Baker McKenzie’s Global Disputes Forecast reports that 40% of companies consider ESG disputes a significant risk – a notable decrease from last year, when it was over 70%. Partners Peter Tomczak and David Gadsden analyse this decline and how companies are attempting to mitigate the continuing risk.
Baker McKenzie’s Global Disputes Forecast, published in January, found that 21% of companies believe ESG issues pose the greatest dispute risk to their organisation. Almost double that figure broadly consider ESG disputes a significant risk.
The firm surveyed 600 senior decision-makers with responsibility for litigation at organisations with annual revenues greater than US$500 million. Respondents were based in the United States, the United Kingdom, Germany, Singapore, Hong Kong and Brazil. The report also drew on insight from its clients and from its global network of lawyers – with more than 1,000 practitioners across 74 offices.
Despite continuing corporate concern over ESG dispute risk, however, the issue has fallen down the in-house counsel risk list. In the firm’s 2024 Global Disputes Forecast, 73% of respondents considered ESG disputes a risk to their organisation – ahead of any other issue. In 2023 it was 58%.
A firmer grasp on ESG issues
Peter Tomczak, Chicago-based chair of Baker McKenzie’s global investigations, compliance and ethics practice, and David Gadsden, chair of the firm’s Canadian class actions group, told Forward Law Review that it comes down to several factors.
“Respondents are looking at it in the way they would look at many different risks, which is not to say they’re immaterial or that they’re not top of mind, but that they’re more known,” Tomczak says.
In response to this risk, Gadsden adds, “in recent years companies have been bulking up legal departments to handle ESG-related claims and issues.” The survey found that 57% of companies that reported ESG disputes as a risk had responded by increasing the size of their legal teams and/or allocating additional resources.
“These issues have been around for some time and companies are learning how to prepare for and deal with them,” Gadsden says. “These matters are perhaps registering as less of a concern now because in-house legal teams feel like they have a firmer grasp on ESG issues than they have in previous years.”
The rise of anti-ESG
A caveat to the forecast is that the survey was carried out before Donald Trump took office in the United States. The new administration, along with many emboldened US states, is vocally critical of all things ESG – and this is likely to have changed the dynamic for disputes risk.
On the one hand, companies are being targeted globally for alleged ESG (particularly climate-related) failings – from greenhouse gas emissions to greenwashing. Typically, this is coming from activist organisations and some governments – although Tomczak says they are starting to see commercial disputes too.
On the other, US states and various organisations are pursuing companies – particularly in the financial services sector – for being too ‘progressive’ on ESG-related issues, such as net zero. Diversity, equity and inclusion programmes are also in the new administration’s crosshairs.
Tomczak says: “We still have this tension between ESG and anti-ESG. Under the Biden administration, we saw a lot of very proactive and assertive moves by the anti-ESG states, but not at the federal level. Then Trump took office. The survey predates much of the day-to-day volatility that we have at the moment. I think that’s in part why you see some of the respondents putting it a little bit back on their list of risks.”
He continues: “The anti-ESG movement has spread out a little bit internationally now, although I wouldn’t say it’s as prominent outside the United States as it is within. With proposed legislation in the Middle East, from China, and other countries, it’s starting to look a little bit less US-versus-the-world now.”
Increasing sophistication
What’s more, as several organisations tracking litigations have noted, the volume of climate change disputes has diminished in recent times, although that does not necessarily correlate with a reduction in risk.
Tomczak says that while there may be fewer cases overall than there were several years ago, the sophistication of climate-related disputes, in particular, is increasing. “Gone are the days where most suits were simply disputes about semantics – ‘you said X and we don’t think X is true’,” he says. “Aspirational statements are not actionable.”
He continues: “But the companies and clients we’ve talked to are focused on more sophisticated litigation – on carbon credits, on securities lawsuits, and certain doctrinal principles.”
There is a sense that plaintiffs have been bringing waves of cases in the hope that some of these make it to the courtroom. “They’re starting to bring more thoughtful, more focused, heavier complaints that are surviving motions to dismiss and leading to discovery,” Tomczak says.
The success of just a handful of cases then provides the basis for other plaintiffs to launch further complaints.
What types of dispute?
According to businesses surveyed by the Global Disputes Forecast, waste management is the number-one ESG dispute risk, with 60% of respondents who reported ESG dispute risks highlighting this as a concern. This covers many of the ‘traditional’ issues for environmental lawyers.
This may also be high on the agenda for in-house counsel given the European Union’s current focus on the issue. The EU Council presidency and the European Parliament recently agreed to revise the Waste Framework Directive to reduce food waste and develop a more sustainable textile sector – with potential increased levies for fast-fashion brands.
Water stress is second on the list. While respondents may have had different views on what constitutes a water stress dispute, broadly it covers the sustainable use of water as a common resource.
Tomczak highlights the United Nations’ Sustainable Development Goal 6, which aims to ensure the availability and sustainable management of water and sanitation amid increasing water scarcity in many places around the world.
“In many ways, this is a natural outgrowth of many of the arguments about climate change – desertification, increasing water use, impacts on certain parts of the globe – and all these are contributing to an increase in disputes around water,” he says.
Another high-profile water stress issue is the presence of PFAS (per- and polyfluoroalkyl substances) in drinking water and other water sources. As well as the long-running slew of litigation against companies that have used PFAS in their products, jurisdictions around the world are now coming down hard on ‘forever chemicals’, with many proposing limits on the levels found in drinking water.
Other types of ESG dispute risk that respondents mention included emissions regulation, supply chain issues and greenwashing. Perhaps notably, anti-ESG legislation was relatively low down the list – with 20% of respondents citing this as an ESG dispute risk. Whether this moves up the agenda, given the increasing anti-ESG movement in the United States and elsewhere, remains to be seen.
Geographical risk
The report says: “In terms of geographical risk, Canada (44%), the UK (35%) and Australia (34%) are the top regions where organizations anticipate ESG disputes. These regions have robust regulatory frameworks and actively enforce ESG regulations, making compliance critical. The EU (23%) and Germany (23%) also present significant risks.”
Says Gadsden, based in Toronto: “Of the countries surveyed, Canada is the closest to the US in terms of being a litigious society. There’s a very well-developed class action regime, third-party funding is common and the certification bar for class actions is generally low.”
He continues: “Also we have a number of statutes that include private rights of action with respect to deceptive statements – including consumer protection legislation, securities legislation and competition legislation. We’re seeing more and more claims in Canada alleging deceptive marketing in the ESG space – primarily greenwashing-type claims.”
Tomczak notes that the regions in-house counsel say pose the greatest threat from ESG disputes (the US is also top-five) are all common law jurisdictions with well-honed class and private litigation regimes.
Corporate response to ESG risk
As noted above, companies have been actively responding to the perceived risk of ESG disputes by bolstering their legal teams and funding. Other, more significant alterations are also on the table.
The report says: “Significantly, 52% of respondents are making changes to their business model, while 48% are considering a change in their operating locations in response to, and anticipation of, ESG disputes.”
Tomczak said in a contribution to the report: “ESG litigation risk is now an important factor in strategic business planning. Organisations may be less inclined to invest in more challenged businesses. Companies are also making changes to their business models or considering de-listing to avoid some of the regulations and disclosures required by authorities, such as the US Securities and Exchange Commission.”
Furthermore, 52% of companies who cited ESG issues as a dispute said they were making changes to their business model – while 15% said they were sufficiently concerned that they were changing the sectors in which they operate.