‘Nothing comes close to litigation for ESG impact’ says banking dynasty as lawsuits boom

Investment managers for the Stern banking dynasty are financing lawsuits in a bid to achieve ESG impact, as Facebook, Qualcomm, Oracle and the Australian Government are added to the list of entities facing legal challenges over a lack of action on key sustainability issues.   

J. Stern & Co, the family office of Jerome Stern, whose ancestors gave their names to banks including A. J. Stern & Cie, Stern Brothers, Bank Pallas-Stern and Bank Stern, is preparing to invest into a new litigation fund focused on financing class actions against companies accused of falling foul of diversity and environmental rules.

Last week, the board of directors of Californian semiconductor company Qualcomm was hit with a shareholder lawsuit claiming it has breached its fiduciary duty by having no African-Americans on its board or among the firm’s top executives. The lawsuit was filed through law firm Bottini & Bottini, which earlier this month mounted similar challenges on behalf of shareholders at Oracle and Facebook.   

"This is about holding these businesses to account where they haven’t fulfilled their fiduciary duty" – Alex Robins, J. Stern & Co

Also last week, a law firm in Australia began litigation against the government on the grounds that it fails to offer investors transparency on climate risk when issuing sovereign bonds. 

Speaking to RI, Alex Robins, an Investment Advisor at the UK branch of J. Stern, said the family office was “looking at a number of impact investments, but I don’t think anything comes close to litigation in terms of being a driver for impact”.

“You can invest in businesses like renewables, or businesses that are making a climate transition, for example, or you can do collaborative engagement to get businesses to change; but there are very few business areas where you can invest and have an [environmental or social] immediate impact.”

The fund, which co-finances litigation alongside law firms, is run by Aristata Capital – a company founded by ex-Client Earth director Rob Ryan, which claims to be the “first litigation fund dedicated to driving positive social and environmental change with an attractive financial return”, although it also says it “views social impact with a wide lens”.

Robins would not discuss particular cases being financed as part of the venture, but highlighted oil spills as an area with strong potential for litigation, pointing to a 2016 lawsuit filed on behalf of 15,000 seaweed farmers in Indonesia who claim an oil spill off the North of Australia reduced their ability to earn money owing to polluted waters. The case, which is ongoing, is against PTTEP Australia, a subsidiary of a company owned by the Thai state.

“As a private individual or a pension plan, you can now invest alongside law firms to assist those people in making a claim to compensate them for these disasters,” said Robins, adding that the process also disincentives oil activities “because these issues don’t happen in the same way with solar panels, for example”.

The asset class, which Robins described as a “grey area” – not equity or debt, but a part of J. Stern’s private markets portfolio, as well as its allocation to ‘impact’ – was likely to boom, with an influx of cases expected around diversity in light of the growing mobilisation around racial and ethnic equality, and the #metoo movement for gender equality.

Two years ago, the UK’s largest supermarket chain, Tesco, was taken to court over discrepancies between how it pays its male and female employees. That action is ongoing, with claims estimated to be worth around £4bn at the time. 

“There have been a number of cases where staff at both senior and junior levels have been underpaid unfairly for a number of years,” said Robins. “This is about holding these businesses to account where they haven’t fulfilled their fiduciary duty. Equal pay claims are a major way to have social impact. Again, you can vote against some things at AGMs to support equality, and you can have hard-and-fast rules around how you invest in companies using data on equality, but a lot of those techniques of dealing with diversity can be quite slow. This is a more tangible way of forcing businesses to take notice now.”

He added that, while private market performance is strongly correlated to broader economic performance, “the correlation of litigation lending relative to the rest of your portfolio is very low – even to the extent that if the economy sees a downturn, this kind of litigation may increase”.

J. Stern & Co runs around £575m (€631m) in assets in total, covering the Stern family money and co-investments from other high-net worth individuals and family offices. Aristata is planning to raise £75m for its first fund, with a first close target of £40m by the end of the year. The amount invested by the Stern family office is yet to be confirmed, according to Robins.