ESG Litigation & Claims

Litigation as the final remedy for ESG compliance

10-11-2023
Climate change and the necessity for companies to become more sustainable are fully in the picture. Regulations are being drawn up left and right, both at national and at international level, in fields including environmental footprint (emissions reduction), market/product communication and financial reporting for companies. Partly as a result of those regulations, companies are increasingly being held legally accountable from different angles in respect of their responsibility and role in climate change (ESG Litigation ). ESG Litigation currently focuses mainly 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.

ESG Litigation in a nutshell

Generally, 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 does not lead to the desired result, legal action may be taken, including litigation. International studies show that the number of climate cases are rapidly increasing. Worldwide, climate litigation has doubled since 2015, bringing the total number of climate lawsuits to some 2,000 - 25% of which have been initiated in the period of 2020-2022.

Particularly in the Netherlands, it is very well possible for interest groups (associations and foundations) to bring class actions under the Settling of Large-scale Losses or Damage (Class Actions) Act (WAMCA) to stand up for the interests of certain groups of private individuals or legal entities or a general interest. In such a class action, both damages (in case of large-scale losses) and a declaratory judgment can be sought.

ESG Litigation has increasingly become a strategic risk for companies.

Litigation surrounding the dangers of climate change are often, strategically, conducted against the holding company of the group, even though they may relate to the policy of a foreign subsidiary. The holding company is held to have a certain duty of care because of its intensive involvement in the policy of subsidiaries. This appears, for example, from the Vedanta, Oguru, Okpabi and Milieudefensie cases. The ESG Litigation trend is supported by the judiciary, which is prepared to accept that companies have a responsibility under existing soft law in the field of the climate. Examples are the Paris Agreement and human rights embedded in the ECHR. Illustrative is the well-known judgment rendered by The Hague District Court on 26 May 2021 against the multinational company, Royal Dutch Shell (in the case brought by Milieudefensie). Risks for companies are increasing even further because also concrete EU and national laws and regulations are under preparation, so that soft law is increasingly being converted into hard law. ESG Litigation has, thus, increasingly become a strategic risk for companies.

In the context of ESG Litigation, environmental organisations are working at an international level to make the climate policies of large companies transparent and assess them against the Paris Agreement. Since the Milieudefensie case referred to above, Milieudefensie has started a public campaign and sent out public demand letters to ask another 29 large companies about their plans to reduce greenhouse gas emissions (climate plans). In July 2022, a report was published by NewClimate Institute, the research agency engaged by Milieudefensie, in which the climate plans were assessed. This report assesses the transparency and integrity of the climate commitments and the underlying strategies on four points:

1. tracking and disclosure of emissions (scope 1 emissions as a result of the company's own operations, scope 2 emissions linked to purchased energy, and scope 3 emissions both upstream and downstream in the value/supply chain);
2. setting emission reduction targets;
3. reducing own emissions;
4. climate contributions and offsetting claims.

On behalf of trade and industry, VNO-NCW employers' organisation states that, although all input to become more sustainable is welcome, the Milieudefensie analysis does not produce many usable insights to accelerate the process. The employers have requested Milieudefensie to provide practical input as to how barriers, such as slow permit granting, can be removed. 

In response to Parliamentary questions presented to Minister Jetten for Climate and Energy Policy based on the aforementioned report by NewClimate Institute, the Minister said on 29 August 2022 that companies and financial institutions themselves are responsible for becoming more sustainable. According to the Minister, large companies are well on their way to reinforcing and implementing their climate plans. The Minister does, however, recognise that trade and industry is confronted with obstacles preventing them from going full speed ahead. Those obstacles are found in the fields of infrastructure, availability of sustainable energy, permit granting and nitrogen. So, the government also has a certain responsibility in offering the legal and factual ESG infrastructure and supervising the protection against infringing activities.

Milieudefensie has indicated that it wants to continue the dialogue and to review in one year whether the climate plans are future-proof then.

Below, we will discuss the various trends regarding the angles for ESG Litigation.

Infringement of national and international climate law

An important angle for taking civil action against companies is on grounds of unlawful act, whether or not through a WAMCA class action. In this angle, the unwritten standards of care contained in Article 6:162 DCC are worked out in further detail based on soft law from international conventions (1992 UN Framework Convention on Climate Change (Climate Convention) and ECHR), standards (UN Guiding Principles and OECD Guidelines for Multinational Enterprises) and the facts ensuing 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 of 23 February 2022 for a Directive on Corporate Sustainability Due Diligence. The legislative process is expected to take a while longer, so that a final directive will not enter into force until 2025 or 2026. The obligations to be embedded in this directive are, however, 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. In this convention, procedural agreements have been made among the Member States periodically to 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. This is a mechanism to promote compliance with NDCs through reporting duties and periodic assessments.

In the Netherlands, the targets ensuing from the Paris Agreement have been incorporated in the Climate Agreement and the 2019 Climate Act. Based on the Climate Act, the cabinet has drawn up a Climate Plan for the period 2021-2030.

It is advisable for a company to monitor the development of these NDCs and the company's percentage share therein. In the next few years, accountability will be one of the key themes in the climate transition. The climate standards for accountability, as agreed among Member States, could become a duty of care for companies through soft law. This will certainly be the case for larger companies if their business operations cause substantial environmental impacts.

In this context, the UN has taken the initiative to draw up the UN Guiding Principles on Business and Human Rights (UNGP, which do not have binding force). The Member States of the Organisation for Economic Cooperation and Development (OECD) have drawn up the OECD Guidelines for Multinational Enterprises. UN Guiding Principles and OECD Guidelines already contain a corporate sustainability due diligence obligation. This is based on the idea that companies can have a share in adverse human rights impacts through both their own activities and those of their business relationships with other parties.

The Milieudefensie case shows that, even now, companies can be held accountable on the basis of this soft law in its continued effect in the open standard. This judgment is based on a combination of increasingly concrete soft law standards in the fields of climate and the responsibility of companies in that respect. The judgment emphasises that not only the company in question, but companies in general, have climate duties and are required to contribute. According to UNGP 13, the duty to respect human rights requires that companies:

• avoid causing or contributing to adverse human rights impacts through their own activities, and address such impacts when they occur;
• seek to prevent or mitigate adverse human rights impacts that are directly linked to their operations, products or services by their business relations (even if they have not contributed to those impacts).

With a view to the foregoing, it would be wise for companies constantly to identify with climate expertise what minimum requirements they must in any event meet and continue to meet based on their contribution to the annual NDCs.

Recent foreign judgments and views from international UN agencies build on the arguments used in the Milieudefensie and Urgenda judgments. Partly following on from the Milieudefensie case, since mid-May 2021, cases have been brought in Germany against the car manufacturers BMW and Daimler (the parent company of Mercedes-Benz) by the German climate NGO DUH and against Volkswagen by Greenpeace, with a view to the accelerated phasing out of combustion engines.

Greenwashing: Misleading market communication and financial information

The greening trend also entails the inevitable risk that companies advertise financial instruments and products as greener and more sustainable than they really are. Companies must be aware of the risk of providing misleading market communication and financial information, also known as 'greenwashing'. On the face of it, greenwashing can be divided into several categories:

• market and product information for consumers;
• information for the investing public about ESG risk control;
• financial annual reporting.

Illustrative is the fact that, on 25 August 2022, the Australian Centre of Corporate Responsibility started proceedings in Australia against the Santos oil and natural gas group about misleading the investing public in relation to its claim that it would be 'net zero' by 2040 and that, by that time, it would produce climate-neutral hydrogen. 

a. Greenwashing mark - product information to consumers

Misleading product information may constitute a wrongful act. This may be based either in the qualified form of unfair and misleading trading practices or in unlawful act on account of infringement of a written or unwritten standard of care. The most important sources of law are:

• Part 3A of Title 3 of Book 6 DCC, implementation of the 2005 European Directive concerning unfair trading practices.
• The updated guidance on the interpretation and application of the Directive concerning unfair trading practices, as presented by the European Commission in December 2021. These guidelines do not have any formal legal status, but offer important handles for the interpretation and application of the applicable legislation.
• Guidelines Sustainability Claims of the Authority for Consumers & Markets (ACM), published in January 2021. These guidelines contain rules of thumb and practical examples to help companies formulate sustainability claims. An important standard in the ACM Guidelines Sustainability Claims reads: 'Be honest and specific about your company’s efforts with regard to sustainability. (...) Any claim about your company’s sustainability ambitions must be in proportion to your actual sustainability efforts.' Claims can, therefore, be misleading, even if they are not representative of the business operations - a form of greenwashing that is frequently seen.
• The ’anti-greenwashing‘ proposal of the European Commission reforming the Directive concerning unfair trading practices and making enforcement considerably easier, published in March 2022. 
• The Dutch Advertising Code, and more specifically the Environmental Advertising Code. 

The purpose of the Directive concerning unfair trading practices, as incorporated in Book 6 DCC, is to remove obstructions for the internal market and to achieve a high level of consumer protection. Unfair trading practices undermine consumer confidence and distort the market, because they prevent the consumer from making the right choices. Environmental claims may be misleading if they are based on vague and general claims about environmental advantages, without clearly substantiating the advantage or stating to which aspect of the product the claim relates.

As a first step in a greenwashing claim, often a complaints procedure before the Advertising Code Committee (RCC) is completed. Lodging a complaint with the RCC is relatively simple and free of charge, so that it may later, after the complaint has been awarded, serve as a stepping stone towards proceedings on the merits. The RCC regulates misleading advertising and, in the event of a well-founded complaint, can issue a recommendation, or a public recommendation (including press release) to companies.

A special advertising code is the Environmental Advertising Code. This applies to all advertisements that make express or implied reference to environmental aspects associated with the production, distribution, consumption or waste treatment of products (both goods and services).

RCC decisions are not binding but are usually complied with by companies. If an RCC decision is not complied with, the Committee can request the ACM to take action, for example, by imposing a fine. In a press release dated 13 September 2022, the ACM emphasised that it will play its part in the supervisory process:

‘With its oversight over sustainability claims, ACM plays its part in that process. Consumers must be able to make sustainable choices with confidence, and businesses that undertake sustainability efforts must be protected against businesses compete unfairly by using misleading claims.’

In the spring of 2022, KLM was confronted with a civil WAMCA action following on from an RCC procedure on its advertisements.

b. Greenwashing financial information to the investing public

In its Trend Monitor 2020, the Authority for the Financial Markets (AFM) specifically warned about the risk of greenwashing vis-à-vis the investing public. It announced that it would monitor this and would take action against parties that abused investors. This will not only be reflected in actions by regulatory authorities but, of course, also by investor stakeholder organisations, such as the VEB investors' association. Several successful complaints have been lodged by NGOs and others against IPOs where the prospectus concealed environmental and climate risks.

c. Greenwashing annual financial reporting

Starting 2024, in phases, the first group of Dutch companies will be required to report extensively on their environmental and social impacts in their annual reports under the Corporate Sustainability Reporting Directive (CSRD). This extended reporting duty is aimed at further accountability. The CSRD Directive requires large companies to report on issues such as carbon emissions and social capital, but also about the impact that a company has on biodiversity and human rights violations in the chain. The directive is an extension of the existing EU directive on sustainability reporting, the Non-Financial Reporting Directive (NFRD). Based on legislation following on from the NFRD, large listed companies, banks and insurers have been required since as early as 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 come under the NFRD and as from 2025, for large companies that do not yet come under that scope. For listed SMEs, the CSRD will come into effect on 1 January 2026. The more extensive accountability will also entail that companies will be held accountable for possible incorrect and even misleading annual reporting. Under Dutch law, the board, and possibly the supervisory board, may be held jointly and severally liable for misleading annual reporting (under Articles 2:249 DCC and 2:260 DCC). For more detailed information on these directives, see Chapter 4.

Liability of the company for pollution of, 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, whether or not through a class action. Such claims will be based on wrongful act in combination with environmental legislation.

Shareholders' actions at (listed) companies in order to influence the strategy

Studies show that shareholders are increasingly exercising their shareholders' rights (together with other shareholders and institutional investors) for ESG purposes to force the board to take action, for example, their right to place items on the agenda, their right to speak or to vote on the appointment or dismissal of directors or their remuneration policy. Institutional investors such as APG and PGGM have their own policies on responsible investment for quite some time now (partially as a result of pressure from their own investors, for example, the participants in a pension fund). Based on this, these investors make investment decisions and monitor the compliance of their portfolio companies with that policy.

An example is the British investor Aviva Investors which, in January 2022, notified the board of 1,500 companies in which it invests, spread over 30 countries, that it will let the remuneration and the retention of directors depend in part on their efforts in fighting the climate crisis and protecting human rights and biodiversity.

Another example is the non-commercial Follow This organisation, which strategically purchases a small package of shares in large oil companies in order to place adjusted climate policy on the agenda during their shareholders meetings. In this respect, it is worth mentioning that large institutional investors (particularly pension funds) increasingly endorse the resolutions of Follow This. 

Personal liability of directors

A trend that we see at an international level is that, in addition to holding the company liable as a means to exert pressure, the board is also held personally liable for compliance with the company's ESG obligations. This relates to 1) personal involvement/negligence in violated standards; and 2) improper climate change policy. In the spring of 2022, in the United Kingdom, the board of a multinational company was already held personally liable in civil proceedings for failing to pursue a proper climate policy with a view to the energy transition. The directors were said to affect the long-term interests and, thus, their statutory duties.

In the Netherlands, directors and supervisory directors must be guided in the fulfilment of their duties by the interest of the company and the businesses associated with it. The company interest is generally mostly determined by the promotion of the continuing success of the business. The board must take care to protect the interests of all those involved in the company and its business, including employees, shareholders, suppliers, customers and creditors. These open standards of care can be given shape, inter alia, by:

• the Dutch Corporate Governance Code 2016 (for listed companies, but may also serve as inspiration for non-listed companies) and, in future, the Draft Dutch Corporate Governance Code 2022, which has been submitted for consultation;
• UN Guiding Principles on Business and Human Rights;
• the OECD Guidelines for Multinational Enterprises;
• the right to life and the right to respect for private and family life (Articles 2 and 8 ECHR and Articles 6 and 17 IVBPR).

It would be advisable for directors to take note of applicable standards in the field of human rights and soft law on ESG and climate in order to be aware of liability risks.

Action by stakeholders against the company through the right of inquiry

For quite some time now, legal science and literature have considered the possibility that the right of inquiry may be used by stakeholders in ESG Litigation surrounding the climate policy of companies. In inquiry law, the Enterprise Chamber can be requested to order immediate relief, such as the appointment of a temporary director or supervisory director to supervise this climate policy. Furthermore, an independent investigation can be ordered into the policy of the company (inquiry proceedings) by investigators to be appointed by the Enterprise Chamber.

The requirements for admission to the inquiry proceedings do not seem to be an obstacle. Shareholders will be able to use this remedy, as may other parties entitled to an inquiry, such as trade organisations, the Works Council or the Public Prosecution Service (in the public interest).

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 referred to earlier. 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 the OECD Guidelines. Stakeholders can lodge a complaint with the NCP in their country about an infringement of the OECD Guidelines by a company in a Specific Instance Procedure. If, after an initial assessment, the NCP concludes that the complaint is worth investigating further, the NCP will offer its 'good offices' to help the parties resolve their dispute. If either party does not accept it, or if the parties fail to reach consensus, the NCP will publish a final statement even without such a mediation phase. The impact may be substantial if such an action is brought to the attention of the media.

In line with the efficient way that stakeholder organisations operate, it is also likely that an investigation by regulatory authorities will be used in their actions, such as the AFM and the ACM. A possible report or sanction may also be used as a lead for further action.

Conclusion

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, thus, a possible impact on its stock market value.

Based on existing international soft law - recognised in case law - which is expected to be converted into hard law in European legislation in 2024-2026, companies are required to adopt (and monitor) a climate policy to prevent dangerous climate change. Environmental organisations are already monitoring the climate policy and the communication of large companies. It would be advisable for companies to formulate and safeguard a solid and credible climate policy in respect of their own footprint and that of their business partners. According to the NGO Milieudefensie, large companies that lag behind will be the first to be confronted with ESG Litigation.

In this respect, 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 put under pressure.

Tips & Tricks

• Set up a multidisciplinary team with specialist expertise in the field of climate impact, (crisis) communication, stakeholder management (both internal and external) and legal. This is advisable for purposes of formulating and monitoring a climate policy, but also for possible crisis management in the event of ESG litigation.
• Formulate and safeguard a solid and credible climate policy in respect of the company's own footprint and that of its business partners (scopes 1-3).
• In the context of the business operations, monitor the climate risk management in contracts and assurances.
• Monitor factual and legal developments in the field of climate and environmental policy.
• Where necessary, proactively start a dialogue with environmental organisations and competent authorities active in the sector and in the environment of the company in order to influence public opinion and the (regional) policy.