People-Planet-Profit Balance: An overview of ESG Litigation from a global perspective
Climate change and the necessity for companies to become more sustainable are fully in the picture. Regulations are being drawn up both at the national and international levels, concerning reducing the emissions of companies, market/product communications and financial reporting of companies. Partly as a result of these regulations, companies are increasingly being held legally accountable from different angles for their responsibility and role in climate change (ESG Litigation).
Currently, ESG Litigation mainly focuses on larger companies with a larger footprint. Companies are often publicly held accountable, through various media channels and campaigns. It is not just environmental organisations that are taking action. Consumers, investors, shareholders and local communities are increasingly becoming vocal. The primary goal of ESG Litigation is to bring about a behavioural change in companies. Companies should make the transition to an adjusted qualitative and transparent climate policy, to protect the rights of individuals and communities.
In 2022, the Intergovernmental Panel on Climate Change (IPCC) recognised the importance of ESG Litigation in affecting the outcome and ambition of climate governance.
If holding companies accountable in the public domain do not achieve the desired result, legal action may be taken, including litigation. International studies show that the number of climate cases is rapidly increasing. Worldwide, climate litigation has doubled since 2015, bringing the total number of climate lawsuits to about 2,000, 25% of which were initiated between 2020 and 2022.
In this article, we will discuss the various trends of ESG Litigation.
Infringement of national and international climate law
One of the primary ways to take civil action against companies is on grounds of unlawful acts, whether or not through a class action. Although unwritten, the relevant standards of care are based on soft law from international conventions (1992 UN Framework Convention on Climate Change, also known as the Climate Convention, and the ECHR), standards (UN Guiding Principles and OECD Guidelines for Multinational Enterprises) and the facts derived from investigative reports (IPCC).
At this point, there is no international binding convention on business and human rights. In Europe, however, a great deal of ESG legislation is under preparation, including the Proposal of the European Commission on 23 February 2022 for a Directive on Corporate Sustainability Due Diligence. The legislative process is expected to take longer and a final directive will not enter into force until 2025 or 2026. However, the obligations to be embedded in this directive are already largely part of existing soft-law standards ensuing from previous international conventions.
The 1992 UN Climate Convention, which has been ratified by most of the global community, forms the basis for climate law. Under this convention, Member States periodically examine emission reduction targets at an annual conference. The 2015 conference in Paris resulted in the Paris Agreement and the Glasgow Pact. There is a system of Nationally Determined Contributions (NDCs), under which participating Member States must inform the Secretariat of the Climate Convention what their targets are. Those plans must be tightened every year. This process is called the ratchet mechanism, which promotes compliance with NDCs through reporting duties and periodic assessments.
Conversely, the regulations formulated by intergovernmental organisations are predominantly integrated into domestic laws, thereby heightening the potential for sanctions and legal disputes. The integration of such international regulations into national legislation holds significant importance, particularly for jurisdictions outside of the EU, as the national laws directly shape the trends observed in ESG Litigation.
Turkey is a notable example since it stands outside the EU and remains unaffected by the EU's oversight mechanisms, despite its close cultural, economic, and geographical ties to the European Union. Notably, Turkey has its own environmental legislation and oversight mechanisms in place. Firstly, it should be noted that class action practices are generally not permitted in Turkey. However, a noteworthy trend in ESG Litigation within the country involves the pursuit of legal actions through administrative courts. In such cases, individuals residing in environmentally affected areas have the opportunity to collectively engage in lawsuits. These legal actions aim to address situations that can potentially cause significant harm to the environment, such as the establishment of hydropower plants on rivers with low water flow, forest zoning, the construction of waste disposal facilities near residential areas, and the issuance of mining licences without obtaining environmental impact assessment reports.
Recently, individual cases have been brought to court in Turkey. One notable instance involves a citizen filing a lawsuit against the Ministry of Environment, citing a violation of the individual's right to a clean environment. Additionally, three young people filed a lawsuit against the government, contesting "unclear environmental policies." Conversely, it is not currently a widespread practice in Turkey to file lawsuits against companies. Nonetheless, it is anticipated that such cases will arise in the foreseeable future.
In this particular context, Africa serves as another important illustration. Historically, investors and corporations in Africa have not prioritised ESG Litigation. However, due to the ever-growing need and expectation to conform to ESG standards, corporations both big and small are now focusing on complying with ESG standards since sustainability in a business is key to ensuring growth. This is particularly case with Africa since it is dominated by extractive industries and exposed to climate change conditions.
Africa has and continues to make an effort in the development and improvement of climate change. An example is South Africa's decision to draft the National Climate Change Response White Paper in 2011 in contemplation for the need to develop legislation relating to climate change. Subsequently, various laws were published concerning climate change in South Africa, namely the Carbon Tax Act 15 of 2019 and various regulations relating to greenhouse gas emissions and pollution prevention plans. The Carbon Tax Act demonstrates South Africa's commitment to contribute to climate change since it has a number of regulations, administrative requirements and submission requirements, which encourage businesses to comply and contribute to calls for climate change. In addition, South Africa has proposed a Climate Change Bill, which is currently before Parliament awaiting debate and passage. This Climate Bill is expected to support co-operative governance in the diverse and complex terrain of climate change policy and the regulatory landscape while supporting the country’s efforts to meet international emissions-reduction targets.
Greenwashing: misleading market communication and financial information
Companies must be aware of the risk of providing misleading market communications and financial information, also known as 'greenwashing'. This is particularly the case when companies advertise financial instruments and products as greener and more sustainable than they really are.
Greenwashing can be divided into several categories:
- market and product information for consumers;
- information for the investing public on ESG risk control;
- financial annual reporting.
Misleading product information may constitute a wrongful act. This may be based either in the qualified form of unfair and misleading trading practices or on account of infringement of a written or unwritten standard of care.
The CSRD Directive requires large companies to report on issues such as carbon emissions and social capital, but also on the impact that a company has on biodiversity and human rights violations in the chain. The directive is an extension of the existing European Union directive on sustainability reporting, the Non-Financial Reporting Directive (NFRD). Based on legislation following from the NFRD, large listed companies, banks and, insurers have been required, since 2018 (for the reporting year 2017), to include a non-financial statement in their directors' report and a diversity statement in their corporate governance statement. On 1 January 2024, the extension of the CSRD will come into effect for companies that now fall under the NFRD, and from 2025 for large companies that do not yet fall under this scope. For listed SMEs, the CSRD will come into effect on 1 January 2026. Those companies will now be held accountable for possible incorrect and even misleading annual reporting.
Liability of the company for pollution and damage to the direct environment
In the context of ESG Litigation, companies may, of course, also be held accountable by local communities for polluting or causing damage to the direct environment, and not just through a class action. Such claims will be based upon wrongful acts in combination with environmental legislation.
The nature of ESG Litigation cases is evolving and varied, particularly given the increasing private litigation. In addition to climate litigation, which is typically administrative in nature (such as governments' insufficient assessments of climate risks when considering and/or approving coal fired power plants), there is a global emergence of greenwashing claims and cases by shareholders against board individuals who inadequately disclose their climate obligations.
Shareholders' actions at (listed) companies in order to influence strategy
Studies show that shareholders are increasingly exercising their rights as shareholders (together with other shareholders and institutional investors) for ESG purposes to force boards to take action. By way of example, shareholders are exercising their right to place items on the agenda and speak or vote on the appointment or dismissal of directors or on their remuneration policies. Institutional investors such as APG and PGGM have long had their own policies on responsible investment (partially as a result of pressure from their own investors, such as participants in pension funds). These investors make investment decisions based upon their policy and then monitor the compliance of their portfolio companies with that policy.
An example is the UK's Aviva Investors, which in January 2022 notified the boards of 1,500 companies spread over 30 countries in which it invests that it will let the remuneration and the retention of directors depend in part on their efforts to fight the climate crisis and protect human rights and biodiversity.
Another example is the non-commercial organisation Follow This, which strategically purchases small packages of shares in large oil companies in order to place adjusted climate policy on the agenda during their shareholders meetings. Large institutional investors (particularly pension funds) are increasingly endorsing the resolutions of Follow This.
Personal liability of directors
A trend that we see at an international level is that, in addition to holding a company liable as a means to exert pressure, board members are also personally liable for compliance with the company's ESG obligations. This relates to (i) personal involvement/negligence in violated standards; and (ii) improper climate change policy. In the spring of 2022 in the UK, the board of a multinational company was held personally liable in civil proceedings for failing to pursue a proper climate policy surrounding energy transition, which was in contravention of their statutory duties as directors to act in the best interests of the company.
There is also potential for criminal liability to be imposed on company directors. A notable example is demonstrated in a decision by the Turkish Supreme Court, wherein it clarified that the director of a limited liability company, a hotel, cannot be exempted from the responsibility to prevent environmental pollution resulting from the hotel's operations. This ruling highlights the personal obligation of company directors to take proactive measures in mitigating the environmental harm caused by their business activities.
Use of efficient informal dispute resolution mechanisms
ESG Litigation is often conducted through inexpensive low-threshold modalities of dispute resolution, such as the Advertising Code Committee. Another example of a complaints mechanism is a procedure before the National Contact Point (NCP), which is set up in participating countries on the basis of OECD Guidelines.
Conclusion
Climate change is alarming and the urgent need for action on our planet has prompted intergovernmental organisations and lawmakers to establish clearer standards determining the extent to which businesses can impact the environment while pursuing their operations. We are now aware that we stand at a crucial point in history, necessitating the implementation of rules that uphold the values of people, the planet, and profit in equal measure. It is imperative that these rules take effect without delay, accompanied by an efficient enforcement mechanism to ensure compliance. Currently, ESG Litigation appears to be the chosen means through which humanity intends to achieve this enforcement.
The impacts of ESG Litigation extend beyond the courts as these have a global effect. ESG Litigation is increasingly becoming a strategic risk for companies and their individual board members. The legal action that can be taken in the context of ESG Litigation raises media attention, which means that a company runs the risk of reputational damage and impact on its stock market value. In this respect, it is likely that we shall see increasingly novel climate litigation and it is important to recognise in the context of risk management that, in the long run, the insurability of climate-related claims and the associated legal fees (particularly for companies with a large footprint) will be placed under pressure.
