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A Snapshot of ESG in Litigation Funding

August 18, 2022

A Snapshot of ESG in Litigation Funding

As the litigation funding market continues to grow and evolve, funders are placing a higher value on environmental, social and governance (ESG) issues. This development raises questions about the connection between ESG and litigation funding, how litigation funders are currently addressing ESG, and what the future of ESG in litigation funding will look like. The following article will offer answers to those questions and act as a general overview of the state of ESG in litigation funding.

What is ESG and Why Does it Matter?

ESG encompasses environmental issues like air or water pollution, social issues such as customer privacy and data security, and governance issues like transparency. ESG pursuits have come to the forefront of many corporate agendas over the last decade. In some cases, this focus may be self-imposed, but it’s often a legal requirement as well. Even as companies champion ESG to satisfy customers and shareholders, they don’t always stay in compliance with those values and/or laws. As the number of ESG-related laws and regulations increases, compliance will become a greater focus for companies and investors alike. Litigation exists as both a deterrent to, and a regulator of, ESG non-compliance. ESG cases in response to corporate non-compliance create the connection between ESG and litigation funding. As Tets Ishikawa, Managing Director at LionFish Litigation Finance stated, litigation funding of ESG cases has a key role to play in helping businesses meet their ESG goals. Corporate executives aren’t the only ones concerned about ESG issues, however; savvy investors also recognize the importance of ESG. Responsible investing in ESG causes is often an obligation for pension fund managers and other asset allocators. Even when that is not the case, investors increasingly see ESG as a priority, with 85 percent of investors interested in sustainable investing.

Litigation Funders Pursuing ESG Cases

Major players in the litigation funding arena are already talking about or pursuing ESG investments. Funders like Therium, Woodsfood, North Wall Capital, and Litigation Lending Services have prioritized ESG cases, and more funders will likely join them in the coming years. One leading litigation funder, Therium, emphasizes the importance of ESG as part of broader responsible investing efforts. Funding ESG legal action, the funder states, makes justice more accessible for those harmed in ESG breaches. Litigation funding helps those claims be brought, even when the claimants don’t have the resources to fund extensive legal battles. Woodsford is another litigation funder touting the value of ESG litigation. Bob Koneck, Director of LitFin and legal counsel at Woodsford, emphasized the potential of ESG litigation as a reputation-enhancing tool for companies. He claims that companies can position themselves as ESG leaders through litigation, while also recovering money to use toward additional ESG initiatives. This is a unique view on the value of ESG litigation that speaks to the potential these cases have for corporations. This past week’s news cycle illustrates how cemented the concept of ESG litigation has become within the litigation funding ecosystem, as both new entrants and entrenched players are making waves on the topic. North Wall Capital recently announced a $100 million investment into law firm Pogust Goodhead, with the aim of funding ESG cases specifically. Fabian Chrobog, Chief Investment Officer of North Wall, argues that ESG investment makes practical sense, as these cases maintain a higher probability of settlement than most other claim types. And Paul Rand, Chief Investment Officer of Omni Bridgeway, recently revealed that the longtime funder is planning the launch of an ESG Finance fund. According to Rand, Omni is currently testing bespoke techniques for valuing and assessing ESG risk management.

ESG Cases Funded by Litigation Funders

Airbus Case Funded by Woodsford One prominent ESG case organized and funded by a litigation funder, is the Airbus case financed by Woodsford. Investigations by international authorities including the US Department of Justice revealed that Airbus SE, a manufacturer of military and civilian aerospace products headquartered in Europe, had participated in a widescale bribery and corruption scheme. In 2020, the company was forced to pay billions of dollars of fines to resolve these bribery charges, causing a major dip in its share price. Airbus investors incurred serious losses due to these violations of ESG principles and Airbus’ failure to inform the public in a timely manner about its conduct. That’s where litigation funder Woodsford got involved. Woodsford organized the affected investors into a special purpose entity, Airbus Investors Recovery Limited (AIRL), which is currently pursuing legal action against Airbus in Amsterdam to recover losses. The ESG team at Woodsford is funding and organizing this action. Without such involvement, the claimants may not have been able to pursue action against a large company with such deep pockets. Being able to hold major corporations like Airbus accountable for their egregious ESG breaches is one of the most significant benefits of litigation funding. Litigation Lending Services’ “Stolen Wages” Claim Litigation Lending Services, an Australian litigation funder, funded another notable ESG case related to stolen wages. This class action began in September of 2016, and was a lawsuit on behalf of Aboriginal and Torres Strait Islander workers in Australia. The workers had been subject to ‘protection’ legislation from the late 1800s up to the 1970s. This wage control legislation led to tens of thousands of indigenous workers across a variety of industries never receiving their full wages, estimated to be millions of Australian dollars in total. Wage violations like these fall under the governance portion of ESG. Litigation Lending Services offered its support to the case, which reached a settlement of $190 million in December, 2019. To date, the case is the largest human rights case in Australian history. The settlement brought resolution to more than ten thousand First Nations people. Both of these cases illustrate the potential of ESG, and the possibilities for more ESG cases and litigation funder involvement in the future. In Conclusion Global legal actions related to ESG issues like climate change are increasing, and the targets of these lawsuits are shifting to include more corporations over time, rather than just governments. It’s worth noting that environmental issues often get the most attention, but ESG litigation goes beyond just environmental claims. Lawsuits involving fraud, disclosure rule breaches, diversity and equity, misrepresentation, and health and safety issues all fall under the category of ESG litigation. Environmental claims have seen the largest growth in the last few years, but we can expect other types of ESG lawsuits to increase as well. Another factor driving additional ESG litigation is the lack of clarity surrounding what exactly constitutes ESG. The intense focus on ESG is fairly new, meaning parties are not in complete agreement on the definition of ESG and how it should be measured and reported. As the number of ESG group claims increases, there’s room for growth in the litigation funding market. This industry is constantly evolving to keep up with broader trends in litigation, including the evolution of ESG claims. For now, it’s clear ESG will have a key role to play in the future of litigation funding.

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A protracted downturn in litigation finance is drawing hedge funds and special situations investors to acquire legal-claim portfolios at deeply discounted valuations, in some cases as low as 10 cents on the dollar. The roughly $20 billion industry has been battered by tougher regulation, prolonged court timelines, and investor withdrawals, leaving traditional funders short of capital and creating an opening for opportunistic buyers.

As reported by Bloomberg, firms including Davidson Kempner Capital Management, Attestor, Fortress Investment Group, and Bench Walk Advisors are among those exploring purchases of distressed portfolios. In some transactions, buyers are reportedly assuming claims at no upfront cost, paying sellers only a contingent share if cases ultimately succeed.

The shift follows several high-profile setbacks for the industry. In March, a U.S. appeals court overturned a $16.1 billion judgment in favor of YPF SA investors against Argentina — a case backed by Burford Capital. Burford's share price dropped 47% on the news and is down roughly 42% year-to-date.

Zachary Krug of NorthWall Capital observed that lengthy court cases have become a structural problem and that traditional funders are "running out of cash," generating supply for distressed buyers. Adding to the pressure, the UK justice ministry has signaled intentions to introduce "proportionate regulation" of litigation funding agreements, reinforcing the case for consolidation as long-duration capital meets short-duration liquidity needs.

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According to a press release distributed via Newsfile Corp., the SPV will bundle active licensee agreements generating recurring royalty streams, copyright infringement claims against unlicensed users, ongoing and future litigation claims, and rolling receivables from expanded IP licensing activity. Distribution is planned via Rule 144A private placements to qualified institutional buyers in the United States and Regulation S offerings to international investors.

The company is targeting listings on the Luxembourg Stock Exchange and Euro MTF market, the Vienna Stock Exchange and its MTF segment, and other EU-regulated venues. Pro Music Rights has reported a single doubtful account of approximately $1.092 billion tied to its Q2 2024 financials, alongside 2024 reported revenue of $128.9 million against a net loss of $54.4 million, framing the SPV as a structural fix to the gap between contractual claims and realized cash flow.

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UK judges are paying closer attention to the commercial benefits flowing to lawyers and funders in class action proceedings, signaling a tougher review of who actually gains from collective litigation. The shift follows growing concern that funder returns and legal fees can dwarf the per-person compensation delivered to class members.

As reported by The Times, the recalibration is being driven in part by a recent Competition Appeal Tribunal ruling that rejected a proposed collective action over alleged Atlantic salmon price-fixing. The case, brought by proposed class representative Anne Heal and backed by Erso Capital, sought to represent up to 44 million UK consumers. Litigation costs were budgeted at £16 million plus VAT, with after-the-event insurance of £5.3 million, against estimated per-person damages of £1.61 to £8.77.

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