The sharp rise in the number of lawsuits being brought against companies on ESG-related issues over the past decade is being driven by the expanding scope and scale of legal jurisdiction, with legal actions reaching further down the supply chain and encompassing broader legal interpretations, WBCSD research finds.
With lawsuits against companies concerning ESG issues growing by 25 percent over the last three decades, new analysis from WBCSD sheds light on the drivers of that increase, driven by three key trends:
1. More litigations involving supply chains: There is an increase in ESG-related litigations against companies due to their subsidiary companies and suppliers.
2. Policy and regulatory frameworks: There is an increase in litigations citing pre-emptive due diligence requirements related to reporting or maintaining a “standard of care.”
3. Soft laws are entering the Court: Most due diligence-related cases are based on soft law sources, such as the Biodiversity Conventions, OECD Guidelines and more.
The expanded legal landscape, along with increased public and regulatory scrutiny, has also widened the scope of areas that boards of directors must consider to ensure good governance, manage risk, and enhance the resilience of a business.
“The combination of increasing ESG-related lawsuits and the interest among consumers in seeing companies take care of their environmental and social responsibilities has created a new paradigm in which organizations must operate.” “Within this new legal paradigm, there is an increase in lawsuits citing due diligence requirements related to reporting or maintaining a “standard of care” said Khaliun Purevsuren, Associate, and Valentina Baiamonte, Senior Associate at WBCSD, authors of the paper “Uncovering Trends: What is Behind the Increase in ESG-Related Litigations?”. The “double materiality” concept, which focuses on the impacts that a company has on the broader global environment and society and vice versa , emphasizes the need for companies to consider their whole value chain of operations — both upstream and downstream — and to assess and disclose their impacts on ESG material issues from a holistic perspective.
The recently introduced “Duty of Vigilance” law in France is a significant example of the need for companies to carefully consider their materiality and disclosures because, as this new research shows, significant legal risks can occur far beyond operations directly controlled by a company. In this light, this new report encourages legal officers and boards to safeguard their company by broadening their focus and account for a wider pool of stakeholders could be impacted in the company’s operations, for instance, customers, investors, local communities.
The research also makes clear that the rise in ESG-related litigations is promoted by lawmakers are increasingly factoring in 'double materiality' considerations within new legal frameworks and interpretations. To reduce their exposure to ESG-related legal risk, companies need to disclose clear “double materiality assessments” establishing clear impacts and dependencies between a company’s operations, including subsidiaries and supply chains, and ESG material topics, such as environmental and social issues that the company and its operations may impact or aggravate . Companies that perform robust double-materiality assessments can also consider solutions to enhance the traceability and monitoring of their supply chains and suppliers, to reduce information loss, and ensure that corporate policies and suppliers’ codes of conduct are in place.
In sum, WBCSD new report argues that a consistent and comprehensive disclosure strategy aligned with ESG targets and commitments is pivotal to safeguarding a company from growing legal risks.
More resources to future-proof businesses are found here: Resources - World Business Council of Sustainable Development.