Despite ‘Anti-Woke’ Political Pushback in the U.S., Big Companies See ESG Risk on the Horizon

There might be some political debate about the motivations behind the environmental, social, and corporate governance (ESG) movement here in the United States—especially at the state level, where at least 19 states have proposed some form of “anti-woke” legislation. 

But there’s no debating this: The respondents to Baker McKenzie’s latest “The Year Ahead” survey cited ESG disputes as a burgeoning source of risk at their companies. For the seventh year, the firm asked senior legal and risk professionals from companies with more than $500 million in revenue what they anticipate in the year ahead. In this year’s survey, ESG was by far the type of dispute that the 600 respondents—professionals based in the UK, the U.S., Singapore, and Brazil—cited most frequently as a potential risk to their organizations. 

Almost three-quarters (73%) of respondents cited ESG disputes as a source of risk for 2024. ESG far outpaced the second-most-cited risk source—employment disputes, which were mentioned by 52 percent of respondents. The number citing ESG was up from 58 percent last year, when it was the second-most-cited source of risk behind cybersecurity/data. This year, cybersecurity/data fell from the top of the table; whereas 62 percent of respondents mentioned it last year, it came in sixth this year, cited by just 34 percent of respondents.

Peter Tomczak, co-chair of Baker McKenzie’s global dispute resolution practice group who is based in Chicago, said in an interview Wednesday that the “breadth” of ESG is part of what is fueling clients’ concerns about it, along with its relative newness. “It encompasses such a wide variety and broad scope of potential disputes: anything from the ‘E’ to the ‘S’ to the ‘G,’” he said. Tomczak added that the “sheer amount of regulation” on the ESG front has clients’ attention.

“I don’t think it’s controversial to say the U.S. is politically paralyzed on ESG right now. But even in that paralysis, you have the anti-ESG movement—you have attorneys general who are sending out letters and trying to investigate things—and you have climate change litigation and other forms of litigation—plastics is one that seems to be on the horizon,” he said. “While we’re sitting here, Europe is just marching ahead,” said Tomczak, referencing the E.U.’s Corporate Sustainability Reporting Directive, which regulates the social and environmental information European companies have to report and which went into effect last year. 

The firm’s write-up of the survey results noted that while there might be some pushback to the ESG wave here in the U.S., “the tide of change largely flows one way.” Of particular note on the environmental front, the report points out, there are currently more than 2,000 active climate change cases around the world, with key decisions expected in several in the coming year. And although a recent analysis by the London School of Economics found the rate of new climate cases slowing, plaintiffs are expanding their targets in those suits, including to defendants in the financial services industry. The types of claimants are also expanding to include developing countries and small island nations. 

The perceived risk from ESG disputes is widespread. ESG ranked tops among survey respondents in industries including energy, mining and infrastructure, financial institutions, healthcare and life sciences, industrials, and manufacturing and transportation.

The rise in concern about ESG in the Baker McKenzie study jibes with something noted in a similar survey of more than 400 in-house litigation leaders based in the U.S. and Canada released by Norton Rose Fulbright last week. One in 10 respondents to the Norton Rose research reported that they experienced ESG-related litigation last year, up from just 2 percent in 2022. 

Risk, meet reality.

When asked in the Baker McKenzie survey which prong of ESG presents their companies with risk, respondents leaned heavily toward environmental (45%) and governance (44%), but the number for social risk (22%) doubled year-over-year. Tomczak said the growing concern over the social prong of ESG risk coincides with a growth in concern about employment disputes, and the two would seem to be related. 

“I think when you put yourself in a client’s shoes looking at risk, you can’t remove the human element of seeing this as new and reacting to it both in terms of scope and the uncertainty around it,” Tomczak said. Some risks that have been present for longer than ESG, he pointed out, have been previously addressed. “You have a framework and kind of a perspective to address it,” he said of more well-established risks, such as cybersecurity. “I think that influences some of the responses we’re seeing.”

From: Litigation Daily