Fund Managers Turn to Lawyers as Old ESG Playbook Falls Flat

Investors are losing patience with corporate foot-dragging on key ESG metrics and starting to see legal action as the logical next step, according to the head of Britain’s biggest sustainable finance association.

They’re “frustrated at the pace of progress in many of the larger corporates, for example fossil fuel companies,” James Alexander, chief executive of the UK Sustainable Investment and Finance Association (UKSIF), said in an interview. “There is a real appetite for using litigation.”

Turning to lawyers represents an escalation of investor tactics to push portfolio companies to mitigate environmental or social harm and prevent bad governance. Last year, shareholders brought lawsuits against Glencore Plc, Standard Chartered Plc and BT Group Plc for alleged ESG-themed shortcomings under the UK Financial Services and Markets Act. Lawyers advising investors say a case doesn’t need to prevail in the courts for the strategy to be declared a success.

“The cases being launched aren’t necessarily related to the rate of success, but they have very clear reputational impact and damage,” Sonali Siriwardena, global head of ESG at Simmons & Simmons, said at a recent event arranged by UKSIF in London. “So the mere factor of being launched is worthy of attention. They might not have success, but they do the damage.”

Spokespeople for Glencore and Standard Chartered declined to comment. A BT Group spokesperson didn’t immediately respond when approached by Bloomberg.

Louise Howard, chief legal officer at Universities Superannuation Scheme, characterizes litigation as “a sledgehammer, a last resort.” USS has itself been the target of legal action after its members brought a lawsuit alleging it failed to produce a credible fossil fuel divestment plan. USS won the case, but Howard says litigation is clearly a good way to force attention on a theme.

“There’s a lot of money to be made by people in litigation,” Howard said. It’s also “a very effective tool for all sorts of reasons: commercial success or reputational damage, getting something on an agenda.”

Alexander, whose organization represents firms managing over £19 trillion ($23.4 trillion) in combined assets, said exploring legal action is fast becoming a “key part of the investor engagement process.” In fact, there’s a good likelihood that “investors increasingly are going to see this as a core part of it,” he said.

It’s a development that’s being monitored closely in the fast-growing industry for litigation finance, whereby third parties — often funds with specialist legal expertise — step in to help investors take on big corporations suspected of serious ESG violations. And increasingly, such firms are pitching their own ideas to investors, before being approached.

Mitesh Modha, head of business development at Woodsford, a litigation funder, said he and his team are now “going to investors and saying you can be part of an action — an escalated and collective engagement with your investee company — to achieve compensation and to seek to deter future wrongdoing.”

Woodsford commits over £100 million a year to its global portfolio and typically £10 million to £15 million per case. That’s to cover claimant costs as well as potential adverse expenses if the case is lost. If the lawsuit is successful, they earn fees based on a multiple of their investment or a percentage of damages recovered.

A December study by the US Government Accountability Office identified a handful of commercial funders reporting over 90% returns on invested capital. Litigation funders “can offer high returns because these investments are high risk,” it said. Sometimes, returns can even be multiples of the invested capital. AIM-listed Litigation Capital Management recently reported a 635% return on a single case.

The global litigation finance industry has built a war chest of about $20 billion in funds, ready to be deployed in such cases, according to Rob Ryan, chief executive of Aristata Capital, another litigation funder. And climate change is becoming a key point of focus, as investors grow more sensitive to how their capital is being deployed in the age of global heating.

Litigation finance is “an attractive and growing asset class,” said Ryan, who used to work at nonprofit ClientEarth, which last year successfully sued the UK government for its failure to produce a credible net zero strategy.

Daniel Summerfield, director of ESG at Pomerantz LLP, said the “rather litigious society” many associate with the US is now making its way to the UK “quite quickly.” Focus areas will be climate change, greenwashing and ESG more broadly, he said at the UKSIF event.

Meanwhile, regulators are churning out a battery of rules around which investors can build lawsuits. In the UK, the Sustainability Disclosure Requirements has set limits on the ESG claims that fund managers can make. The International Sustainability Standards Board introduced global ESG reporting guidelines this year that countries can adopt as a bare minimum. And in other jurisdictions such as the European Union, regulators are going considerably further and enforcing strict requirements across all corners of ESG.

As companies issue statements that make claims about the extent of their adherence to such frameworks, investors will be handed the tools with which to screen for greenwashing, Alexander said. And regulators themselves will also be monitoring compliance closely, he said.

The trend is typically new regulations and then a few years down the line “activists, shareholders, the general public and regulators bring litigation as a lever for holding companies accountable for compliance, regulation or in terms of expectation,” Siriwardena said.

–With assistance from Jeremy Hodges.