ESG litigation is nothing new. It’s been a concept for more than a decade, and to some extent, its purpose has been a part of the legal world for much longer than that. However, you have almost certainly heard of ESG litigation for the first time within the last couple of years. This is because, as society has become much more aware of serious ethical problems in the corporate world, it has become paramount for those in a position capable of making an impact to take action against companies that come up short in the ethics department.
Today, we want to take a deeper look at what ESG litigation is, the role of investors and shareholders to carry out activism, and how these things are handled in the courtroom.
Let’s get started.
What is ESG Litigation?
ESG is short for Environmental, Social, and Government. In regards to litigation, ESG litigation is when legal action is taken against a company because it has not met standards for one of those categories. This is to ensure that companies are held accountable for their actions instead of being able to sweep them under the rug.
As we said, this is nothing new. “ESG litigation” has been around for quite a while in one way or another. Consider the lawsuits brought against companies for dumping hazardous waste in water sources. Those cases were early forms of ESG litigation before the term took off or the practice became a priority.
What Types of Things is ESG Litigation Used for?
ESG litigation covers a broad spectrum of situations pertaining to companies and entities with power. The acronym stands for environmental, social, and government, and those three categories might seem fairly straightforward, but they can be broken down into tons of subcategories that would all fall under the jurisdiction of ESG litigation.
We’ll talk about each one separately with a few examples for each.
The environment and how companies impact it via their practices are some of the most well-known uses for ESG litigation. Like in our example earlier, companies have had a bad reputation for damaging the environment over the last several decades, and legal action has been taken to hold them accountable for as long as most people can remember.
However, environmental ESG can pertain to much more than just dramatic examples of intentional recklessness. It can also pertain to far more debatable situations, and in fact, those are the situations that are leading the charge in modern environmental litigation.
We’re talking about cases that revolve around the emissions caused by outdated machinery, overzealous usage of environmentally-destructive chemicals and materials, producing products with far higher carbon footprints than they really need, sourcing materials from unethical or unsustainable sources, and more.
Basically, if a company or government entity is doing something that is harming the environment, ESG litigation can be used to hold it accountable and, hopefully, change the behavior.
The social aspect of ESG litigation has garnered a lot more attention in recent years. While it has always technically existed considering it pertains to situations when employees, customers, or the general public are being mistreated, it is more focused on substantial cases of socially unacceptable behavior, now.
For example, ESG litigation might be leveraged against a company if it is found that the company disproportionately hires women despite plenty of qualified female professionals applying while lesser qualified males are hired on the spot. That could potentially spark ESG litigation. Race, sexuality, gender, religious beliefs, and other things can, and usually are, the root of ESG litigation in the social sphere.
This could also be done if something harms the community at large. For example, Chik-Fil-A had a major issue years ago when it was discovered the fast-food giant wouldn’t hire non-straight employees or required them to more or less hide their personalities for the same effect. This triggered a massive blowback from half the country’s population, and as such, a string of ESG litigation cases started to kick off. That resulted in various internal policy changes, public apologies, and more. That’s ESG litigation in action in the social arena. It’s designed to hold companies accountable for social discrepancies that actively harm employees, communities, and beyond.
Another example of social ESG litigation would be a company releasing promotional material that has obvious racial undertones that target a portion of the population. In response, some people might raise ESG litigation to hold the company accountable for that and lead to a change in the company’s policy going forward.
There are many ways that social aspects can lead to ESG litigation, and as society becomes more aware of how companies have intentionally targeted specific groups of people, you’re bound to see more ESG litigation hit the headlines in the near future.
So far, we’ve only talked about holding companies accountable for things such as destroying the environment or doing things that are socially unacceptable and unethical, but this third category of ESG litigation is one of the most important. It pertains to the government and companies “cooperating” in unethical and unacceptable ways.
For example, one of the most controversial concepts in legislation is lobbying. This is when companies fund the political campaigns and goals of politicians. However, it’s typically used as a way to “push” the politician in question toward supporting or opposing different pieces of legislation that might or might not be in the best interest of the lobbying company.
Without using a real-world example, let’s say that a famous energy drink company wants to keep its audience as large as possible. However, there are bills on the table that might raise the legal age of purchasing an energy drink to 25. This is due to recent (not real) studies showing that energy drinks cause brain damage or some other dramatic effect in minors. The company might attempt to persuade a politician via funding to prevent that legislation from becoming law.
Any time there is a questionable exchange between companies and governing agencies, ESG litigation is a possibility. After all, those are two powerful entities that should be separated from one another committing strange or detrimental actions together. Without holding companies accountable for such activities, society-wide consequences can occur.
Why are Investors and Shareholders Important for ESG Litigation?
In the past, fighting a company over the issues we’ve highlighted here would require ample evidence, tons of public interest, and really, really good lawyers. Companies felt and seemed invincible due to their massive supply of capital and the power they hold over employees who might not speak out due to losing the only way they have to pay their bills and feed their families.
However, in recent years, bringing this type of litigation to the forefront has become a lot easier thanks to investors and shareholders taking a stand and initiating ESG litigation themselves.
Investors and shareholders hold unique positions in the companies they support. While not being directly involved in the company’s practices, they do provide funding and have partial ownership of companies, and that makes them some of the ones to notice these issues first and have the means to take action from an advantage point instead of a disadvantage like employees or customers would, and more.
This gives investors and shareholders a pivotal role in ESG litigation; they hold power and a perspective that others in a position to leverage litigation against companies simply couldn’t hope for, and this makes investors and shareholders doubling as activists especially useful when it comes to holding companies accountable.
Reasons Investors and Shareholders Participate in ESG Activism
Investors and shareholders are pivotal for large businesses to succeed. They provide crucial capital that funds the day-to-day operations and continued expansion of companies in exchange for a share of the growing profits.
That’s a huge gamble. A company can fall apart and leave investors at a loss, and obviously, the investors want the businesses they support to do as well as possible to help them line their own pockets. So, why would they care about activism and holding those same companies they fund accountable?
There are a few reasons for that, and we’ll highlight each of them briefly.
1: Long-Term Preservation of the Company
This directly coincides with the point we made shortly ago. Investors want the companies they’re funding to perform as well as possible for as long as possible. If a company is doing things that draw the ire of the general populace or various authoritative agencies, that can spell disaster in the long run.
This can be seen as the company’s ownership and directors not protecting the profits of the investors, and that alone is reason enough for an investor to seek legal action against the company; after all, they’re in it for a profit, and they fund the company expecting the ownership to do what’s best for generating profits. Creating major backlash and social problems is the exact opposite of that.
2: Personal Values
Investors might not be looked highly upon by the general population, but the fact is, they’re human, too. They have their own set of values and sense of morality, and while their money is on the line, they most likely don’t want to fund companies directly going against those personal values, either.
For example, let’s say that one of the investors for a company selling women’s shampoo is also a major advocate for breast cancer awareness and frequently helps fund research for the condition. What if the shampoo company decides it won’t hire women with a history of breast cancer, or maybe there’s an ingredient in the product that has been linked to it? That investor is emotionally, and even financially, invested in that so heavily that they could very well justify ESG litigation and activism despite their involvement with the shampoo company.
You can’t underestimate the human element that comes into play and motivates an investor to act in the best interest of the greater good.
3: Reputation and Public Opinion
Bigger investors, such as the ones funding massive corporations, don’t tend to just be random people with a lot of cash. They’re business professionals who have their own businesses on top of their investing endeavors.
Take the show Shark Tank for example. Each of the investors on the show has their own impressive portfolio, and they have reputations to uphold. Now, imagine one of them investing in a guest of the show that promises eco-friendly cleaning materials. Years after the company has taken off and everyone knows that investor is connected to the company, they find out the company is dumping hazardous waste into the local water supply near its factory. Not only would that damage the company, but the investor and every company they control will also feel the backlash. To protect themselves, they are inclined to take action against the company acting recklessly.
What Do These Activism-Focused Investors and Shareholders Cause in the Business World?
At first glance, you might be a bit hesitant to think any of this equates to anything meaningful. After all, businesses, especially the largest ones, have a reputation for just shrugging major problems off as minor inconveniences. If they throw enough money at it, it seems they can get away with it as if nothing happened.
Well, those days are largely over, and it’s thanks to a lot of work in the overall field of ESG litigation, and because of the investors and shareholders who have joined in holding companies accountable.
Due to their larger influence, they have a bigger impact. Just mentioning that they can pull out and act against the company is a reason to be concerned; let alone going through with it.
In recent years, such action has caused complete internal policy rewrites, extensive retraining programs to be initiated, public apologies, compensation being distributed appropriately, and more. The impact when an investor acts against a company with ESG litigation is much more noticeable in recent years. If you’re interested in ESG litigation, or you need guidance in leveraging it yourself, contact Litigation Legal Insight Group, today.