ESG Litigation Risk: Navigating the Rising Tide

Ambitious claims are being brought against English parent companies in an attempt to test the boundaries of corporate liability. These claims, which are generally brought as group actions, typically seek to hold English-domiciled parent companies liable for the actions (or inaction) of foreign subsidiaries, even though the alleged harms are connected to the subsidiaries' operations. Such claims are brought in negligence for diverse alleged wrongs: environmental damage from mining operations and oil pipelines; assaults perpetrated by local police; allegations of gender-based violence and human rights infringements; and industrial accidents, to give a few examples.

The principles of negligence which underpin these cases are not confined to the parent-subsidiary relationship but focus instead on the degree of "control" that the parent has over relevant functions in the subsidiary. This is a material broadening of the profile of legal risk for companies – and is particularly acute for corporate groups with operations in emerging markets and challenging environments. 

Businesses also need to take stock of their potential exposure to so-called "value chain liability" claims.  Similar to parent company claims, they are generally brought as large-scale tort claims and are a facet of global pressure for greater corporate accountability for human rights and environmental impacts within the value chain, again often with a focus on activities in emerging markets. 

Value chain liability claims are similarly premised on the argument that a UK-domiciled defendant should be liable for harm caused by a third-party (generally in a foreign jurisdiction).   They are highly novel and ambitious.  However, they present similar reputational considerations, and potential implications for stakeholder confidence, even if the claims are ultimately legally proved to be misconceived.  For this reason, their emergence is a risk that businesses, especially with operations with global value chains, need to take seriously.

This underlines the need for businesses to assess carefully potential risks in their value chain by means of appropriate due diligence and mitigation plans, and to ensure that their policies, procedures and internal and external communications are consistent with them.  It is also important to note that the regulatory environment is developing fast in this area, notably with the forthcoming EU Corporate Sustainability Due Diligence Directive and other existing national human rights and environmental due diligence regimes in certain jurisdictions.  Whether or not businesses are directly caught by the scope of such regulation, it is certainly informing consumer and stakeholder focus on these issues in many markets and regions, and brings with it attendant litigation and regulatory risk. 

Greenwashing refers to the practice of making false or misleading statements about environmental/sustainability credentials.  Such statements might relate to specific products, corporate governance or investment approaches.  We are seeing increased activity by regulators and litigants on greenwashing in many jurisdictions, and while the landscape is by no means uniform, we predict that it is a trend that will continue, including in the UK.

From a UK perspective, to date, activity around greenwashing has largely sought to change the behaviour of businesses, for example by forcing them to withdraw an advertisement or claims about a particular product. However, we expect that greenwashing claims will also increasingly relate to misleading statements made in companies' investor-facing statements, including as novel securities litigation. 

Greenwashing risk may present as:

• complaints to regulators including the UK Advertising Standards Agency and the FCA.  The FCA's recently published anti-greenwashing rule which applies to all regulated firms demonstrates its focus on this issue;
  
  
• claims by shareholders under the Financial Services and Markets Act for losses suffered when they have invested in companies in reliance on misleading environmental / sustainability claims; and/or
  
  
• consumer class actions.

Businesses should ensure that they are aware of guidance issued by regulators, including the ASA and FCA and ensure, for example, that their sustainability statements can be substantiated.  Consideration of the relevant rules and guidance should be monitored on an on-going basis and with a clear eye to the legal risk they could attract.

There has been a surge in climate change-related litigation globally, which is often launched with high-profile PR campaigns and accompanying substantial media attention.  While states rather than private entities have historically been the target of climate-change litigation, and continue to be so, increasingly the law is also developing so as to pave the way for claims against private companies, novel examples of which are already being seen.  In short, this type of litigation is increasingly seen as a tool by activists, shareholders and civil society organisations to address perceived corporate inaction in the face the climate crisis.  In a regulatory environment where businesses are increasingly required (if they have not already done so voluntarily) to make climate-related disclosures, this is not a risk that businesses can afford to ignore. 

In particular, claims focussed on allegedly inaccurate or misleading climate-related disclosures (see section on "Greenwashing" above); claims for breach of directors' duties to act in the best interests of the company by virtue of allegedly inadequate climate strategies; or claims seeking specific changes of corporate behaviour around climate, are examples of how this type of risk might eventuate.

The risk landscape around ESG is fast moving and dynamic – and includes both regulatory and litigation risk.  Claimants and regulators are seeking to hold corporates to account for their record on sustainability in myriad ways.  The regulatory landscape is increasingly requiring mandatory ESG-related disclosures to be made, so businesses need to work on the basis that their record on sustainability, and the accuracy and completeness of the statements made in this regard, will be closely scrutinised.  While, in the litigation space in particular, claims are often highly novel and by no means ultimately guaranteed to succeed, they often can have an almost immediate impact on value and reputation – and the costs of defending a claim, even successfully, are very high.  This all underlines the need for businesses, especially those with global footprints and value chains, to understand in real time how this area is developing.

In this area, prevention is almost always better than cure.  Our experience in this area means that we can help you assess the nature of ESG-related risk as it applies to your business, so that you can best mitigate it, and ensure that you fulfil your sustainability ambitions in a way that does not expose you to unwarranted risk.  While there are no silver bullets for avoiding regulatory attention, or being the target of ESG-related litigation, businesses that are well prepared to meet the scrutiny this brings are best able to weather the challenge. 

In addition to handling any litigation or regulatory actions, our team is happy to provide preventative counselling in this area and would be delighted to share our insights with you.