Hedge funds look to target ESG lapses for mega returns

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

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.