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ESG & Sustainability

ESG & Sustainability

Litigation Fund

Damian Carnell
November 30, 2022

WHATS THE STORY?

Soros backed Aristata Capital has launched "Litigation Fund1" to fund ESG no-win, no-fee litigation.

The first close raised £40mill, and the June 2023 final close hard cap is £100mill.

Soros-backed Aristata fund aims to turn ESG litigation into a profitable investment

ESG-related litigation funds offer “decent” returns and a positive reputational impact from taking part in cases that generates widespread interest

https://www.funds-europe.com/october-2022/esg-soros-backed-aristata-fund-aims-to-turn-esg-litigation-into-profitable-investment

The fund IRR target is 20%, and the fund mechanics mimic a classic PE closed end fund.

WHY DOES IT MATTER

The global litigation funding market will be c.$18 Billion by 2025, growing in excess of 8% p.a.

The US market is much bigger than Europe, but in 2020 Europe had 46 litigation finance fund managers and even a fund of funds.

Non-compliance with ESG standards, underpinned by the European Representative Action Directive will drive litigation growth. So too will extensive new disclosures.

TCFD
ISSB
GRI
EFRAG and similar.

Some 50,000 EU companies must disclose under EFRAG disclosure standards from 1 January 2024.

Corporate sustainability reporting

EU rules require certain companies to report annually on the social and environmental impacts and risks related to their activities.

https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en

Double Materiality means investors demand investment grade information. When this is non-compliant, in error or misleading, class action lawsuits for investment loss will add to the list of litigants suffering actual corporate harm.

DOUBLE MATERIALITY & D&O INSURANCE - CORGRO

DOUBLE MATERIALITY & D&O INSURANCE

https://corpgro.co.uk/blog/www-corpgro-co-uk-double-materiality-do-insurance/

And for companies it gets worse. Check out the Principles of Responsible Investment backed Inevitable Policy Response: 2022 Policy Gap Analysis.

PRI | Inevitable Policy Response

Sustainability impacts on a wide range of ecological and human issues, from the preservation of natural resources to a commitment to human and societal wellbeing.

https://www.unpri.org/sustainability-issues/climate-change/inevitable-policy-response

This maps potential global law changes on climate. The breach of law and following litigation exposure scope is expanding fast.

Traditional litigation funders have a high return threshold. This new 20% IRR target will mean there is already a huge untapped pipeline of viable cases.

CORPGRO NEWSPOINT VIEW

Knowledge of an ESG litigation fund is likely to affect a company’s ESG management, both ESG positive actions and the approach to Sustainability and ESG disclosures.

A company facing litigation on ESG is likely to see damaged stakeholder relations, and on top, hiked insurance costs.

Insurance is not limitless; some activities will become uninsurable as risks rise. The choices are stark. Clean up the ESG profile to become insurable, boldly self-insure, or exit.

None of these are cost free. Aside from the uptick in annual cost there will likely be a strong rise in the size and incidence of write downs of "Stranded Assets".

D&O insurance rates will rise too as hostile litigation hots up. Directors and companies should check their D&O level and footprint meets the need.

For executive incentives, adding small pay to a DE&I or Carbon metric is tinkering. The drivers of change mean that the "What Next in ESG incentives" needs serious thought.