Hedge funds look to target ESG lapses for mega returns

Hedge funds look to target ESG lapses for mega returns

These funds are backing litigation against broken environmental pledges, corporate misdeeds.

A successful case can leave a litigation funder with returns well in excess of 25%

In a corner of finance that rarely generates headlines, investors are busy mapping out paths to huge returns as they contemplate the fallout of new laws in Europe.

The area in question is litigation finance, and the focus is alleged ESG transgressions. Regularly bankrolled by hedge funds and other alternative investors, the lawsuits target supposed corporate misdeeds such as broken environmental pledges, exploited workers or corporate governance failings. A successful case can leave a litigation funder with returns well in excess of 25%.

Last year, citizens in the European Union won access to the kinds of class-action lawsuits that have long fueled litigation in the US. Another piece of EU legislation close to finalization exposes firms to unprecedented legal risk if environmental or human-rights violations are detected in their supply chains. And in the UK, litigation funders face a “spike” in inquiries thanks to new ESG fund rules, according to Kate Gee, a partner at Signature Litigation.

Among hedge fund managers allocating capital to litigation funding is Connecticut- based Gramercy Funds Management, which recently unveiled a £450 million ($570 million) investment in London law firm Pogust Goodhead. The money is intended to help pursue mass claims against carmakers involved in the so-called Dieselgate scandal, as well as investor suits against BHP Group Ltd. and Vale SA for their role in the Mariana dam disaster in Brazil.

More regulation in Europe “will bring more litigation,” Ana Carolina Salomão, chief investment officer and partner at Pogust Goodhead, said in an interview. Increasingly, investors are also drawn to the “feel-good factor” of such cases, she also said.

Steven Friel, chief executive officer of Woodsford Group Ltd., which operates a large litigation funding businesses, says his ESG team is “closely monitoring” the regulatory development in Europe, which he says is “highly likely” to shape his firm’s work.

Cases currently on Woodsford’s books include a suit against Airbus SE, in which institutional investors are fighting out their claim in front of a Dutch court. They want compensation after claiming the company’s shares slumped because of a bribery and corruption scandal that was settled in 2020. Woodsford also is helping investors fight a case against Standard Chartered Plc related to sanctions violations, as well as an investor lawsuit against Boohoo Group Plc tied to allegations of modern slavery.

The work represents a “high-risk venture for which handsome rewards are available if it’s done well,” Friel said in an interview. “We go in when there’s a catastrophic breakdown in ESG in major companies with losses for shareholders or customers. We mobilize them, engage with the company, seek a settlement or litigate.”

Litigation funding surfaced two decades ago in Australia, and has since become prominent in the US and increasingly in the UK. Swiss Re says the industry may reach $31 billion of investments by 2028 as investors are lured by returns of 25% or more.

In some cases, returns can be hundreds of times an initial investment. Burford Capital, a litigation funder based in New York, stands to collect more than $6 billion after allocating $16.6 million to help fund a case targeting Argentina’s nationalization of energy company YPF.

With such huge sums at stake, litigation funders are starting to draw the attention of lawmakers.

Axel Voss, a member of the European Parliament, accuses the industry of operating “in the shadows,” while raking in a disproportionate share of any award. He’s the architect of a legislative proposal now before the EU Parliament that seeks to rein in overzealous litigation funders. Among recommendations is a cap of 40% on any litigation finance award.

Corporate insurers, meanwhile, fear that third-party financing can prolong a lawsuit, increase the cost of claims and drive up premiums. Swiss Re Institute has estimated that in US cases, up to 57% of legal costs and compensation go to lawyers and funders.

In the UK, the supreme court ruled last year that litigation funders aren’t allowed to strike deals in antitrust class-action cases in return for a cut of the damages won.

Even in the US, there’s growing pressure on litigation funders to operate in less opaque ways. A bipartisan bill has been introduced in Congress seeking the disclosure of foreign entities that invest in litigation in federal courts.

So far, investor cash is continuing to flow into ESG litigation.

Courtesy: Livemint.com Dt. 10th Jan 2024
Image Credits: Livemint.com Dt. 10th Jan 2024

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