Loan vehicles to finance ESG-focused litigations are gaining traction among fund managers. “Large corporations should be held accountable for the damage they do to the environment and the world,” says Fabian Chrobog, founder and chief investment officer of credit fund manager North Wall Capital.
North Wall Capital has found a way for private fund managers to take a slice of the upside when these large corporations are held to account. Last month, the firm agreed to lend £100 million ($121 million; €119 million) to claimant law firm PGMBM to finance mass litigations of ESG breaches by large corporations. The deal is from North Wall’s second Legal Assets fund. “Within our credit facility, we have an undertaking that the firm will only pursue ESG compliant cases,” said Chrobog.
For example, PGMBM has represented plaintiffs in litigations regarding Brazil’s Mariana Dam disaster, Volkswagen’s Nitrous Oxide emissions and a breach of personal data held by British Airways.
Other firms are also approaching litigation finance with a sustainability lens. Aristata Capital is raising an impact litigation fund to back plaintiffs bringing ESG-related lawsuits. Aristata announced a first close at £40 million last month with investors including Capricorn Investment Group and the Soros Economic Development Fund. It has set a £50 million target and £100 million hard-cap.
In a similar vein, Kerberos Capital Management launched a $300 million-target litigation fund last year, of which it committed to dedicating $200 million to ESG-linked loans. Borrowers could receive lower margin ratchets by meeting targets related to providing providing pro bono legal services, working on ESG-related cases and applying exclusions for ESG-adverse cases.
Litigation finance, an emerging sector within private debt, typically takes two forms. Aristata’s strategy provides financing for plaintiffs – rather than the law firms representing them – and its return is contingent on plaintiffs winning their cases or obtaining settlements. North Wall’s strategy carries less risk: it lends to the law firms representing plaintiffs, and the loan “is not tied to a specific litigation or its outcome – the firm has to repay the capital whether or not they win”, said Chrobog.
North Wall is now plotting its third fund in this series, which may be dedicated entirely to ESG-related litigation financing, if the firm sees enough opportunities in this space, said Chrobog. “We are seeing strong investor demand for ESG compliant litigation finance.”
Chrobog declined to comment on a target fund size for Legal Assets III, but a source familiar with the firm said North Wall believes it could deploy between €300 million and €500 million in this area.
Litigation investments typically sit within an LP’s private debt allocation, said Chrobog. Targeted returns are in the high teens or low twenties, or between 2x and 3x money multiples, “but the investment is also much riskier than a normal lending strategy. You’re lending to a performing borrower with a very complex collateral base – and the underlying litigations’ outcomes can be highly uncertain. If they were to lose all the litigations, recovery could be impaired, but on the other hand, only a small number need to be successful to generate strong returns”.
The ESG aspect of these loans – including litigating environmental disasters and harms to human populations – can help mitigate the inherent risk in North Wall’s investments, however. “This type of litigation is more likely to settle than other types of litigation, because it’s also being tried in the court of public opinion,” said Chrobog.
“Personally I also prefer funding these type of cases to plain vanilla corporate liability cases – it’s just more interesting and fun.”