The evolving landscape of global ESG litigation and regulation

Disputes in Perspective

In the U.S. and UK, issues relating to ESG risks are expanding and evolving rapidly and continually for commercial entities. Organizations have a part to play in promoting good ESG conduct, but this comes with the responsibility of managing potential liability and litigation. In this podcast, Tom Webley, partner in our Global Commercial Disputes Group in London, Mark Goldstein, partner in our Labor and Employment Group in New York, and Mark Pring, partner in our Insurance Recovery Group in London, discuss topical issues relating to ESG risks and steps directors can take to mitigate these risks in both the UK and U.S.

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Transcript:

Intro: Welcome to Disputes and Perspective, a Reed Smith podcast. This podcast series will discuss disputes related trends, hot topics and developments occurring in the global legal landscape, and hopefully provide you with some helpful insights and practical tips. If you have any questions about any of the episodes, please feel free to contact our speakers.

Mark P: Welcome back, everyone, to Disputes in Perspective. My name is Mark Pring and I'm a partner in our global commercial disputes and insurance recovery teams. I'm delighted to be joined by my partners and colleagues, Mark Goldstein, a labor and employment lawyer in our New York office, and Tom Webley, a commercial disputes and regulatory lawyer in our London office with extensive experience, particularly in the financial services sector. In this short podcast, we'll be addressing some topical issues relating to disputes arising out of ESG risks. We think it's fair to say that people have long been aware of the risk of litigation in the ESG context, but we're starting to sense that the litigation landscape and indeed the regulatory landscape is changing in a number of jurisdictions, including the UK and the US in relation to litigation. The focus of attention previously was on class action claims against the likes of polluters and governments directly responsible for environmental damage or impacts on communities, but now there are myriad other risk exposures. Tom, if we can start with you. Do you get the sense that the UK risk landscape is changing?

Tom: I do. Mark, I mean, I think it's not just changing, but it's fair to say that in relation to ESG risks and litigation risks, it's probably expanding and expanding quite rapidly and continually. You mentioned that a lot of the previous claims were against what we probably could look at as primary infringes. So for example, anyone who's directly responsible for any pollution or emissions or environmental harm. But that certainly isn't what we are seeing claims limited to now and probably increasingly so, ESG and particularly the E. So if we think about climate change, this is seen as something for which all commercial entities have some sort of responsibility to drive change for the good, to improve their own conduct in their own performance in that sphere. And I think the net result of that is likely to be an increased amount of claims against a much wider range of potential defendants, almost to the point where actually any single commercial entity could be in the firing line. And if we take an example of how this has manifested in practice, you could look at the action that's been taken by organizations like ClientEarth. You may well be aware a lot of people will. That client brought a claim against directors of Shell. Again, that's much more focused on the more primary infringer type claims, but they've also been writing to wider organizations like trustees of pension funds, reminding those trustees that people investing money also have an obligation to the wider community to ensure that the investments drive change in a positive way. So that's an example of the expansion away from the original target for those claims into something completely different. And it's likely not just to be pension funds and the asset managers and people with large amounts of money to invest banks and lenders have really been put on a pedestal as an industry, which is at the forefront of change, forefront of promoting good practice and ensuring that all organizations are moving in the right direction. And with that responsibility comes potential liability as well. So I mean, I think the scope really has expanded dramatically from only those directly involved in certain industries, certain sort of higher risk industries being the potential targets to actually it being much broader. And I think it's almost fair to say, Mark, that it's difficult to imagine any sort of commercial entity or organization these days that doesn't have a part to play in promoting good ESG conduct and therefore takes on some responsibility and potentially some sort of liability for doing so.

Mark P: Yeah, yeah, no, I agree. Can we explore a little bit further what might actually be driving a lot of those claims? Maybe not all of them, but from a sort of social context, what do you see in terms of underlying currents that might be driving a lot of those claims?

Tom: I think in its most basic market, a lot of them are driven by genuine passion and desire and a really strong sense of feeling. I mean, if you look at compared to Mark Goldstein compared to the US where class actions are very well established practice, we have only had a few class actions group litigations strike claims being brought over here by comparison, but a lot of them are financially driven, whereas the sense that I think we're getting particularly again going back to the environmental side of the ESG claims is that people feel very, very strongly about this. I mean, all you have to do is look at some of the other activities that people do, the activist activities such as people who are going out of their way to take physical steps to stop certain types of what they see as harmful activities and risking prison sentences increasingly in the UK as well, that people do feel strongly about this and they feel that litigation is a very powerful tool which can be used to change how people behave to hold wrongdoers to account and promote good conduct. And so therefore, I think part of this is being driven by that real genuine desire for change and seeing that litigation be a part of that. Social media as with so many other things, plays an important part as it means people can combine together, they can unify, there's a real sense of power in numbers as people can coordinate activities, which makes these sort of claims much easier to bring rather than individuals trying to do it themselves. And I think also there's a wider opportunity for there to be causes of action. And I think there are a number of reasons for this. One is an increase in legislation. There's much more pro ESG legislation that's being brought out. That means that companies and organizations are under more legal pressure and legal obligations, which the more obligations you have, the easier it is to breach them. So that can trigger causes of action. And there's also the greater ability for claimants to actually bring the claim. If you go back, Mark, to the sort of the primary infringer point that you raised earlier, often any action or any negative action would really affect relatively small communities. They could have catastrophic effects, but they would still be quite localized. For example, in oil spill emissions, something that came out of a particular factory or mine, whatever it is. But because the focus on climate change is such a global one and everyone sees it as now an issue that's affecting absolutely everybody. On the one hand you have this being looked at as almost a human rights issue, which gives everyone the ability to bring a claim because they've been affected by it or more narrowly. If you take a look at, for example, anyone who's choosing which companies to use, who to invest in whatever it is, consumer behavior is being much more driven by ESG related criteria. And that means people are being induced or people are being convinced to take certain action to buy certain goods, to invest in certain companies on the back of their ESG credentials. And that means that there's much more opportunity to argue that there was, for example, a misrepresentation which caused you to take certain steps, which meant you suffered loss. So that I think is increasing the opportunity for claims to be brought as well. As I mentioned above, there's a much wider pool of potential defendants out there against whom to bring the claims, but none of that would be possible without the funding to bring them. I mean, I think it's fair to say that litigation, particularly in the UK, is incredibly expensive. It's very, very challenging to get enough money to get these claims off the ground, let alone run them to completion. And that's where litigation funders come in and they've been very vocal as an industry, I think in promoting ESG claims as a potential source of their funding or potential home for their funding. And they do see this as a big growth market for that sort of investment. And that will very much help drive these claims as well, I would've thought. So what it really is is a combination of a groundswell of genuine feeling added to more opportunities to bring the claims and then the available funding in order to be able to bring them and take them through. And that I think has created a potential perfect storm in relation to the growth and development of ever increasing ESG related litigation.

Mark P: Yeah, lots of food for thought there, Tom, and we'll pick up on one or two of those strands. I think later on. I'm very conscious we want to bring Mark in on the US side as well. But just briefly alongside and perhaps interlinked with the litigation risk, there's a perception of greater, if I can put it, regulatory risk as well. And how are the regulators from the UK context at least behaving and responding to this new litigious environment or landscape? And two, those systemic ESG related pressures that you talked about as well. What's the regulatory response?

Tom: Well, I think it's very much, again, seen as part of the process for change. I think certainly in the UK there's a huge governmental pressure towards things like net zero towards improving behaviors, and the regulator has to be a key part of that as the custodian of good conduct, if you like. So they're very much part of that process. I think there's a greatly increased amount of regulation, a growing amount of regulation in this area to try to encourage good conduct. But again, particularly on the environmental side, but certainly not uniquely and they're likely with everything as with the legislation, the more regulation there is and the more regulatory activity and keenness for the regulators to do something about it, the more chances there are of companies falling foul, there've been breaches, sanctions, fines, any sort of adverse regulatory finding. And Mark, you talked about the interconnectivity between the regulatory side and the litigation, and that I think is an incredibly important point and a very strong driver potentially for future ESG related claims. Historically, in relation to other areas, what we saw was a huge connection between adverse or negative regulatory findings and litigation, particularly on the almost quasi class actions or group litigation coming through. Because a negative finding by regulator is almost doing part of the work for a claimant already. There's already been a finding of wrongdoing. So all the claimant then has to shoot is go on to show that they've got standings to bring a claim and that they suffered loss, but they're starting from a very strong position. So if we start to see a lot more negative findings on organizations such as their disclosure obligations or if they do disclose certain ESG related information that shows that they've fallen short of where they should, I think that is a really potentially good source for the real claimant driving firms or the funders or anyone else to bring litigation against those organizations that there always has been a very strong connection there. And I can't see why it would be any different with ESG, but I mean that's certainly very much coming from a UK centric focus. And Mark G. I mean, I know that particularly on the class action side and on the regulatory side, the US is probably a much more advanced market than we are. I don't know if you are seeing the same sort of trends there or you think you're likely to see similar sort of trends in the future.

Mark G: It is interesting when you talk about the US I do think there is somewhat of a contrast between the governmental approach, but even just the more public perception to ESG compared to the US, compared to Europe and the United Kingdom specifically. Historically, ESG matters and efforts have been largely voluntary. And while there may have been some best practices promulgated by regulators, they weren't much more than that. It's only in the last few years where we have seen a substantial increase in public awareness and corporate awareness of ESG related matters and started to see some regulations come into form their admittedly early stages regulations, for example, from the US Securities and Exchange Commission. But a lot of the regulation has been taken on by state lawmakers, California in particular, but several other states as well. And then talking about measures relating to things like board diversity, climate related issues, I think the focus of the E, the S and the G and the US, if you had to pick one, would be the S. As I think over the past decade or so, we've seen a substantial rise in corporate DEI efforts and social responsibility efforts in the US and that's eventually kind of heading towards the litigation realm. And what's happened is in last summer, the US Supreme Court issued a decision that the long and short of it, and it does not have direct applicability in the ESG context, but I'll explain in a moment why I'm raising it basically determined that admissions to Harvard and University of North Carolina could not consider race-based factors, so-called affirmative action, it undid about four decades of Supreme Court precedent. And now in the wake of that, what some partisan groups are doing is filing suits against businesses that have and their DEI efforts claiming that they amount to some sort of quota or similar system that violates the concepts that the US Supreme Court struck down in that Harvard USC about a year ago. So I would say that's been the focus really here in the US is corporate DEI programs, making sure they're structured in such a way that they're permissible and seeing how it plays out in the courts challenges to those programs. For instance, there was a recent business down in Georgia that was sued, that gave grants out only to black owned companies and a recent federal court decision. The challenge is brought again by one of these groups, at least federal court decision did come down and say that that was impermissible and violates the law. So that's I think where we have a very robust dichotomy right now is on the S aspects of ESG. And that's where the litigation, I think is primarily focusing on as more states consider and adopt regulations, California continues to be at the forefront of that, but as that spreads to places like New York and Illinois and other states around the country, especially in the absence of real meaningful federal regulation in that regard, I do think that the litigation will correspondingly expand. But that's where we are for right now.

Tom: Thanks. That's sort of incredibly interesting point. It shows the difference I think between the two reasonably similar jurisdictions, but with a slightly different focus. But I mean, from my point of view, I think one thing that seems to have sort of cut across both the E and the S of the ESG, I mean obviously this impacts organizations and commercial entities themselves, but a lot of this seems to come down to the people within those who are actually making the decisions. And from that point of view, I mean there seems to be some potential risk and liability at the very least there. Not just for the organizations themselves, but for individuals. I mean, I'm thinking in particular for a lot of organizations in relation to the directors, and I mean on that basis, Mark Pring, can you think of any particular risks that those sort of management individuals, directors, partners, whoever they are, might be facing, and if there are risks that they do have to deal with at the moment, based on what Mark just said on the potentially increased risk of ESG litigation, is there anything they can be doing to mitigate those risks or prepare for them in advance?

Mark P: Broadly, in terms of risks, we're certainly seeing, to your point, increased scrutiny of directors in many sectors, both from applicable regulators and from other stakeholders in particular investors as you were flagging earlier. It's noteworthy for instance that all UK public and larger private companies have reporting requirements that include what's referred to as a section 1.72 statement in their annual director's report. And that statement includes reporting on the impact of the company's operations on the community and environment. So reference to the community there, but again, that focus we have maybe more here on the environment. I'd also note in passing the significance, particularly in the financial services sector of the so-called anti-green washing rule that applies to all firms authorized by the financial conduct authority who make sustainability related claims about financial products and services. And as a result of those requirements and others, there's certainly an increased risk of claims targeting directors and officers in circumstances where companies may have failed to deliver, for instance, on their ESG targets. So in the UK, without bearing into the detail, it's expected that what we refer to as sections 90 and 90A of the Financial Services and Markets Act or FSMA may increasingly become prevalent tools in the context of climate litigation. In particular, shareholders may claim that they've suffered losses arising from untrue or misleading statements made either under Section 90 in a prospectus or under 90A in other published information such as, again, director's reports. Those are just by way of example really. But I think prominent examples, you asked about mitigating risks. How much time have you got? But in any event, certainly directors should assess whether corporate governance could be improved in the ESG arena, whether their company has performed an up-to-date risk profile assessment, whether mitigants in particular insurance are adequate in view of, among other matters, the increased costs associated with the sort of litigation and regulatory investigation we've been touching on. And for the directors, whether they have access to specialist and early legal and accounting advice when considering reporting obligations, I think these lessons as it were, or these thoughts apply across the Atlantic, either side of the Atlantic. And it goes without saying that directors should always ensure that all decision-making is appropriately recorded. So I think those would be the initial thoughts, Tom.

Tom: No thanks, Mark. I mean I completely agree with that, particularly in relation to not just the mitigation steps, but the potential risks of statements being made, which are then used against directors and companies if they're proven not to be true. And it's interesting what you were saying about the decision making process and also the actual strict obligations on directors to consider the community at large and issues outside their organization. But I suppose that raises the question, well, what are the competing liabilities and responsibilities of directors and could that cause any problems? So for example, if a director in an organization was absolutely compliant with ESG related criteria is living up to the standards that it placed on itself and its wider obligations, is that enough or is there any sort of other risk that in doing so it is failing to fulfill another obligation or it's wider purpose or IT sort of focus to shareholder investor or that sort of thing? I mean, Mark G., can you see any risk that even an organization which is very, very good with its ESG compliance might still end up facing some sort of liability?

Mark G: Yeah, I still think that's absolute possibility that the US happens to be an extremely litigious atmosphere and our courts are always overburdened with cases. So I think that's entirely possible. I think you could do everything the right way and still find yourself ending up in court regardless of that.

Tom: No, I mean, so it really sort of emphasizes the difficulty of the type rape, doesn't it Mark mean how to balance those competing factors? I mean, just sort of anecdotally, I know that certain organizations in the financial services sector are pulling out of lending to certain industries because it's seen as too high risk. It's seen as against their ESG criteria and obligations. But at the same time, other funds are going into oil and gas into other what are seen as the less popular areas because they're under an obligation to make the best possible return for their investors. So it is a very difficult balance to hit, isn't it? And tricky to get that right.

Mark G: That's an exactly right point. And because there's a fiduciary obligation, you do have to strike that balance. I do think there's been some interesting polling in the US suggesting that most Americans do not care if ESG factors into investment decisions. So I just think that's an interesting starting point. But certainly we've seen a rise of social impact investing and socially conscious investing, but for businesses that issue opportunities that to so-called vice opportunities or vice stocks, you do have the potential of breaching your fiduciary or at least being alleged to have fiduciary for fiduciary obligations to the shareholders, to the investors by not pursuing the opportunities that could maximize the return. And so if you are trying to be socially or ESG conscious can be caught in a bit of a catch-22.

Tom: And Mark Pring, I mean Mark mentioned that the US is particularly litigious jurisdiction, but I imagine there'd be similar pressures on directors in the UK.

Mark P: Yes, Tom, I was just thinking through this in terms of competing risks. I mean, certainly we may be operating slightly different environment in terms of at least historical pressures caused by class or collective actions, but in theory, I think we'll see actions being possible, even the sort of vice stock type actions depending upon the nature of representations made to investors by directors. So we can see some of those sort of countervailing pressures potentially. It's certainly the case that directors are under potentially competing pressures thinking about, again, regulatory position, reputational risk duties to shareholders, expectations of insurers and so on. And we know that the investors and their lawyers are increasingly creative, so directors and their advisors have to keep pace with these creative arguments.

Tom: Mark, in circumstances where based on all of that, a director could be at risk no matter what they do. I mean, because there are two competing groups and sets of obligations. You've mentioned a number of things that they can do to mitigate that risk, particularly the mapping through the decision making process. But given your background and area of expertise as being insurance, is there something on the insurance side that they should be thinking about as well?

Mark P: Yeah, I mean, absolutely right. I mean, briefly again, as you say, without repeating some of my earlier comments in the first instance, directors should ensure that their companies implement robust policies and procedures to address any risks identified in proactive risk assessments. And not only should they do that anyway, but they should do that prudently in order to satisfy that they satisfy their various insurers that they are what we would call prudent uninsured as well. They should at the same time, as you've hinted, be identifying affordable insurance options with the help of their specialist professional insurance brokers. And that applies potentially to their companies in terms of their insurance program and the individual directors. So along with D&O liability insurance, for instance, they should look at the availability and scope of employment practices liability cover, depending which arena they operate in environmental liability covers for instance as well. There's a myriad of insurance options they should be considering, depending which sector they're involved in, Tom.

Tom: Yeah, no, very good advice and important for people to be considering that. And Mark G., I mean, the risks are fairly common across both sides of the Atlantic. So typically you guys in the US would see things probably before we did, but it'd be similar trends coming across. But is there anything particularly US specific in relation to risk identification and mitigation in this area, or is it much the same as we'd expect to see over here?

Mark G: It's much the same. And the steps should really focus on any types of social programs, corporate DEI programs, and anything should be focused, the steps should be focused on that. We haven't quite caught up on the E to the UK yet. And so really focusing on what are your goals, what do you do as a company want to stand for, and trying to tailor that in a way that complies with what is an evolving area of the law.

Tom: And I think that last point is a crucial one, isn't it, Mark? I mean, it is constantly evolving. So we talk about risk assessment and analysis and try to work out what the potential risks are, but they are constantly changing and both just legislatively regulatory, but also just more widely socially. This isn't something where you can just put a policy in place, stick it in a drawer and forget about it. I mean, this is something which does need constantly monitoring, updating, and assessing.

Mark G: That's absolutely right. That's absolutely right. At least in the US I think we are at early stages of all these things for the most part. And so what the landscape is going to look like in five and 10 years may both be drastically different. So you need to be staying abreast of the developments consulting with council on a fairly frequent basis to make sure that you're up to date on the latest developments.

Tom: No, completely agreed and conscious that time is running away from us. And this is obviously a huge topic we could talk about for many hours, but Mark P. in conclusion, I mean, is there any concluding thoughts or calls for action that you think would be a good takeaway for the listeners?

Mark P: Well, it would be selfish of us to start with consult a lawyer, but obviously whenever risks are involved, then lawyers are involved from one angle or another. I mean these areas, and it's interesting again to hear of the different perspectives from the US and the UK. These areas are clearly a minefield and a careful balancing act for companies and for their directors is required. They're going to need to consider all competing ESG pressures when setting strategies. Directors in particular will need to address carefully the tension between their traditional duties as directors, if you like, with increasing obligations to advance an ESG agenda with elements of the ESG that they need to advance maybe varying between jurisdictions like the US and the UK. So they've got to look at it from every angle.

Tom: They're absolutely right. And again, it goes back to that global point, doesn't it? Where these things affect so many different people nowadays. You can't just look at it, it's very much in one jurisdiction, it has to be across the globe. Mark G, anything in particular from you as a final takeaway?

Mark G: I think the jurisdiction specific point is a good one because in the US for many years until recently, we just had corporations really focusing on having robust DEI programs, social responsibility programs, and that was great. And then all of a sudden, a few years ago in particular, we started seeing certain states like Florida and take on, try to counterbalance that with certain types of regulations that corporations can't have certain types of information in their training and their workplace trainings and things like that. So being cognizant of the rules in the jurisdiction that you're operating in, which may differ from two states that border each other, may take two very different approaches. But as with many things in the US, this is very much a state specific thing. US law, while everybody looks to the federal government, obviously much of US law, probably the most important aspects of US law really comes down to state law. And we've got 50 different states, which means potentially 50 different approaches. And while there really aren't 50 different approaches, there are different approaches taken based on a whole set of factors. So if you're operating in California versus Florida, you have to have a whole different strategy and approach. And if for an operating in both California, Florida, you have to think about precisely those things. So I completely agree. And second, the suggestion to consult with counsel.

Tom: Thanks. It is just sort of hugely challenging, isn't it? Dealing with so many competing jurisdictions even within one country, let alone within various different continents. From my point of view, I think it's the final point I'd emphasize is again, going back to that issue that the legal landscape is changing so fast, you just got to keep monitoring it, particularly going, you just said Mark G. about the various different jurisdictions, but even within one jurisdiction, things change so quickly that everyone's just got to keep on top of it. And one thing in particular, going back to something that Mark Pring said earlier on is it's important as part of that to monitor what statements any organization is making and ensure that they are accurate and you're still living up to them because it's such an easy source of litigation for claimants to pick up on things which have been said, but the action doesn't quite match up to that, that it's just so important to just keep an eye on that and make sure everything is up to date and everything is accurate. And that as much as anything else is a good way to mitigate any potential risks. And as we've seen, there are increasing and ever-growing risks out there. So I do think that's important, but unfortunately I think we are very much out of time as a result of that. But as I say, this is a huge topic and one that we could carry on talking about for a very, very long time. Unfortunately, we don't have the opportunity to do so now. So all it leaves me to do is to thank both Marks, Mark Goldstein and Mark Pring for their time, and also to thank the listeners for listening. We hope you enjoyed it. If you have any questions or if there are any issues coming out of this that you'd like to discuss further with us, obviously please do not hesitate to get in touch.

Outro: Disputes in Perspective is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's litigation and dispute resolution practice, please email [e-mail]. You can find our podcast on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith's LLP or its individual lawyers.

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