How-to guide: How to consider and navigate the consequences of ESG risks (Global)

Introduction

This how-to guide provides legal counsel with guidance on understanding the importance of planning for and being aware of environmental, social and governance (ESG) risks in their organisation. It highlights the consequences of an organisation neglecting ESG risks and suggests how to navigate such risks and add value to the organisation’s business decisions.

The guide covers the following:

1. What are the consequences of neglecting ESG?
2. Case studies on the consequences of failing to embrace ESG
3. Adding value by navigating ESG risks

It is aimed at in-house lawyers and compliance professionals in organisations of all sizes and sectors and can be read in conjunction with How-to guides: What general counsel (GC) need to know about ESG, Understanding ESG and How to understand and implement the ‘S’ in environmental, social and governance (ESG).

Section 1 – What are the consequences of neglecting ESG?

ESG has become a core consideration in the commercial world. A primary reason for this is the shift towards mandatory reporting requirements, as well as sustained investor interest. Despite the politicisation of ESG investing and anti-renewable measures in some regions, the Institute of Energy Economics and Financial Analysis (IEEFA) found in its 2024 report that investments into sustainable funds were robust. In a 2025 briefing note, the IEEFA reaffirmed this conclusion notwithstanding broader market volatility, with global large-cap sustainable funds continuing to outperform their conventional counterparts. Further, despite regulatory debate and uncertainty, a 2025 EcoVadis study found that 87% of companies in the United States were maintaining or expanding their sustainability spending.

In 2024, Bloomberg projected that global ESG assets are on track to surpass $40 trillion by 2030. As a result, legal counsel needs to expand their expertise in corporate sustainability and ESG issues. This is particularly important as they are also playing a role in directing the cultural and commercial changes their companies need to address to be ESG compliant.

Law firms are embedding sustainability and ESG within their organisations. They are also including sustainability advisory services to meet the client demand for enterprises, including their clients’ organisations, to be ESG compliant. See RSGI Sustainable Lawyers The Green Print Report.

Organisations that integrate ESG effectively stand to benefit from the clear advantages of doing so. However, organisations that fail to act face material risks. Some of the consequences of inaction are outlined below. See also the Guide for General Counsel on Corporate Sustainability prepared by the United Nations Global Compact together with Linklaters LLP.

1.1 Risk of losing investors

ESG credentials are an important factor when considering where to invest. As of March 2025, the United Nations Principles for Responsible Investment (UNPRI) has 5,261 signatories, of which 748 are asset owners. This represents collective assets of just over $139.6 trillion.  According to the May 2025 edition of BNP Paribas’ biennial ESG study, 87% of the respondents (420 asset owners, asset managers and private capital firms across 29 countries in total) confirm that their ESG and sustainability objectives remain unchanged, with 84% saying they believe that sustainability is either going to continue to progress or accelerate between now and 2030. The study also showed that 85% of respondents integrate sustainability-related criteria into their investment decisions, and that there has been an emergence of private capital managers in sustainable investing and that they are placing more emphasis on social issues (76%) and just transition (63%).

Investors are also increasingly demanding standardised and verifiable ESG data. Frameworks such as the EU’s Corporate Sustainability Reporting Directive (CSRD) and International Sustainability Standards Board (ISSB) standards are raising expectations for reliable disclosures. Companies that provide only aspirational policy statements, without robust metrics and independently assured data, risk exclusion from sustainable portfolios. 

1.1.1 Debt financing

ESG-based investing has increased significantly in debt and equity capital markets.

Investment in green bonds, where a company raises money for a project designed to create a positive environmental impact, has risen. According to the Bank for International Settlements’ Quarterly Review in March 2025, the market capitalisation in the green bond market has reached $2.9 trillion, which is up nearly sixfold since 2018. In 2024, the annual issuance of green bonds reached $700 billion, however, this did not reach the estimated $2 trillion annual investment needed to tackle climate change.

1.1.2 Equity finance

Investment funds are increasingly integrating ESG metrics into their analysis of companies when deciding whether to invest in shares. In Q1 2024, the full global sustainable fund market recorded net inflows of nearly $900 million. Notably, sustainable fixed-income funds attracted more investment than their non-sustainable counterparts in the fixed-income universe (excluding the United States), indicating a positive trend for the asset class. Despite the ongoing tensions in 2025 – including energy transition and security, increasing power demand, geopolitical conflicts, demographic, technological and policy shifts, and demand for resources, housing, and labour – the anticipated growth in sustainability trends is expected to continue and, in some cases, accelerate.

Investors make fact-based decisions; therefore, as an organisation, having only policy statements concerning ESG is not sufficient. Companies that fail to generate reliable, comparable ESG data aligned with regulatory standards, risk losing investor confidence and long-term financing opportunities.

In the United States, there has been a backlash against ESG investment. According to Morningstar, in the first quarter of 2024, investors pulled a record $8.8 billion from US sustainable funds, making it the sixth consecutive and highest quarter of outflows. Although the motivations behind outflows cannot be perfectly quantified, many factors are at play. These include high interest rates, middling returns in 2023, greenwashing concerns, and the continued politicization of ESG investing. Morningstar has reported that this trend has continued into 2025, with US-domiciled sustainable funds experiencing outflows for the 11^th consecutive quarter, with $5.7 billion withdrawn in Q2 of 2025.

1.2 Risk of litigation due to legal liability

Neglecting ESG considerations can lead to litigation. Therefore, organisations with supply chains should ensure that they keep abreast of all relevant legislation and ensure that they are embedding the requirements of the legislation. Industries such as the mining or renewables sectors, which tend to be vulnerable to environmental and human rights risks due to their large and opaque supply chains, will need to ensure compliance throughout their value chains to avoid litigation arising out of non-compliance. For example, companies are facing litigation charges for non-compliance with France’s Duty of Vigilance Law, see How-to guide: What general counsel (GC) need to know about ESG. Recent years have also seen a marked rise in greenwashing litigation, with regulators and NGOs challenging misleading sustainability claims in sectors from fashion to aviation. Directors are also facing personal liability exposure where transition planning is deemed inadequate.

Set out in the table below are some examples of relevant case law.

In addition to these cases, greenwashing litigation is now one of the fastest-growing categories of ESG disputes. Regulators, NGOs and consumers have pursued actions against companies in sectors such as the fashion, finance and aviation industries for making misleading sustainability claims. See the Lexology PRO Greenwashing litigation tracker for examples.

1.3 Risk of non-compliance

ESG developments are occurring globally, and regulatory non-compliance is an increasing risk for companies that operate globally.

The EU’s CRSD and Corporate Sustainability Due Diligence Directive (CSDDD) and the UK’s Sustainability Disclosure Requirements regime are establishing binding obligations with significant penalties. Non-compliance risks extend beyond reputational damage to include fines, exclusion from procurement, and restricted market access. Supply chain due diligence obligations, such as those under Germany’s Act on Corporate Due Diligence Obligations for the Prevention of Human Rights Violations in Supply Chains and the EU’s CSDDD, make compliance a value-chain responsibility, not just a corporate one.

Companies that cannot demonstrate a strong and established ESG standing will be at a competitive disadvantage, playing catch-up, avoiding fines and insulating themselves from bad publicity instead of thriving.

See How-to guide: Understanding ESG for information about ESG laws in a number of jurisdictions globally.

1.4 Risk of losing out on the benefits of diversity

Following the social justice movements of 2020, particularly the global prominence of #BlackLivesMatter, companies are under pressure to improve their diversity ratings. A lack of corporate diversity regarding factors such as ethnicity and gender can harm a company’s reputation and pocket. Failure to embrace diversity could mean losing out on business development and opportunities. According to a 2024 study by the London School of Economics and Political Science, diversity, equality and inclusion (DEI) in business is associated with higher long-term market performance. The same research indicates that the positive effects of DEI on long-term market performance and innovation are amplified in firms with higher levels of ethnic diversity in senior management.

In the United States, DEI efforts have been targeted both politically and at the corporate level, with claims that these programmes are ‘costly and divisive’. For example, in 2024 the state of Florida enacted a ban on public institutions from funding diversity offices and ESG initiatives and in January 2025 President Trump signed two Executive Orders aimed at terminating activities relating to DEI by federal departments and federal funding for DEI initiatives. Following these political shifts, some companies have scaled back their DEI programmes and investments as well. Meta cut 50% of its DEI workforce in 2024 as part of a broader cost-cutting measure.

Not all companies are following this backlash, with the shareholders of companies such as Costco and Apple rejecting proposals to review the potential risks of maintaining DEI initiatives. The value of diversity is relevant to all businesses, regardless of how directly their industry is associated with ESG impacts. For example, in-house legal teams are placing greater emphasis on ensuring their external counsel consists of a diverse team. The push for diverse teams is also driven by the acknowledgement that there are better business outcomes with a diversity of thought, experience and perspective. 

Beyond performance and reputation, diversity has become central to workforce retention. Gen Z and millennial employees increasingly select employers based on visible DEI commitments and will disengage or exit where values do not align. Diversity is therefore not only a social obligation but a business-critical factor in attracting and retaining talent.

For equality and diversity in the workplace to be successful, it should be ingrained in the company culture, not just exist as an afterthought. Companies failing to embrace the social aspect of ESG may struggle to compete with those who are.

1.5 Risk of damaging the organisation’s reputation

Failing to embrace ESG frameworks means that an organisation risks ruining its reputation. Environmental degradation, forced labour, discrimination and lack of diversity are issues that could arise if a company is not taking action to prevent and mitigate these risks. The consequences of a tainted reputation may be severe, including damage to company profits and losing out on investors.

An example of how a company has been negatively impacted by its failure to ensure proper working practices (the ‘S’ part of the ESG framework) is Boohoo Group PLC (Boohoo), now trading under the name Debenhams Group. At the peak of the pandemic, the UK online clothing retailer was found to use UK-based suppliers who paid their workers £3.50 an hour, well below the country’s minimum wage, and had poor working conditions. When the news about Boohoo’s supply chain became public in July 2020, one of the company’s largest institutional shareholders offloaded £80 million of shares. An independent report by Alison Levitt QC (commissioned by Boohoo) noted that Boohoo’s monitoring of the factories was ‘inadequate’ because of ‘weak corporate governance’ and called the failure to assess the potential harm to workers during the COVID-19 pandemic ‘inexcusable’. This exploitation sparked public outcry, and Boohoo pledged a series of reforms, including publishing a complete list of companies in its supply chain, using new ethical suppliers, and reforming their policies.

Companies also face reputational risk from ‘greenhushing’, where firms downplay or stop disclosing ESG progress to avoid scrutiny. This can create the impression of retreat and undermine trust. In an age of AI-driven media monitoring, reputational damage spreads faster than ever, amplifying ESG failures or silences across stakeholder groups.

During highly disruptive periods, such as the COVID-19 pandemic, public ESG criticism can impact organisations’ reputations, leading to a long-lasting impression that affects their future. In June 2021, almost a year after the scandal, a joint report by Labour Behind the Label, ShareAction and the Business & Human Rights Resource Centre found that the low prices paid by Boohoo, its encouragement of price competition among suppliers, and demand for short order times, were drivers for illegally low wage payments and poor working conditions. In May 2024, a new lawsuit was filed against the company by 49 institutional investors who suffered huge losses as a result of a fall in Boohoo’s share price following the exposure of its suppliers’ labour rights violations.

The increased consumer awareness and concern about ESG will only continue to grow. According to a 2024 publication by Marsh and McLennan Gen Z makes up 25% of the global population and, by 2030, will constitute about 30% of the US workforce. This generation places greater importance on environmental and social concerns than its predecessors did – and will expect more from employers on these issues. According to the 2024 Edelman Trust at Work Barometer, 72% of surveyed employees stated that when considering a job, the opportunity to engage in meaningful work and help address social problems was either a strong expectation or a deal breaker.

1.6 Risk of losing opportunities and benefits of ESG

In a 2024 CxO Sustainability Report by Deloitte, 38% of the more than 2,100 executives surveyed, across 27 countries, noted a positive impact of their company’s current sustainability efforts on customer satisfaction and loyalty. Further, another 37% noted a positive impact of such efforts on employees’ morale and well-being, with another 37% referring to supply chain efficiency and resilience as a notable benefit.

The 2023 Ethical Markets Report indicated that in the UK ethical markets had outstripped growth elsewhere and consumer spending on ethical products had increased from £17 billion in 1999 to over £141 billion in 2023. Charity shops were visited more frequently than ever before, with a 147% growth in sales, while spending on electric cars had increased by 80%. The emergence of the UK government’s Net Zero Strategy continues to be driving force for change in how society functions. Now supported by a relaunched Net Zero Council and a dedicated Delivery Group, the main goal remains to end the UK’s domestic contribution to artificial climate change. This is likely to be transformative across categories such as transportation, fuel, power, heat, and buildings, and will inform ethical spending. In March 2023, the government published Powering Up Britain as a way to bring together the UK’s Energy Security Plan and Net Zero Growth Plan as the blueprint for the future of energy in the UK. In June 2025, the government continued this initiative and has further published Powering Britain’s Future as a specific plan to cut electricity prices for business and accelerate the transition to clean power.

Companies, including law firms, that are lagging in developing robust systems, risk losing customers, and clients and profit as a result, which could mean jeopardising their success and relevance.

For institutions such as law firms, the risk of losing opportunities is not limited to how sustainable the organisation itself is, but also to its ability to provide ESG-related advice and services. With the increase in ESG investing, for example, law firms are in a solid position to provide advice to clients in ESG-related transactions. Green bonds: growth in sustainable capital markets financing is a report by Dentons that demonstrates how law firms can provide insight into key considerations around green bonds for stakeholders. When working with green bonds, issuers will need legal advice on the best way to communicate the ESG aims of the bond.

Access to sustainable finance is increasingly conditional on ESG performance. Sustainability-linked loans, green bonds and inclusion in ESG indices all require companies to demonstrate robust credentials. Similarly, many corporates and governments now integrate ESG criteria into procurement, meaning suppliers without adequate ESG performance risk exclusion from lucrative value chains.

Section 2 – Case studies on the consequences of failing to embrace ESG

There are many risks that come with failing to embrace ESG. Below are two case studies of companies that have had to deal with the consequences of having inadequate ESG practices.

2.1 Dyson and ATA

Dyson is a multinational technology group founded by James Dyson, with its headquarters in Singapore. More than a dozen workers from Dyson’s biggest parts supplier, Malaysian firm ATA IMS, alleged numerous labour abuses in Malaysia. The ATA IMS group produced millions of parts and products each year for Dyson, which was, by far, their biggest customer.

According to a Channel 4 news investigation, Dyson had been aware of the problems since 2019. However, according to Dyson no significant issues arose in their five audits carried out between November 2019 and June 2020. In early 2021, Dyson was provided with further evidence of alleged squalid and overcrowded worker accommodation and reports of exploitation at the factory. The allegations were so serious that an investigation was launched by US Customs and Border Protection.

Dyson denies that they failed to act responsibly; instead, they insist that they only obtained concrete evidence of serious violations when they commissioned their final audit in October 2021. Dyson did note that some of the allegations were true, such as excessive hours and failure to reimburse workers for recruitment fees. However, they have refused to release the audit.

ATA IMS faced reputational and financial upheaval after losing its biggest customer and is in breach of Malaysia’s human rights laws. In addition, in December 2024, the UK Court of Appeal ruled that a legal case brought in 2022 by migrant workers employed by ATA IMS against three Dyson group companies (Dyson Limited and Dyson Technology Limited, both incorporated in the UK, and a Malaysian sister company who was the immediate customer of ATS IMS), regarding allegations of forced labour and dangerous conditions at ATS IMS, can be heard in the English courts (for more on this case, see this brief). The UK companies were responsible for the management of the Dyson group at the time of the alleged incidents. In February 2025 the UK Supreme Court refused Dyson’s application for permission to appeal the Court of Appeal’s decision. This ruling keeps the case active in 2025, making it a significant test of whether English courts will extend liability for supply chain abuses to a supplier’s customer and members of a corporate group responsible for its overall management.

2.2 Total

TotalEnergies SE (Total) is a French multinational integrated energy and petroleum company founded in 1924 and one of the seven ‘supermajor’ oil companies. Total planned to drill over 400 wells, extracting around 200,000 barrels of oil per day in Lake Albert and Murchison Falls, a protected natural park in Uganda. A pipeline would be built to transport the oil. These operations would allegedly impact communities and nature in Tanzania and Uganda. The project displaced thousands of people, some of whom complained that Total had failed to compensate them properly.

In 2019, two French organisations – Friends of the Earth France and Survie, and four Ugandan groups – AFIEGO, CRED, NAPE and NAVODA, brought a case against Total in France in its civil courts, accusing the company of the human rights violation of displacement with inadequate compensation.

The case was the first legal action of its kind based on the French Duty of Vigilance law. This law mandates that companies must prevent human rights violations and environmental damage, and the obligation extends to the actions of company’s subsidiaries, subcontractors and suppliers all over the world. The plaintiffs argued that the Vigilance Plan published by Total is not suitable because it does not reference its Ugandan project and therefore violates French law.

Total asserted that its Vigilance Plan complied with local requirements. It also argued that its Vigilance Plan was included in the Group’s management report and for that reason could only be ruled on by the commercial court and not the civil court. However, on 15 December 2021, the French Supreme Court rejected this challenge, recognising the jurisdiction of the civil court.

In February 2023, the Paris Civil Court dismissed the claim on procedural grounds, namely that the plaintiffs provided substantially different submissions on two separate occasions. See ‘Total lawsuit (re failure to respect French duty of vigilance law in operations in Uganda)' for more.

Despite the dismissal, the case remains a landmark under France’s Duty of Vigilance Law and continues to attract global scrutiny, with related activism, appeals and challenges linked to TotalEnergies’ East African Crude Oil Pipeline project still unfolding.

There is also a second lawsuit pending against Total under the French Duty of Vigilance Law. In 2020, 16 local authorities and six NGOs filed a claim against the company, alleging that Total did not include enough detailed information in its Vigilance Plan with regard to reducing emissions and cutting its contribution to climate change.

In June 2024, the Paris Court of Appeal ruled the legal action against Total was admissible and as of September 2025 it is ongoing. See ‘TotalEnergies lawsuit (re climate change, France)’ for more information.

Section 3 – Adding value by navigating ESG risks

To avoid the consequences of failing to embrace ESG, all businesses should consider:

• performing a gap analysis to gain insight into the company’s ESG efforts versus its goals. This is an effective approach to benchmark a company’s gaps and highlight to organisations what work is required to reach their ESG goals;
• developing and embedding key ESG policies, such as an environmental policy and human rights policy, into the company. Policies on human rights, environment, climate change, and procurement are an essential means of communicating an organisation’s stance on ESG issues to its employees and corporate group and to its partners (eg, suppliers); and
• ensuring key staff, such as C-level executives and procurement departments receive training around ESG and how to incorporate it into daily business activities.

It is crucial that organisations start building robust ESG frameworks. Arguably, the more robust and developed the ESG framework a company has, the less likely it is to be in situations that jeopardise its reputation and finances. Having a practical ESG system in place and the ability to demonstrate a positive approach towards ESG can help reduce public scrutiny. For example, in 2021, Tony’s Chocolonely – a Swiss chocolate brand that has marketed itself partly on a commitment to end forced labour and child labour in the cocoa trade and to making slave-free chocolate – was removed from Slave Free Chocolate’s ethical company list for its ties with Barry Callebaut, a major chocolate producer that is accused of labour abuses in its supply chain. Tony’s Chocolonely, due to its solid due diligence systems and continued effort to produce ethical chocolate, responded with a statement explaining how it monitors its supply chains and why it chose to work with Barry Callebaut (see Tony’s Chocolonely’s statement). Without having robust frameworks in place, a solid reputation, and an established culture around ESG, Tony’s Chocolonely would not have been able to control the narrative and defend its interests and actions. Although the chocolate company has not been re-added to Slave Free Chocolate’s ethical company list, it was able to establish that the issue at hand was not due to any major oversight on its part.

This practical resource was produced in partnership with Ardea International.

Additional Resources

ESG Mark, ‘ESG as a Competitive Advantage’
Business and Human Rights Resource Centre

Related Lexology Pro content

How-to guides:

Understanding ESG
What general counsel (GC) need to know about ESG
How to understand and implement the ‘S’ in environmental, social and governance (ESG)
How to understand and implement the ‘E’ in environmental, social and governance (ESG)
How to understand and implement the ‘G’ in environmental, social and governance (ESG)
How to understand and avoid the risks of greenwashing
An introduction to sustainable finance
How to promote diversity and inclusion within an organisation
Business and legal developments related to climate change (USA)
Overview of climate legislation and regulation in the UK and Europe
How to create a supplier code of conduct (UK)
How to approach and implement an ESG strategy
How to navigate the regulatory and litigation risks associated with greenwashing in the UK and EU

Checklists:

Conducting Environmental, Social and Governance (ESG) due diligence in supply chains (UK)
Greenwashing risk assessment (UK)

Quick views:

Overview of current ESG pressure points

Other:

Global research hub - ESG
Greenwashing litigation tracker

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