How to protect your business in a changing world of ESG?

In today’s rapidly changing world, 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.

How to protect your business in fast evolving business world of today and avoid ESG litigation?

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. It is essential for the managers to understand the key drivers of ESG litigation.

Environmental litigation

Protecting our vital natural resources poses major challenges for governments. The issue of compliance with current environmental and climate laws has been a particular focus of public attention in recent years. Climate change litigation has surged in all jurisdictions, with businesses increasingly held accountable for environmental damage. Claims related to environmental damage, pollution, and non-compliance with environmental regulations are becoming more common. Additionally, businesses face claims for failing to disclose environmental 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.

In addition to civil litigation, in Poland there is also a threat of criminal corporate liability. Since 2022, companies who breached environmental rules can face criminal liability. For instance, a steel plant can be prosecuted for violating its permit to discharge pollutants into a waterway, even where no individual person is specifically identified regarding culpability.

Labour and social litigation

Labour and social regulations cover the legal framework and fundamental social rights that regulates industrial relations, employment and social policies across Europe. It includes national, EU and international legislation. The labour and social litigation refers to 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 organizations. 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 the increased risk of litigation.

Governance litigation

Corporate governance litigation usually includes M&A litigation, corporate control disputes, shareholders’ disputes or governance failures. Governance failures—such as lack of transparency, poor corporate oversight, or conflicts of interest—can expose businesses to significant litigation risks and reputational damage. Shareholders may bring 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 lawsuits from customers and regulators alike.

How ESG failures lead to legal action

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

Non-compliance with existing regulations and practices

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 unfair dismissal claims filed by employees.

This includes also breach of fiduciary duties by directors and officers. 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 lawsuits and other conflicts.

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.

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. The step to be taken are as follows:

1.?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.

2.?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.”

3.?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.

4.?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.

5.?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.