The rise of ESG disputes: A growing concern for businesses

Environmental, Social, and Governance (ESG) factors are becoming increasingly important in the business world as companies strive to align their operations with sustainable, ethical governance, and social responsibility.

With this growing focus on ESG commitments, disputes related to these areas are also on the rise. These disputes can lead to costly legal battles, damage to a company’s reputation, and long-term operational challenges. Understanding the nature of ESG disputes, why they are increasing, and how businesses can mitigate these risks is crucial in today's corporate landscape.

What Are ESG disputes?

ESG disputes arise when companies face challenges or legal actions stemming from their environmental, social, or governance-related commitments. As regulatory bodies, investors, and the general public demand more from businesses in terms of sustainable practices, ethical behaviour, and corporate transparency, companies are held to increasingly higher standards. When companies fail to meet these standards or breach their ESG commitments, disputes can arise. These disputes may take the form of litigation, regulatory actions, or reputational damage, all of which can have significant financial and operational consequences.

Examples of ESG disputes

1. Environmental disputes: Environmental issues are at the forefront of ESG disputes. These disputes often involve allegations that a company has failed to meet its climate-related goals, engaged in harmful pollution practices, or violated environmental laws and regulations. For example, a company might face litigation for not adhering to its publicly-stated climate targets, or for causing environmental harm through negligent practices such as improper waste disposal or deforestation.

2. Social disputes: Social issues in ESG can lead to disputes related to employment rights, human rights, and the impact of business operations on local communities. Companies that fail to ensure fair employment practices in their supply chains, for example, may face legal challenges. Similarly, disputes may arise if a company is perceived to have harmed a community by its operations, such as through the displacement of local populations or exploitation of natural resources.

3. Governance disputes: Governance-related disputes often involve accusations of misconduct by directors, lack of transparency, or governance failures within the company. Shareholders may bring legal action if they believe the board of directors has failed to act in the best interests of the company, such as through poor decision-making or lack of oversight. Governance disputes can also arise from failures to comply with disclosure requirements, particularly as regulators increasingly demand transparency in ESG-related reporting.

Why are ESG disputes increasing?

Several factors are contributing to the rise in ESG-related disputes, making it essential for companies to understand and manage these risks proactively.

1. Tighter regulations: Governments around the world are implementing stricter regulations related to ESG, such as mandatory climate risk disclosures and requirements for sustainable business practices. Failure to comply with these regulations can result in significant legal challenges, including fines, penalties, and regulatory enforcement actions.

2. Active investors: Investors are becoming more vocal in their expectations for companies to adhere to ESG commitments. When there is a gap between a company's stated ESG goals and its actual performance, investors may withdraw their support, engage in activist shareholder actions, or initiate legal disputes. This growing trend of investor scrutiny is driving companies to be more accountable for their ESG performance.

3. Public accountability: The rise of social media and the increased visibility of corporate actions have heightened public scrutiny of businesses' ESG practices. Environmental damage, poor employment practices, or governance failures can quickly escalate into reputational crises, leading to legal disputes and loss of consumer trust. Companies that fail to address public concerns regarding ESG issues may find themselves embroiled in costly litigation or regulatory investigations.

4. Contractual breaches: As ESG commitments are increasingly embedded in contracts, particularly in mergers, acquisitions, and supplier agreements, breaches of these commitments can lead to legal disputes. When a company fails to fulfil its contractual ESG obligations, the other party may file a breach of contract claim, resulting in potentially costly legal action and reputational harm. 

Mitigating the risks of ESG disputes

Given the rising incidence of ESG disputes, businesses must take proactive steps to mitigate their legal and reputational risks. The following strategies can help companies reduce the likelihood of ESG-related disputes:

1. Strengthen compliance: A robust ESG compliance programme is essential for mitigating dispute risks. Companies should ensure their ESG commitments are backed by clear policies, regular audits, and transparent reporting mechanisms. By identifying and addressing potential compliance issues early, companies can prevent disputes before they arise.

2. Conduct due diligence: When engaging in mergers, acquisitions, or supply chain management, conducting thorough ESG due diligence is critical. This process helps companies identify potential ESG risks and integrate them into their overall risk management strategies, minimising the likelihood of disputes.

3. Communicate transparently: Clear and consistent communication about ESG goals and progress is essential for managing expectations and preventing disputes. Companies should ensure that their public statements about ESG initiatives align with their actual performance, avoiding discrepancies that could lead to investor dissatisfaction or legal challenges.

4. Engage stakeholders: Regular engagement with stakeholders – including investors, employees, and local communities – can help companies address concerns early and prevent disputes. By fostering open dialogue and responding to stakeholder concerns in a timely manner, businesses can build trust and avoid litigation.

5. Prepare for litigation: Despite best efforts to mitigate risks, ESG disputes may still arise. Companies should have a plan in place to manage ESG-related litigation, including engaging legal experts with experience in ESG disputes and ensuring that their legal teams are prepared to handle these complex cases. 

Conclusion

As ESG factors become increasingly important in the business world, companies must be vigilant in managing the legal risks associated with their environmental, social, and governance commitments. The rise of ESG disputes underscores the need for businesses to integrate ESG considerations into their operations, strengthen compliance programmes, and maintain transparent communication with stakeholders. By doing so, companies can not only reduce the likelihood of costly disputes but also enhance their reputation as responsible corporate businesses.

The Hamlins Commercial Disputes team has a depth of experience in resolving disputes swiftly and painlessly, and provides sensible, practical solutions and sound advice. We understand individuals and businesses need realistic solutions to their issues and we take a commercial approach, providing pragmatic and straightforward advice to guide clients to the route best suited to their situation.

For more information or advice on managing ESG disputes, please get in touch.