Navigating ESG risks: how to protect your business in a changing world

In today’s fast-evolving business landscape, Environmental, Social, and Governance (ESG) factors are no longer just buzzwords but have become critical elements that businesses must address to remain competitive and legally compliant. With increasing regulatory pressures, investor expectations, and societal demands, navigating ESG risks is essential for businesses. A failure to properly manage these risks can lead to legal liabilities, reputational damage, and financial losses.

This article examines how ESG factors contributes to litigation risks and outlines strategies for businesses to protect themselves against legal challenges in a rapidly changing world.

The litigation risks associated with ESG

As ESG awareness continues to grow, so too does the number of claims brought against companies for failing to meet their obligations in these areas. Understanding the key drivers of ESG litigation is essential.

Environmental litigation

Climate change litigation has surged globally, with businesses increasingly held accountable for environmental damage. Claims related to carbon emissions, pollution, and non-compliance with environmental regulations are becoming more common. Additionally, businesses face claims for failing to disclose climate-related risks to investors. In many cases, these claims are driven by activist groups, regulatory bodies, and even shareholders seeking to hold companies liable for contributing to climate change.

Social litigation

The “S” in ESG often triggers legal challenges relating to labour practices, human rights violations, and diversity issues. Businesses that engage in or fail to address unfair labour practices, discrimination, or unsafe working conditions face claims from employees, consumers, and non-governmental organisations (NGOs). With increasing regulations around modern slavery, human trafficking, and forced labour in supply chains, businesses that fail to adequately monitor and address these issues are at heightened risk of litigation.

Governance litigation

Governance failures—such as lack of transparency, poor corporate oversight, or conflicts of interest—can expose businesses to significant litigation risks. Shareholders may bring derivative lawsuits against directors and officers for breaches of fiduciary duties or unethical practices. Additionally, businesses that fail to ensure proper data privacy and cybersecurity governance face growing risks of class action lawsuits from customers and regulators alike.

How ESG failures lead to legal action

The litigation risks associated with ESG typically arise from three main areas:

Regulatory non-compliance

Governments worldwide are implementing stricter ESG regulations. Non-compliance with these laws can result in regulatory enforcement actions, fines, and civil lawsuits. For example, failure to comply with environmental regulations can result in costly environmental litigation, while violating labour laws can lead to employee class actions.

Misrepresentation or inaccurate disclosures

Companies that make misleading statements about their ESG performance or fail to disclose material ESG risks may face claims from shareholders or regulatory bodies. Increasingly, investors and regulators are holding companies accountable for misrepresenting their ESG credentials (so-called “greenwashing”) or failing to report ESG risks that could impact long-term financial performance.

Breach of fiduciary duty

Directors and officers have a fiduciary duty to act in the best interests of the company and its shareholders. This duty increasingly includes considering ESG risks. Failing to address material ESG risks or making decisions that harm the company’s sustainability can lead to shareholder derivative lawsuits, particularly if the company suffers financial harm as a result of ESG mismanagement.

Protecting your business from ESG litigation

While the risks are substantial, businesses can take several steps to protect themselves from the growing threat of ESG litigation:

Implement comprehensive ESG due diligence

ESG risks are complex and often hidden deep within a company’s operations or supply chain. Conducting thorough ESG due diligence is essential to identifying potential risks before they turn into legal liabilities.

Enhance ESG disclosures and reporting

One of the most common causes of ESG litigation is inadequate or misleading disclosures. Businesses should ensure their company’s ESG reporting is accurate, transparent, and aligned with recognised frameworks. Avoid overstatement of ESG initiatives that could later be challenged as “greenwashing.”

Strengthen supply chain oversight

Many ESG-related claims arise from issues within a company’s supply chain, especially those linked to environmental harm or labour violations. Implement robust supply chain monitoring and auditing systems to ensure your suppliers comply with environmental regulations, labour standards, and human rights obligations. Contracts should include enforceable ESG clauses, holding suppliers accountable for compliance.

Train your leadership and employees on ESG compliance

Effective governance begins at the top. Businesses should ensure that their board of directors and senior management are aware of their ESG responsibilities and how these tie into their fiduciary duties. Provide regular training on emerging ESG risks, compliance obligations, and litigation trends. This is particularly important as regulators begin to hold directors personally accountable for ESG failures.

Develop an ESG-focused crisis management plan

Even with the best ESG practices, crises can occur. Having a well-defined crisis management plan that addresses potential ESG incidents—such as environmental disasters, labour strikes, or governance failures—can help mitigate the impact and reduce the risk of litigation. Businesses plan should include protocols for legal review, communication strategies, and swift corrective action to resolve the issue.

Monitor evolving ESG regulations and case law

ESG regulations are evolving rapidly, and courts are increasingly interpreting laws through the lens of ESG obligations. Being proactive in anticipating regulatory changes will help businesses avoid compliance breaches and potential lawsuits.

Seek legal advice early

Finally, obtaining legal guidance from experienced ESG advisors is crucial. Engaging legal experts early in your ESG planning will not only help ensure compliance but also reduce the risk of litigation.

By taking proactive steps to identify risks, protect against misstatements, and develop robust ESG policies, businesses can better safeguard themselves from the growing threat of ESG litigation