Businesses have witnessed a remarkable increase in environmental, social, and governance (ESG)-related lawsuits and settlements in the last few years. This surge has forced companies to reevaluate their approach to communicating about ESG issues and has pushed many to seek guidance from legal experts and subject matter specialists. As businesses navigate this evolving legal terrain, it becomes evident that the concern is genuine, and addressing ESG-related matters is no longer just a matter of good corporate citizenship but a strategic imperative for safeguarding the company’s reputation and financial stability.
The Escalating ESG Litigation Trend
Research conducted by the World Business Council for Sustainable Development (WBCSD) published earlier this year sheds light on the staggering increase in ESG-related lawsuits over the past three decades. The study revealed that such litigations have surged by a substantial 25 percent during this period. These legal actions encompass a wide range of issues, from supplier misconduct, such as illegal logging committed by contractors, to preemptive due diligence related to regulatory frameworks like the Paris Agreement’s ambitious goal of limiting global warming to below 2 degrees Celsius.
The Challenge of “Soft Law” Policies
Interestingly, the rise in ESG-related lawsuits isn’t limited to actions enforceable by law alone. Some of the litigations involve “soft law” policies that lack direct legal authority but still have significant implications in the courtroom. For instance, the Task Force on Climate-related Financial Disclosures (TCFD) offers recommendations for reporting material climate information. Although not legally binding, these guidelines can be referenced in court proceedings, leading to further complexities in ESG litigation cases.
Regulatory Crackdowns and Event-Driven Securities Litigation
Alongside the rise in ESG-related lawsuits, regulatory authorities are becoming more vigilant in their efforts to combat “greenwashing” – a deceptive practice where companies exaggerate their commitment to sustainability for marketing purposes. Regulators are taking strict action against businesses that make false or misleading claims about their environmental efforts, further increasing the potential for legal battles.
Moreover, the growing occurrence of event-driven securities litigation is contributing to the surge in ESG-related class action lawsuits. When significant events, such as environmental disasters or ethical controversies, impact a company’s stock price, shareholders may take legal action against the company for alleged mismanagement or failure to disclose material information. This creates an additional dimension of risk and complexity for companies looking to enhance their ESG efforts.
The Changing Landscape of Business Communications
The mounting legal challenges related to ESG issues are prompting companies to reassess how they communicate with stakeholders and the public at large. Transparent and accurate communication is now paramount in order to avoid potential litigation and uphold the company’s reputation. Companies are recognizing the importance of providing clear and comprehensive ESG disclosures to inform investors, customers, employees, and other stakeholders about their sustainability initiatives, progress, and performance.
Consulting Lawyers and Subject Matter Experts
As the intricacies of ESG-related regulations and soft law policies become more apparent, companies are increasingly turning to legal professionals and subject matter experts for guidance. Engaging with experts helps companies navigate the complex legal landscape, ensuring compliance with ESG regulations and mitigating the risk of litigation. Legal advisors and specialists provide valuable insights into the latest developments, best practices, and strategies for crafting effective ESG communications.
The rise in ESG-related lawsuits and settlements is a powerful catalyst for change within the business world. It is prompting companies to reevaluate their communication strategies and adopt a more proactive approach to addressing environmental, social, and governance issues. Compliance with ESG regulations and guidelines is no longer a choice but a fundamental requirement for businesses to remain sustainable and resilient in an ever-changing legal and environmental landscape. By seeking counsel from lawyers and subject matter experts, companies can navigate the complexities of ESG litigation, uphold their reputation, and demonstrate a genuine commitment to sustainability and responsible governance. Ultimately, these efforts not only benefit the businesses themselves but contribute to the collective goal of creating a more sustainable and equitable future for all.
Ensuring that your organization isn’t greenwashing as an internal auditor or a regulatory change expert is very important. Managing your organization’s ESG risk through an objectives-centric approach can help. Learn more about EmpoweredESG on our website here, or by filling out the form below.