There is an increasing desire amongst PE firms to publicise
value creation through the use of bespoke metrics to measure
improvements and value derived from (ESG) policies including
improved reputational risk management; better and more transparent
governance; better health, environmental and safety standards;
heightened efficiency; less disruption as a result of sanctions and
These and other opportunities inherent in a robust ESG strategy
are generally well-understood by PE firms. However, commensurate
appreciation of growing legal risks for buyout firms that
communications around ESG strategy and commitments entail, is less
There is more to this evolving area than simply general
compliance and being a good corporate citizen. Real reputational,
legal, political and financial consequences can arise from failing
to align business practice with ESG statements and policies. Such
statements and policies often contain laudable public commitments
and pledges around ESG, and acknowledgements of control of, and
responsibility for, such matters by private equity management and
boards. However, these statements and policies have legal content
and significance that must not be overlooked; they potentially
create misstatement litigation exposure at board, operating and
portfolio company levels.
We are seeing the mass tort litigation environment becoming
increasingly active with claims sponsored by non-governmental
organisations and no-win, no-fee lawyers trawling for cases
using public literature in which broad statements around ESG
commitments and control structures are made. For now,
multinationals are in the spotlight, but attention may not stop
there. In addition, litigation against parent companies based on
overseas human rights and environmental impacts has passed
threshold admissibility challenges in British, Canadian and Dutch
courts. This has brought the issue of fund and portfolio company
separateness into sharp focus. The litigation risk level for buyout
firms is increasing as these developments in litigation practice
align with heightened transparency and reporting of ESG issues. For
example, buyout firms frequently publish various ESG reports for
investors, which can create liability issues where standards are
not met. Further, deal teams frequently consider issues such as
modern slavery, anti-bribery and environmental factors during
diligence. However, firms must be careful about sharing information
with non-lawyer consultants or NGOs as this will not be protected
by the cloak of legal privilege and could be used against the firm
in future litigation, should adverse ESGimpacts materialize.
What can deal teams do to minimise the risk of ESG based
litigation? In our view, prospective portfolio investments should
be assessed and current portfolio investments should be monitored,
in light of fund ESG commitments. Buyout firms' claims must be
supported by appropriate diligence that matches up to
internationally recognised standards. Structured, systematic and
precise internal control systems with appropriate and expert legal
input are required.
There is enormous opportunity for those focused on sustainable
investment but there is a real and increasing need to approach this
as a fundamental risk mitigation issue.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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