Corporate class action litigation risk and the choice of environmental, social, and governance practices

This paper examines how environmental, social, and governance (ESG) practices influence corporate class action litigation risk. Using Federal Judicial Center Civil Integrated Database records and ESG metrics from Sustainalytics, we investigate whether responsible ESG behaviour mitigates firms’ exposure to future class action lawsuits (CALs). Before controlling for endogeneity, higher ESG scores are associated with more future CALs, consistent with high‑risk firms adopting stronger ESG practices as ex ante insurance against ex post value destruction. After accounting for the endogenous choice to improve ESG, the relationship reverses: better ESG performance predicts a lower likelihood of future CALs. Pillar‑level analysis reveals that environmental and governance practices provide meaningful preventive value, while social practices play a limited role. Overall, these findings suggest that ESG, particularly through environmental responsibility and strong governance, both acts as reputational insurance and reduces litigation risk.