Mean green litigation machine

Last month, Oxfam, Friends of the Earth and Notre Affaire à Tous served BNP Paribas with legal action in relation to the bank’s fossil fuel financing activities. The claimants allege a breach of France’s 2017 environmental vigilance laws, which include obligations to take ESG requirements into account as a matter of policy.

In a recent article, we explored the topic of ESG litigation, discussing possible claimants, which forms legal action could take and the mitigating measures GPs can look to. With the first ever proceedings against a private bank now underway, there are new questions to consider.

In order to claim damages in a lawsuit, the affected must prove loss suffered. However, as the subject of the proceedings is the Earth’s climate, it is unclear how this would be established. Similarly, as the climate affects every living being on the planet, the question remains who exactly can litigate on its behalf. While the activist claimants are targeting the “fundamental role the financial industry has been playing in the climate crisis”, a more concrete answer is claims brought by shareholders and stakeholders. These parties have a likely base to claim loss of investment due to a firm’s or company’s unsuitable ESG strategy.

First jurisprudence is important here as it will set precedent for later proceedings or references, depending on the jurisdiction. Further, while international legislation designing entire frameworks such as the SFDR takes centre stage, it should not be forgotten that the claim against BNP was brought on the basis of a national law. The former increase both the number of the latter and their firepower.

The above-mentioned legal principles still apply and, at first glance, leave a suit such as the one against BNP seemingly toothless. However, they can result in a trial by media over alleged greenwashing, which carries reputational risk. For an industry such as private equity where reputation is a cornerstone of the relationship with LPs, this raises serious concern. Additionally, whether successful or not, lawsuits take up enormous time and resources.

Impact (on) investing
Correspondingly, a majority of market players cite a fear of these claims as the primary reason for holding out on sustainable investment strategies and marketing their sustainable credentials. In a recent poll conducted by IQ-EQ, two-thirds of respondents confirmed this. The company’s ESG director, Lyons O’Keeffe, commented: “The poll result is concerning, but not surprising. The lack of clarity from global regulators is prompting investors to avoid ESG labelling because of potential repercussions linked to greenwashing.

“Our constant interactions with clients demonstrate that it’s not for the want of trying, as investors are very interested in the sector, however they fear miscommunication will damage their reputation, or worse. This suggests that clients require additional support to engage in the right way; it’s key that the investment industry does not shy away at this critical time.”

While the courts grapple with questions of jurisprudence, the industry appears to be holding its breath before committing to sustainability. But the main takeaway here should be that the time for marketing speech is over. GPs need to roll up their sleeves and embed ESG into every vein running through their ecosystem – all the way from the firm through the fund, the investment strategy and down into the portfolio.

However substantiated, the mean green litigation machine could hit anyone and a ‘show, don’t tell’ approach is the best way to defend and mitigate negative outcomes.