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How litigation funding drives progress in the ESG agenda

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

With some strategic planning, litigation funding can act as a way to leverage an ESG agenda among law firms and their corporate clients

Litigation, by definition, acts as a deterrent, often leading to environmental, social and governance (ESG) improvement; yet, at the same time, litigation is expensive.

Litigation funding — the payment by a third party of a claimant’s legal fees and other costs associated with the litigation, in return for a portion of any successful award of damages — is one way to democratize funding sources and is one of the most common ways to increase access is to justice.

A driving force in access to justice

Litigation funding improves access to justice in three ways, according to Lucy Glyn, Director at Exton Advisors, an independent advisory business in disputes finance. First, it removes the cost barrier for a claimant wishing to pursue a claim using experienced legal teams, and instead allows claimants to focus on the merits of their case rather than being burdened by financial concerns. Litigation funding also provides the financial stability and support needed to pursue legal action without compromising on the quality of representation or legal strategy.

Next, litigation funding provides an alternative source of finance for claimants who would like to free up the capital they do have to be used for other business projects. And finally, it allows a group of claimants to come together to challenge corporate misconduct or negligence on issues that have broader public interest such as consumer rights, environmental harm, or human rights. Individually the level of harm may not be sufficient to pursue a claim, but because claimants may be in large and disparate groups, some specialist litigation funders can bring together relevant stakeholders to inform them of their rights and help to coordinate the process to achieve redress.

Litigation is increasingly being used by private consumer and shareholder plaintiffs to make claims across a number of areas of ESG to include allegations of greenwashing, perceived supply chain abuses, and alleged misstatements or omissions regarding sustainability statements. And now, litigation funding is being used to support a range of ESG-related claims, including environmental pollution, climate change, product liability, human rights abuses, and corporate misconduct.

And the trend is likely to continue. Key players in the litigation funding space are already pursuing ESG investments or planning to do so. “Essentially, litigation funding is a way for impecunious claimants to pursue a claim against a company that it may ordinarily not be able to afford, enabling them to ultimately to hold companies to account for ESG failures,” Glyn explains.

Using litigation funding to drive change in ESG

Investors are a key driver in the use of litigation funding, says Glyn. “They [investors] are increasingly recognizing the potential of litigation funding as a powerful tool to deploy their capital strategically and serve as a catalyst for changes to promote responsible business practices,” she adds. More specifically, investors supporting legal action can encourage companies to improve their performance, comply with regulations, and adopt sustainable practices.

Litigation can also serve as a strategic tool to help establish legal precedents and landmark court decisions, setting the stage for future legal actions and regulatory changes. Investors funding cases that challenge existing laws or seek to strengthen legal protections related to the environment, human rights, or governance, can therefore drive systemic change and create a more favorable legal environment for ESG practices.

Indeed, investors are in a powerful position to leverage their influence to push for positive change within companies and whole industries by aligning their investments with specific ESG objectives. Investors can put pressure on corporate boards and management teams to prioritize ESG, enhance disclosure and transparency, and consider the long-term implications of their decisions.

When investors are considering ESG claims, they often look at investment criteria similar to any other commercial claim. For example, they will analyze: i) the significance and materiality of the ESG issue at hand and the impact of the alleged wrongdoing on stakeholders; ii) the regulatory environment and legal framework relevant to the ESG claim so that they understand the legal and regulatory risk that will be essential to assessing the potential return on investment; and iii) the collectability of the damages with regard to the financial strength of the defendant party.

On the horizon

Use of litigation funding in ESG-related claims is likely to expand. Areas in which this is likely to occur include public interest litigation that targets governments or public agencies for failing to implement or enforce environmental regulations, social welfare policies, or human rights obligations.

Litigation funding also could be used for legal actions challenging inadequate climate policies, insufficient environmental regulations, or the promotion of fossil fuel activities. Indeed, it has huge potential to be used strategically by investors of all sizes to drive the global ESG agenda.

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