Financing Litigation: A Pathway to ESG Compliance

Understanding Litigation Financing

Litigation financing for ESG, a relatively recent phenomenon in the legal landscape, has emerged as a powerful tool for individuals and entities seeking access to justice and redress for grievances. It involves the provision of financial resources by a third-party funder to a claimant or group of claimants to pursue a legal claim. This funding typically covers the costs associated with litigation, including legal fees, expert witness fees, and court costs. In return, the funder receives a pre-agreed share of the proceeds if the litigation is successful. The emergence of litigation financing has significantly democratised access to justice, particularly in complex and high-value cases where the costs of pursuing litigation can be prohibitive.

There are various types of litigation financing, each with its own implications for legal cases. Third-party funding, the most prevalent form, involves an external funder providing non-recourse funding to the claimant. This means that the funder only recoups their investment if the case is successful. Contingency fees, another common type, allow lawyers to take on cases without upfront payment from the client, instead receiving a percentage of the damages awarded if the case is won. Both third-party funding and contingency fees have played a crucial role in enabling individuals and businesses to pursue meritorious claims that they might not otherwise have been able to afford.

The litigation financing industry has experienced significant growth in recent years, driven by several factors, including increasing litigation costs, a growing awareness of the potential returns from successful litigation, and a more favourable regulatory environment in certain jurisdictions. According to a report by Burford Capital, a leading litigation finance provider, the global litigation finance market was estimated to be worth $11.3 billion in 2020 and is projected to reach $25.9 billion by 2028 (Burford Capital, 2021). This growth reflects the increasing acceptance of litigation financing as a legitimate and valuable tool in the legal system.

The Intersection of Litigation Financing and ESG

Environmental, Social, and Governance (ESG) criteria have become increasingly important in modern investment and corporate strategies. ESG factors encompass a wide range of issues, including environmental impact, social responsibility, and corporate governance practices. Investors and corporations are increasingly incorporating ESG considerations into their decision-making processes, recognising that these factors can have a significant impact on long-term value creation and sustainability. Litigation financing has emerged as a powerful tool for advancing ESG goals by enabling stakeholders to hold corporations accountable for environmental damage, social injustices, and governance failures.

Litigation financing can support ESG initiatives in several ways. Firstly, it can provide funding for lawsuits against corporations that have engaged in environmentally harmful practices, such as polluting waterways or emitting excessive greenhouse gases. Secondly, it can support claims against companies that have violated labour laws, engaged in discriminatory practices, or failed to uphold human rights standards. Thirdly, litigation financing can be used to challenge corporate governance failures, such as breaches of fiduciary duty or insider trading. By providing financial resources to pursue these types of claims, litigation financing can help to level the playing field and ensure that corporations are held accountable for their actions.

Several case studies illustrate the successful use of litigation financing for ESG purposes. For example, in 2019, a group of indigenous communities in Ecuador secured funding from a litigation finance firm to pursue a claim against Chevron for environmental damage caused by oil drilling in the Amazon rainforest. The case, which had been ongoing for over two decades, resulted in a $9.5 billion judgment against Chevron (Aguinda v. ChevronTexaco, https://www.earthrights.org/case/chevron-ecuador/). In another example, a group of investors filed a class action lawsuit against Volkswagen in 2015, alleging that the company had misled investors about its emissions testing practices. The lawsuit, which was partially funded by a litigation finance firm, resulted in a $14.7 billion settlement (In re Volkswagen “Clean Diesel” Mktg., Sales Practices, & Prod. Liab. Litig., https://www.lieffcabraser.com/case/volkswagen-emissions-fraud/). These cases demonstrate the potential impact of litigation financing on both the legal and corporate sectors in advancing ESG goals.

Challenges and Considerations in ESG Litigation Financing

While litigation financing offers significant potential for advancing ESG goals, it is essential to acknowledge the potential risks and ethical considerations associated with this practice. One key concern is the potential for conflicts of interest, particularly when funders have a financial stake in the outcome of the litigation. It is crucial to ensure that funding decisions are based on the merits of the case and not on the potential financial returns. Transparency and disclosure are essential to mitigate this risk.

The regulatory landscape surrounding litigation financing and ESG is evolving rapidly. Some jurisdictions have introduced specific regulations governing litigation financing, while others are still developing their regulatory frameworks. For example, in the United States, several states have enacted legislation regulating litigation financing, including disclosure requirements and restrictions on certain types of funding arrangements. The European Union is also considering introducing regulations on litigation financing. These developments highlight the need for lawyers and investors to stay abreast of the latest regulatory changes and ensure that their activities comply with applicable laws and regulations.

The viability and sustainability of ESG-focused litigation financing are subject to ongoing debate among various stakeholders. Investors are increasingly interested in the potential returns from ESG investments, including litigation financing. Lawyers are exploring the use of litigation financing to pursue ESG-related claims on behalf of their clients. Corporations are facing growing pressure from investors and other stakeholders to improve their ESG performance. The perspectives of these stakeholders are shaping the future of ESG litigation financing.

Future Trends and Recommendations

Litigation financing has emerged as a significant force in advancing ESG goals, enabling stakeholders to hold corporations accountable for their actions and driving positive change. The growth of the litigation financing industry, coupled with the increasing importance of ESG considerations, suggests that this trend is likely to continue in the future. As the regulatory landscape evolves and the perspectives of various stakeholders become clearer, the role of litigation financing in promoting ESG compliance is likely to become even more prominent.

For lawyers and investors seeking to engage with litigation financing in an ESG context, several practical recommendations can be offered. Firstly, thorough due diligence is essential when selecting a litigation finance provider. Factors to consider include the funder’s track record, expertise in ESG-related litigation, and ethical standards. Secondly, establishing clear and transparent partnership agreements is crucial to ensure alignment of interests and avoid potential conflicts. Thirdly, lawyers and investors should consider the broader implications of their investment and legal strategies on ESG outcomes, fostering a proactive approach to responsible financing.

Litigation financing offers a powerful pathway to ESG compliance, empowering stakeholders to hold corporations accountable and drive positive change. By understanding the intricacies of litigation financing, navigating the evolving regulatory landscape, and adopting a proactive and responsible approach, lawyers and investors can leverage this tool to advance ESG goals and contribute to a more sustainable and equitable future. It is incumbent upon all stakeholders to consider the broader implications of their actions and embrace the potential of litigation financing to promote ESG compliance and create a more just and sustainable world.