ESG: A lawyer’s dream (or nightmare)

TOP OF THE HEAP — If you’re a regular reader of the Long Game, it shouldn’t come as a surprise to learn that corporate lawyers now see environmental, social and governance disputes as their companies’ biggest litigation risk in 2024.

ESG’s rise to the top spot in the annual year ahead report from global law firm Baker McKenzie reflects the topsy-turvy world corporations are facing, where what’s banned in one jurisdiction is encouraged in another and where what one side says goes too far is countered by the other side saying it doesn’t go far enough.

If we weren’t already there, 2024 marks the messy era of ESG.

“In the U.S., you actually have political paralysis at the state level with conflicting regulations saying, ‘You’re going to do this,’ and the other side saying, ‘If you do that, you’re in trouble,’” said Peter Tomczak, co-chair of global investigations, compliance and ethics at Baker McKenzie. “That’s the unfortunate tension. If there was a magic bullet, I haven’t heard of it yet.”

The fact that the report draws from 600 senior legal and risk leaders at large organizations from the U.K., U.S., Brazil and Singapore sheds new light on the global attention to the issue.

Large asset managers continue to take the most heat from the anti-ESG movement, which contends that their sustainability policies violate their fiduciary duty. And a string of recent legal cases is continuing to expand the movement, including Tennessee’s lawsuit against BlackRock, a suit challenging New York City’s fossil fuel divestments and a failed effort by Republican AGs to upend a Biden administration rule allowing ESG factors to be considered in retirement plans.

ExxonMobil’s lawsuit against shareholders in an attempt to block a climate-focused resolution reminds us not to ignore the “G” in ESG, either.

But ESG litigation could strike the other way, too, and companies of all stripes could be caught up in it.

John Bueker, global co-chair for litigation and enforcement practice at Ropes & Gray, for instance, pointed out the real threat of securities fraud claims from green groups and litigation-hungry private plaintiff lawyers stemming from new climate disclosure requirements out of Europe, California and potentially the federal government. Paul Washington, executive director of The Conference Board’s ESG Center, said companies need to start getting used to applying the same level of scrutiny to their ESG reports as is applied to other legal and financial filings.

Enviros and their lawyers will be watching for greenwashing in corporate advertising and labeling, like the lawsuit challenging Delta’s carbon neutrality claims. Unions and fiduciaries are also poised to continue to assert legal damages and lost pension returns in response to anti-ESG laws in red states.

It’s a hot time for ESG-focused lawyers as regulations, politics, market realities and courts converge on the issue.

“The anti-ESG movement opens a new front in the litigation,” Washington said. “Many of the people who are filing these suits are well-funded, and it’s often a coordinated effort. This is not unusual, in some ways. What’s different now is the subject matter. The fact that you can face claims from two different sides is different. There’s a feeling of vulnerability.”

Oh, and don’t forget the “S”: Almost twice as many respondents said social disputes are a concern this year compared with last year.

No wonder only 16 percent of respondents said they were fully or very confident about their organization’s level of preparedness for litigation across all risk types — with ESG ranking as the top expected dispute type.

“These are novel issues in many respects,” said Melissa Tea, lead for the K&L Gates global litigation and dispute resolution practice area. “The causes of action are novel. The universe of stakeholders who are asserting claims continues to broaden. So from the lawyer standpoint, we are trying to get our arms around this emerging litigation, and the regulations are evolving in real-time.”

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