Environmental, Social and Governance (ESG) continues to dominate headlines, and we’re seeing increased investor interest in its application to the shareholder litigation space.
Over the next two months, six non-US recovery efforts have registration deadlines where investors can apply environmental, social, and governance (ESG) factors to prioritize the opportunities.
Like investment ESG, litigation ESG enhances decision-making at the margin. For investments, the primary concern is a return for risk. For litigation, it’s potential recovery for risk. When choosing among litigation matters competing for limited internal resources, or if fund losses are ‘close’ to pre-set threshold amounts in securities litigation policies, the potential ESG benefits of suit can inform participation activity.
This article considers the upcoming matters from an ESG perspective, providing a good starting point for thinking about the inclusion of ESG factors in governance policies and procedures.
The Six Matters with Upcoming Deadlines
Organizers are pursuing recovery efforts involving companies in several countries. Core claims in all six matters can be tied to Governance (G), Environmental (E) and Social (S) factors.
|Wirecard AG (against Ernst & Young)||Germany||4/15/2021 (soft deadline)||The company’s former auditors certified financials that included $2B cash that apparently never existed.|
|Glencore plc||UK||5/30/2021 (soft deadline)||The company allegedly engaged in bribery of foreign government officials.|
|Bayer AG||Germany||5/31/2021 (soft deadline)||Investors claim the company misrepresented the risks from personal injury suits against an entity it acquired for its Roundup weed killer.|
|Daimler AG||Germany||5/31/2021 (soft deadline)||The company allegedly used emission defeat devices in manufactured vehicles.|
|Vale SA||Brazil||5/31/2021 (soft deadline)||The company used dangerous dam techniques at its mines, one of which suffered catastrophic failure, killing more than 259 people and releasing 12 million cubic meters of tailings into the environment.|
|VW Bonds||Germany||5/31/2021 (soft deadline)||The company allegedly used emission defeat devices in manufactured vehicles.|
Investment ESG tries to encourage or discourage corporate behavior through investment. Litigation ESG does the same with lawsuits.
Of the three factors, Governance (G) seems straightforward. All six matters involve false financials and suits attempting to hold the companies and others involved accountable for resulting harm to investors encourages the companies and others to report more timely and accurate results in the future. Wirecard is pure “G”. There don’t appear to be any environmental or social aspects to the matter. Investors just lost their shirts.
The other five have varying degrees of Environmental (E) and Social (S) factors. Daimler and VW Bonds are on the low end. While cars with defeat devices pollute the environment more than represented, which may be bad long term, the immediate harms are financial. Investors overpaid for their shares and consumers overpaid for their cars.
While Bayer seems to have “E” and “S” aspects – personal injury from exposure to unfriendly pesticides – the crux of the matters has to do with the company’s allegedly misleading statements about the risks from previously filed litigation against the entity it acquired. In other words, Bayer did not cause the underlying environmental and social harm. It bought the consequences. While suits against it may encourage better financial disclosures, it likely won’t do much to deter environmental or social harm from pesticides.
Glencore highlights the social ill of public corruption, but it’s not likely people died or the environment was further harmed. By contrast, the human and environmental toll from the Vale damn failure was immediate and enormous. Hopefully, suits holding the company accountable for these consequences will deter future bad mining techniques and somewhat offset the contrary influence of the capital markets, which have rewarded the company with rising share prices.
So, on an ESG scale, the six matters rank as follows, from low to high: Wirecard, Bayer, Glencore, Daimler, VW, and Vale.
|Case||Environmental (E)||Social (S)||Governance (G)||ESG Score|
|Wirecard AG (against Ernst & Young)||--||--||High||Low|
When using ESG in litigation decisions, investors should consider whether joining could change behavior for the better at the company involved or the markets generally. Besides improving financial reporting and promoting good governance – something common to all securities fraud cases – investors should think about whether their litigation efforts may deter misconduct underlying the core claims that have negative environmental or social implications. Concrete, immediate harm should always receive more weight than distant, speculative harms.
While not the main reason for joining litigation, at the margin, ESG goals offer worthy reasons to proceed in close calls or to prioritize certain matters over others when faced with multiple options and limited internal resources. With experience, ESG factors can be refined and expressed in governance policies and practices, with success.
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