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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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MWE Guide Outlines Compliance Priorities for Litigation Fund Managers

By John Freund |

Fund managers exploring or operating within the litigation finance space face a complex and often underappreciated regulatory landscape. A recent guide from McDermott Will & Emery provides a detailed roadmap for how litigation fund managers can navigate this evolving environment, with a particular focus on securities laws, fiduciary obligations, and conflicts of interest.

The memo serves as a primer on key legal considerations, especially for those managing funds in the United States or marketing to U.S. investors. It emphasizes that litigation finance funds may be subject to the same regulatory scrutiny as traditional investment vehicles. Managers must consider registration requirements under the Investment Advisers Act of 1940, as well as exemptions, such as those for foreign private advisers or venture capital fund advisers. The authors also explore the application of the Investment Company Act of 1940, cautioning that even non-traditional funds can be pulled into regulatory oversight if structured improperly.

Fiduciary duties take center stage in the memo’s discussion of fund governance. Managers are reminded that they owe duties of care and loyalty to their investors, which can become complicated in litigation finance where the fund’s interests may diverge from those of claimholders or legal counsel. Disclosure, consent mechanisms, and robust internal compliance protocols are strongly recommended to mitigate potential conflicts.

The guide also highlights the increasing focus by regulators and policymakers on transparency and ethical boundaries within the litigation finance industry. Fund managers are urged to prepare for heightened scrutiny and evolving disclosure expectations.

Commercial Regulatory Issues

Op-Ed in The Hill Targets Foreign Investment in Litigation Funding

By John Freund |

A growing chorus of voices is calling for greater scrutiny of third-party litigation funding, with a new op-ed warning that opaque capital is compromising the integrity of the U.S. civil justice system.

An opinion piece in The Hill by Lindsay Lewis and Phil Goldberg of the Progressive Policy Institute argues that American courtrooms are being quietly transformed into a financial marketplace, with hedge funds, foreign sovereign wealth funds, and other investors channeling billions into U.S. litigation. The authors highlight an alleged lack of disclosure, warning that litigation funders can influence or outright control high-value cases, often without the knowledge of courts, litigants, or the public.

The litigation funding industry has long cited a lack of evidence regarding such accusations, yet the pressure from industry critics persists. The article points to mass torts as a flashpoint for abuse, claiming funders are building lawsuits “too big to fail” by bankrolling advertising campaigns and scientific claims to pressure companies into mass settlements regardless of the merits.

The op-ed also echoes previously-made critiques around national security and economic concerns, citing recent reports of Chinese, Russian, Saudi, and Emirati-backed funds investing in U.S. litigation. These foreign entities, the authors argue, could use lawsuits to access sensitive corporate data or strategically target American companies, all while avoiding U.S. taxes on any litigation proceeds.

Lewis and Goldberg call for reforms mandating disclosure of litigation funders, establishing ethical walls between financiers and legal strategy, and regulating foreign involvement in U.S. lawsuits.

Commercial Regulatory Issues

Increased Access to Justice for Claimants to Take on Powerful Organisations in Court

Ordinary people will have greater access to justice thanks to Government’s plans for legislation to help claimants receive the funding they need to take on powerful organisations in court.    

Since the Supreme Court ruling in PACCAR in 2023, claimants have faced uncertainty about whether they can secure funding from third parties in order to bring a civil case against a well-resourced opponent.  

Third-party litigation funding allows people to bring complex legal cases against powerful organisations when they cannot afford the costs themselves. Under these arrangements, a funder pays for the legal case in exchange for a share of any compensation won.   

The PACCAR judgment, which classed these funding arrangements as “Damages Based Agreements”, made it harder to access to third-party funding and has resulted in a drop in collective action lawsuits. Today, the government is confirming that it will take action to remove this barrier to justice by clarifying that Litigation Funding Agreements are not Damages Based Agreements, protecting victims and claimants.   

Minister for Courts and Legal Services, Sarah Sackman KC MP, said:  “The Supreme Court ruling has left claimants in unacceptable limbo, denying them of a clear route to justice. Without litigation funding, the Sub-postmasters affected by the Horizon IT scandal would never have had their day in court. These are David vs Goliath cases, and this Government will ensure that ordinary people have the support they need to hold rich and powerful organisations to account. Justice should be available to everyone, not just those who can afford it."   

David Greene, co-president of the Collective Redress Lawyers Association (CORLA) said: “This announcement is good news for ordinary people seeking access to justice. However, whilst the government has recognised the urgent need to reverse PACCAR, the proposal to regulate litigation funding agreements as part of the proposed legislation is likely to add considerable delay. We therefore urge the government to introduce an urgent bill to reverse PACCAR, and that the thornier issue of what light touch regulation of litigation funding might look like be considered separately.”

The UK’s legal services industry is worth £42.6 billion a year to the economy, with a highly skilled workforce of 384,000.  

A new framework will ensure that agreements are fair and transparent, so that third-party litigation funding actually works for all those involved.  These changes follow a comprehensive and wide-ranging review by the Civil Justice Council (CJC), published earlier this year. The government will continue to consider the recommendations set out in the CJC review.