Earlier this week, the FT reported that the Securities and Exchange Commission had subpoenaed “several asset managers” in relation to their ESG marketing, targeting those that had rebadged conventional funds with new, sustainability-related labels.

It’s the latest in a long list of legal interventions in sustainable finance over the past 18 months, in a trend that’s been making investors increasingly jittery.

State Street and BlackRock were hauled up in front of a committee hearing in Texas last year to defend themselves against a whirlwind of allegations from Republican politicians, who suggested the use of ESG ratings was anti-American and that the pair were pursuing ‘woke capitalism’ on behalf of pension savers.

In May, 20 US Attorneys General wrote to some of Europe’s biggest asset owners suggesting that their commitments to the Net Zero Insurance Alliance could breach competition rules. Allianz, Axa, SwissRe and a handful of others swiftly renounced their membership.

In an earnings call earlier this month, Allianz’s chief financial officer said it had left NZIA to protect shareholders from legal risks.

But, on this side of the Atlantic, there have been some important legal moves to re-empower asset owners when it comes to sustainability.

In the UK, USS recently defeated a legal challenge against its directors over its investments in fossil fuels.

In 2021, two of the university pension scheme’s beneficiaries filed a crowd-funded derivative claim arguing, among other things, that the directors’ decision to remain invested in oil and gas was financially irresponsible.

Derivative claims are usually reserved for instances in which an entity’s directors – normally the ones responsible for mounting legal challenges on behalf of the entity – are all considered to be acting against its interests. At that point, shareholders or other ultimate owners can ask the court for permission to pursue legal action to protect it.

The case was first rejected last year, failing again at appeal last month. The judge said in her ruling that the fossil fuel argument was an attempt to challenge the directors’ investment decisions “without any ground upon which to do so” and that there was no evidence “to suggest USS has exercised its powers in improper fashion”.

Sarah Ellington, a London-based dispute resolution lawyer at law firm Watson, Farley & Williams, says the decision should provide “comfort” to pension funds and others worried about the legal risks of making environmental and social investment decisions.

“It confirms that it’s a director’s job to set company strategy, make sure it’s implemented and mitigate risks,” she says, not anyone else’s. As long as the decision is considered reasonable, meaning that other directors could make the same one, it doesn’t breach the law.

Lots of the decisions directors have to make are “based on common sense,” she suggests, but in more complex areas such as climate risk, they should fulfil their responsibilities by consulting or appointing the appropriate experts.

“There’s quite a lot of discussion in ESG litigation about who is allowed to bring certain claims,” Ellington continues. She says the court ruling on the USS case showed “some frustration” over the employment of a derivative claim to achieve an objective it wasn’t designed for.

In Australia and New Zealand, activists have been knocked back by the courts, told they must get Parliament to change the law on climate, instead of, as Ellington puts it, “trying to unduly stretch the interpretation of existing law through the courts”.

Asset owners using litigation

Then there are asset owners who are sitting on the other side of the courtroom: weaponising the law to achieve their own ESG objectives.

Swedish pension fund AP7 currently has 18 class action lawsuits underway, targeting portfolio companies it believes have harmed the value of their share price by breaching environmental, social or governance norms.

In 2020, AP7 settled a case against Alphabet, the owner of Google, that it accused of mishandling allegations of sexual harassment. As part of the settlement, Alphabet promised to spend $310m on internal diversity and inclusion initiatives.

Last year, the pension fund mounted another case against gaming firm Activision Blizzard and Microsoft, which argued that their planned merger was cynically and irresponsibly executed to exploit a sexual harassment crisis at the former.

AP7 is also pursuing companies on environmental grounds: negotiations over a settlement with VW over the Dieselgate scandal are ongoing, for example.

But all cases, says Johan Floren, the pension fund’s head of sustainability, are centred on governance.

“It’s fairly common that the company has done something that affects its valuation and it hasn’t been open with the market about it, and that’s not allowed under the law,” he explains.

Altogether, Floren estimates that litigation like this has brought in around SEK140m for AP7. It’s not a lot, he concedes, but “it’s more symbolic than financial”.

“It’s important it contributes to the fund, and we’re certainly not allowed to create a cost for our beneficiaries by doing it, but ultimately this is about corporate accountability. When a company does something that isn’t acceptable, they should pay the price for it.”

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