As fundraising soared to new heights in 2022, so did ESG's adoption across private capital asset classes. The average ESG fund size increased from $399.3 million in 2017 to $590.3 million in 2021 and $575 million in 2022. In 2023, while attention has since refocused on return generation and value protection in the face of macroeconomic pressure on valuations, it is evident that ESG adoption is broadening.
Alongside this, the number of ESG-related legal claims has been rising, too. While not new, corporate ESG litigation has markedly increased in recent years, and we can only expect this to grow as ESG regulation expands across the globe as disclosure requirements become more enhanced with crackdowns by watchdogs on the rise. According to the World Business Council for Sustainable Development, the number of lawsuits against companies concerning environmental, social and governance issues has grown over the last three decades. Coupled with this, the rise of anti-ESG sentiment in the U.S. is also predicted to increase litigation in the country, testing ESG's legal standing from both its supporters' and opponents' points of view.
However, for private markets in particular, the rise in ESG litigation constitutes, both as an engagement tool on one hand and for financial institutions invested in funds, an increasingly material risk as reputational damage and expensive payouts can significantly affect valuations.
While a large proportion of ESG litigation cases are brought against companies involved in the extraction and sale of fossil fuels, the defendants are increasingly diverse, and financial institutions are among those being sued. Of the corporate ESG claims in 2021, only 41% were brought against fossil fuel companies, while the majority were filed against companies in other industries.
Investors are also conscious of this. In Preqin's November 2022 survey, more than 130 investors were asked what would cause them to begin considering ESG issues in investment decisions, and legal requirements were one of the top responses at 53%.
Recently, for instance, the Universities Superannuation Scheme, the U.K.'s largest private pension scheme with assets worth £82 billion ($102 billion), fought against a lawsuit claiming that it had failed to come up with a plan to divest from fossil fuels. While the case was dismissed, it has garnered significant attention and continues to be hailed as evidence of the increasing momentum by activists, shareholders, and other stakeholders to hold institutions accountable for climate change.