Covid-19: Impact investing and disruptive litigation

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Jonathan Kitchin
Michelmores LLP, Exeter

While Covid-19 has resulted in many pre-pandemic issues taking a back seat, the reverse appears to have been the case when it comes to sustainability and climate change. Social responsibility and impact investing are increasingly dominating the agendas of multi-state forums, boardrooms and individual households globally and it seems that the pandemic has served as a wake-up call for investors to consider a more sustainable approach.

Covid-19 has disproportionately affected the most disadvantaged worldwide. The pandemic has highlighted social inequalities and perhaps even contributed to heightened social tensions. While government imposed lockdowns have stunted commerce in order to protect public health, they have also enabled people to innovate and to think about solutions which have a positive impact on health, employment and removing inequality. As nations seek to build back their economies, many stakeholders are calling for this economic recovery to be a sustainable one; to promote the changes needed to continue the ‘race to zero’ and to deliver an overall positive impact.

There is no doubt that making these intentions a reality as we move closer to a sustainable and equal economy requires significant initial and ongoing investment. However, social impact investment is likely to see significant growth over the next couple of years due to the increased appeal of investments that are simultaneously socially and financially rewarding.

What is impact investing?

Sustainable investment has tended to refer to investments made in companies that strive to have minimal negative impact, usually coupled with strong governance and best practices. It presents an opportunity to generate a measurable environmental, social or governance (commonly known as ESG) impact and a sufficient rate of financial return.

As the finance industry becomes increasingly proactive in sustainable investment, there is now a fine distinction between this and genuine impact investment. Impact investing goes further than seeking to influence corporates, however. Instead, it uses the funds generated to target specific objectives, for example disease eradication or increased affordable housing in a community.

Many are often quick to point out that impact investment tends to sacrifice the rate of, or indeed any, financial return. However, ESG investing has defied critics to become increasingly popular and is still attracting capital amid the current market turmoil. In the first quarter of 2020 it was reported that European sustainable mutual funds and exchange-traded funds attracted £35.8bn of inflows, and ESG-oriented funds in the US overtook the record set in the final quarter of 2019. Indeed, this follows previous reports that investment into European sustainable funds increased 58 per cent in 2019, seeing assets reach €668 billion. The concept of shareholder primacy is therefore becoming weaker and slowly replaced with a corporate culture focused on responsible development.

The rise of disruptive litigation

Just as the financing for change has become available, so have the legal avenues to effect it. Legal work previously undertaken through pro bono initiatives is now becoming a profitable area for law firms. No longer confined to environmental actions, strategic litigation is now commenced by various stakeholders who seek to hold corporations to account using a public forum, the courts. In fact, for public companies, material litigation risks are an essential part of their reporting.

Disruptive litigation aims to be more than a legal battle. Instead it seeks to clarify legal duties and governance for corporate stakeholders and increase transparency surrounding business practices. More people than ever care about the sustainability credentials of their employers and corporations they purchase from. It therefore comes as no surprise that disruptive litigation has sought to bring climate risks to the top of corporates’ agendas in more recent times.

Some companies have started to operate with a renewed sense of purpose which addresses the climate emergency, whereas others have used sustainability as a marketing ploy, otherwise known as ‘greenwashing’. Greenwashing is a derivative of increased ESG awareness in a marketplace which perceives sustainable business as being rewarded with a competitive advantage, an increasing market share and an opportunity to make an enhanced risk adjusted return. Companies misrepresenting their green credentials are effectively at risk of misselling products and services to customers and investors; listed companies and large asset owners could also fall foul of regulatory requirements introduced for financial disclosures. It is therefore likely that greenwashing will feature heavily in future litigation trends.

Take, for example, the most recent diesel emissions scandal involving Mercedes UK. The company allegedly misled customers and authorities about the amount of toxic emissions produced by certain models of their cars and vans over an 11-year period (2007 to 2018). A class action has now been filed in the UK on behalf of 65,000 customers following news that its parent company, Daimler AG, reached an agreement in principle to settle lawsuits in the United States. The settlement, reportedly in excess of $2bn, is in addition to the €870 million fine by German prosecutors in 2019.

Another legal avenue available to lawyers is to file complaints against large corporations with intergovernmental organisations. This is precisely what ClientEarth, an eminent environmental law charity, did when it alleged oil giant BP misled the public in its advertising campaigns. Unsurprisingly, BP withdrew its advertisements, but not before a precedent was set by ClientEarth's complaint: it was assessed as material and substantiated by the UK National Contact Point for the OECD Guidelines, a world first.

The Chief Executive of the Financial Conduct Authority has also announced the important role it expects to play to help the transition to a greener economy including taking appropriate action to prevent customers being misled when accessing green financial products and services.

The growing willingness and array of avenues available to hold companies to account for their greenwashing practices is evident. Publicised cases such as these provide a valuable indication that ESG issues are on the radars of judges and regulators globally. They also demonstrate that collective consumer redress is increasingly accessible, in large part supported by the fact that the litigation funding needed to bring a successful action is also widely available.

Concluding thoughts

At the time of writing, climate emergencies have now been declared in 1,765 jurisdictions in a total of 30 countries. Pressure continues to mount on governments at local, national and supranational level and it is likely that rapid changes to regulatory and legal frameworks will be seen. This presents an opportunity for lawyers worldwide to become more proactive about ESG in their roles and to understand the influence they can have when advising corporate stakeholders.

There are many benefits to lawyers willing to take on commercially and politically sensitive cases where sustainable efforts are at stake. Not only does this uphold the rule of law (a fundamental principle of justice), by increasing the dissemination of information to wider audiences and paving the way for new avenues of environmental protection, it also increases the justiciability of ESG issues.

Lawyers can also have an impact at much earlier stages, such as the initial drafting of contracts and agreements. Pro bono climate initiatives, such as The Chancery Lane Project, have now made template clauses available for lawyers to adopt which provide pragmatic and environmentally conscious commercial solutions. Lawyers should also be encouraged to develop their own in-house ’green’ clauses and templates, collaborating with cross-jurisdictional colleagues to increase their enforceability across borders.

The IBA is also, itself, leading these initiatives, notably with the publication in February 2020 of its Model Statute for Proceedings Challenging Government Failure to Act on Climate Change.

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