In recent posts on this site (for example, here), I have discussed the developing ESG-related litigation phenomenon in which claimants file suits not against ESG laggards bur rather against companies that have taken the initiative on ESG-related matters. However, the existence of this trend, while noteworthy, does not negate the possibilities for litigation involving the ESG laggards, as well. There are in fact noteworthy instances of this latter type of litigation, much of it in Europe, as is well-detailed in a December 2022 white paper from the Jones Day law firm entitled “ESG – Climate Change and Related Litigation Takes Center State in Europe” (here). The white paper not only catalogs recent European ESG-related litigation but also identifies regulatory developments and other trends that could contribute to further litigation in the future.
As the white paper notes, in recent years, climate change activists and others have tried to use litigation in Europe to advance their agenda. Their litigation targets are not just the named corporate defendants but also decision-makers in government and in business, as the activists seek to “influence behavior and outcomes.” The decision-makers, in turn, observing the developments, have responded with climate-change related pledges.
The activists, the white paper notes, have notched some notable successes, for example in the Netherlands, where in May 2021 the activists scored a “headline grabbing ruling” in Friends of the Earth Netherlands (Milieudefensie) v. Royal Dutch Shell plc, in which the Shell group was ordered to reduce its global annual volume of CO2 emissions by 45% by the end of 2030. (Shell is appealing this ruling.) The activists’ successes, largely build on arguments under the home jurisdiction’s laws that protection from climate change is a fundamental right, have “emboldened” the activists to “focus their attention on the businesses the consider to be the biggest contributors to climate change” – starting first with energy companies, and then moving on the financial services companies.
The activists’ objectives not only include efforts to try to compel defendants to take more robust action with respect to climate change and other issues, but also to hold defendants accountable when their efforts have fallen short of their claimed aspirations (this latter category often taking the form of “greenwashing” claims).
From the activists’ efforts to date, a number of “themes and trends” emerge: First, the plaintiffs are “using inventive case theories in a bid to persuade courts to expand tortious concepts to novel situations.” Second, the plaintiffs increasingly are seeking redress in companies’ home country courts for environmental incidents that occurred abroad. Third, greenhouse gas emissions are a particular target, as the plaintiffs seek to compel businesses to take stronger measures.
In addition, in a trend of particular concern to readers of this blog, directors increasingly “are in the firing line.” The white paper specifically notes the under the UK Companies Act, the impact of the company’s operations on the community and the environment is one of several factors directors are to regard in fulfilling their company duties. The white paper notes the possibility of shareholder activists using shareholder derivative litigation as a litigation approach to target company inaction.
The white paper notes several legislative developments that could contribute to future climate-related litigation, including in particular the adoption in France and Germany of statutory requirements requiring corporate sustainability due diligence, for example with respect to human rights abuses and environmental impacts in corporate supply chains. (With respect to the German statute, please refer to the recent guest post on this site, here.) The European Commission has also published a proposed directive to combat consumer greenwashing, and the European Parliament has adopted a corporate sustainability reporting directive what is expected to come into force in early 2024, and that would require “significantly more detailed ESG-related corporate reporting and disclosure requirements.”
While the paper notes that climate litigation risks are “inherently jurisdiction specific,” there are several “overarching lessons” that can be drawn from the cases that have been filed so far: First, for claimants, the objectives are not merely to try to win their case, but also to “attract publicity, obtain disclosure of documentation, and to pressure businesses to change corporate behavior.” Second, any gap between a company’s aspirations and its actions creates litigation risk. Third, companies making “green” claims about their products and services will need to ensure they can justify those claims by reference to verifiable evidence based on scientific methodologies. Fourth, directors and other decision-makers need to ensure that proper records are kept to show they have complied with all relevant obligations. Finally, companies must implement robust processes to “diligence” information and business practices and to audit compliance.
Although the white paper is focused on the European context, and although the developments described are very much a reflection of the laws applicable in the local jurisdictions, the trends and implications discussed in the white paper are nevertheless relevant in other contexts, including for U.S.-based companies. The same motives and objectives that have driven the advocacy groups to pursue climate action through litigation drive advocacy groups and activist investors in the U.S. and elsewhere. The white paper highlights and underscores the extent of the ESG-related litigation risk for all companies in the current environment.
The advocacy groups’ actions described in white paper also highlights the fact that, though the recent U.S. ESG-related litigation has been directed against companies that have shown an ESG-initiative, the possibility of litigation against companies that fail to take ESG initiatives, or whose initiatives fall short in the eyes of prospective claimants, remains.
The possibility of this type of litigation also underscores the significance of the white paper’s conclusions, not just for European companies but for their American counterparts as well. Companies and their directors will continue to face scrutiny with respect to their ESG-directed actions or inactions. The evidence detailed in the white paper shows that this scrutiny could translate into litigation risk, as well.
For further perspective on European ESG-related shareholder class action litigation, please refer to a prior guest post on this site, here.