure to ESG disputes in the coming year, according to Roosth. This may be due to concerns around litigation tied to recycling and single-use plastics, she said.

The US Securities and Exchange Commission is still reviewing thousands of comments on its proposal to force publicly traded companies to disclose more about the risks they face due to a changing climate, as well as the greenhouse gas emissions in their production and supply chains. The market regulator is expected to finalize the proposal before the end of March.

Industry groups are likely to challenge the rule in court, which means that many US-traded companies would continue to set their own parameters for climate-related disclosures for some time.

However, this is unlikely to be a permanent situation.