Managing litigation risks: 10 key ways to help protect your business from exposure to ESG litigation

20 minute read
16 January 2024

In the day-to-day operation of any business there will be a need for risk mapping and planning for the unexpected. The material issues will differ for each organisation but, undoubtedly, there will be an Environmental, Social and Corporate Governance element as businesses and stakeholders place greater scrutiny and focus on these areas in a changing world. So, in taking a pro-active approach to managing your E, S and G and preventing any risk areas for litigation, what are some of the key points for businesses to consider?

Here we share our Top 10 for protecting your business from exposure to ESG litigation.



1. Know your 'E', your 'S' and your 'G' – What are the specific risk areas for your business?

The acronym is hard to avoid, and is broad enough to cover an extremely wide range of potential business risks (some old, and some new). Just some of the examples of risks that might be included under each of the E, S and G pillars (and therefore where ESG (Environmental, Social and Governance) litigation may arise) are as follows:

E: Environmental claims may focus on climate change, emissions, waste reduction, biodiversity and carbon footprints. Examples include claims brought by consumers against car manufacturers for diesel emissions. Claims may also be brought for alleged greenwashing, when a company overplays its environmental credentials in a way that is misleading to consumers and investors (see steps 4 and 8 below). 

S: Social claims may revolve around working conditions, human rights, fair pay, diversity and inclusion, equal opportunities and modern slavery. Examples in the UK include large equal pay claims against councils and supermarkets. 

G: Governance claims may concern anti-bribery and corruption, financial crime, data protection, director duties, and corporate reporting and accounting obligations. In step 3 below, we look at recent examples of high-profile governance-related claims.

Every business interacts with the environment, with humans and operates through governance structures. Every business is therefore at risk of liability and litigation in this area. Understanding the specific areas in which your business is potentially exposed (given that all businesses are unique and will have a different ESG profile) is a crucial first step.

2. Know your potential claimants

ESG issues are panoramic and pervasive by nature. While claims can therefore arise from a wide range of areas, they can also be advanced by a broad and diverse group. It is important to understand that these key players may also have different motivations. Where some will seek to address and claim financial loss (i.e. be driven by economic motivations), others might be driven by a desire to prompt behavioural change and raise publicity. Three broad categories of potential claimants to pay particular attention to are:

  1. Individuals and groups of claimants. They can be consumers, shareholders, institutional investors[1], trustees, employees or anyone with a vested interest in your company by virtue of either buying from you, selling to you, investing in you, or working for you. In certain areas, particularly mass tort claims, those individuals and claimant groups may be made up of international as opposed to simply domestic players.
  2. Non-governmental organisations (NGOs), charities and pressure groups/activists (with examples including Greenpeace and Client Earth) have used ESG litigation (or the threat of it) to drive strategic and operational changes forward in corporate behaviour. While not a new stakeholder in litigation, their influence, particularly in this area, appears to be on the rise.
  3. Regulators such as the Advertising Standards Authority (ASA) and the Competition and Markets Authority (CMA) have also become increasingly involved with ESG issues, and the rise in regulatory action in this area is expected to continue.

Much like with ESG profiles, every business will have its own unique and diverse mix of stakeholders which will need to be examined to identify potential claimants. The rise of litigation financing in the ESG sphere, as well as US-style claimant litigation law firms, also presents those potential claimants with new routes to bring actions without having to finance them in the usual way.

3. What sort of claims could be commenced?

The broad range of areas, and of claimants, that may give rise to ESG litigation naturally coalesce in a variety of different causes of action which may give rise to litigation. Some represent new applications of existing legal frameworks, but some are cutting-edge developments as the law responds (as it always has) to new challenges. A few examples include:

  • Shareholders seeking to bring actions on behalf of a company against its directors for alleged breaches of directors' duties. This was the approach taken (unsuccessfully) in two recent cases[2], which are covered in more detail in our earlier article about a High Court decision on claims by an environmental organisation motivated by climate concerns.
  • Claims for misstatement or misrepresentation in respect of ESG claims made by companies, including litigation connected with certain financial publications under s90 and s90A of the Financial Services and Markets Act 2000 (FSMA). The use of s.90 and s.90A FSMA is explored further in our article from last year on the rise in ESG litigation and the potential for shareholder action under the deployment of FSMA claims.
  • Judicial review (JR) – while unlikely to be directly relevant to private companies (although they may be indirectly impacted by any JR decisions, depending on the subject matter of them), decisions of government and other public bodies can be challenged this way and they are likely to be a key element of the ESG case-load going forward, given the nature of decision-making in this area.
  • Claims based on parent company liability – some cases have shown an increasing willingness by the English courts to consider claims that UK domiciled parent companies bear responsibility for the actions and operations of their foreign subsidiaries – particularly in cases where a parent company holds itself out as exercising a degree of supervision and control over its subsidiaries[3].
  • Supply chain liability - there are cases where a duty of care owed by companies has been found to extend to include the actions of its suppliers (creating a direct risk for supply chain liability)[4].  However, more likely, and of more general application, will be businesses bringing claims through the supply chain where there have been ESG-related issues to "pass on" liability or impact.
  • Regulatory complaints and investigations – the CMA has commenced a number of investigations into 'greenwashing'. For the time being these are focused on the fashion, FMCG and gas industries, but we expect other sectors to come under scrutiny over time. Meanwhile, the ASA regularly adjudicates on misleading environmental claims across multiple sectors – most recently it has used Artificial Intelligence (AI)  tools to 'sweep' for airlines making exaggerated sustainability claims in social and digital media. We expect complaints to the ASA and Trading Standards on green and broader ESG issues to rise further.

4. Avoid misstatements

With pressure from investors and other stakeholders mounting and legal requirements growing, companies are increasingly being expected (and in some instances required) to make ESG-related disclosures. Others are keen to promote their ESG credentials in marketing. With this comes an increased risk of litigation, reputational damage and financial penalty if it is uncovered that a company has made an incorrect or misleading disclosure. 

It is therefore critical that organisations take care when making claims and statements in relation to ESG issues.

In order to protect yourself from this exposure to litigation, regulatory complaints and/or allegations of 'greenwashing' your reputation with inaccurate or overstated ESG claims, we recommend introducing processes to verify any ESG claims being made. This should include clearance of ESG claims made in marketing or online. It is also advisable (and, in marketing, essential) to include qualifications and limitations in relation to any statements or claims, such as explaining the methodologies used to reach a given conclusion, in order to reduce the likelihood of misleading your investors, consumers and key stakeholders. Organisations should also focus on tangible and measurable progress towards ESG objectives, and avoid overstating achievements or over-committing to improvements without a plan to deliver them. Avoid vague, unsupportable statements such as unqualified claims to be 'sustainable', 'green' or 'planet-friendly'. 

Similarly, with so many organisations publishing ESG-style reports, whether voluntarily or because of a legal requirement, the need for precise disclosure is essential. We expect that the growth of ESG reporting regimes and standards will continue, and it will be increasingly easy for potential claimants to gather information regarding the sustainability performance of a business or large organisation.  Coupled with the trend for regulators to be under a legal duty to investigate potential breaches of sustainability rules brought to their attention by individuals, the importance of fair, proportionate, and precise disclosure cannot be overstated. Understanding the specific requirements of the myriad of ESG disclosure regulations will be critical to avoiding misstatements or material omission from ESG reports, and great care will need to be taken in their preparation.

For more insight in this area, see our earlier article on the risks of greenwashing in the UK and worldwide, or sign up to our upcoming ThinkHouse seminar which will include a session on greenwashing, the latest guidance and how regulators are approaching these type of claims.

5. ESG Audits

When considering your ESG obligations and commitments, it is important to consider how these flow through the rest of your group, joint ventures and supply chain partners (and the impact that the actions of those parties can have on you).

We recommend considering an annual ESG audit, together with regular progress monitoring and acting on the results. This can provide you with an objective perspective on where your business is likely to encounter issues and how these can be tackled.

Where relevant, consider implementing codes of conduct, information rights and reporting requirements within supplier and joint venture agreements to ensure that you can align your ESG standards and obtain the information you need in order to monitor that performance and substantiate the statements that you make about ESG performance.

6. Invest in training

In order to ensure that your business complies with its duties and operates in a way that is consistent with its ESG values, it will be necessary to provide staff, directors and other stakeholders, such as marketing agencies, with regular training. This can be made part of ongoing compliance and other training programmes, but it is worth exploring opportunities to create positive, ESG-related engagement through other methods (such as discussions with staff to understand their perspectives and identify opportunities they might suggest for improvements in practical operations).  

7. Check your insurance cover

We also recommend checking your insurance portfolio and the extent to which this covers you in relation to the ESG-related risks your business may face. Particular attention should be paid to insurance policies covering directors and officers of the company, as this may provide protection and legal costs cover in the event that their duties are alleged to have been breached. Some of these policies also offer entity cover, which protects the company itself against claims. If your cover is insufficient for your business's needs, consider whether it is appropriate or necessary to change your cover.

Some further details on the interaction between ESG claims and Directors & Officers (D&O) insurance cover are included in our article on D&O liability, key factors influencing it's rise and the growth areas for potential claims.

8. Beware those selling ESG services without adequate credentials

While engaging an ESG consultant can seem like an effective way to streamline or outsource the delivery of ESG objectives, care should be taken to ensure adequate due diligence has been carried out on the proposed supplier, as you would with any other new supplier. Thought needs to be given as to whether the services offered will support your business on its ESG goals, and businesses should be sceptical about any suppliers offering what looks to be an 'easy' route to delivering impactful ESG aspirations. Such 'easfy' routes (without a business first investing in the transformational change needed to substantiate those statements) can give rise to issues of potential greenwashing later down the line.  

9. Formulate an Action Plan

While the actual reaction to a piece of ESG litigation or regulatory enforcement action will depend on the specific facts of any case, having a plan can be essential in speeding up reaction speeds and spotting potential issues in advance. This should cover topics such as Public Relations (PR) issues (including internal communications and/or external statements, particularly for publically traded companies), key stakeholders and advisers to contact, internal management responsibility and the methodology for identifying and preserving key documentary evidence.

10. Understand the regulatory framework and take legal advice

If you find yourself facing ESG litigation or a regulatory complaint, or you think such action might be imminent, the best course of action is to seek input from a legal team with experience in this area who will help you to deal with claims and protect your business. Even better, involve those advisors in the risk analysis and planning aspects highlighted above. By speaking to your in-house legal team or external lawyers, you will be better positioned to comply with regulatory changes and reduce (or at least manage) litigation risk. For those businesses operating in the international market, you will also need to consider the potential changes necessitated by dealing in other jurisdictions.

What does your ESG risk map look like?

These Top 10 considerations are a practical starting point to reviewing your ESG risk areas and to helping your business prioritise any gaps or areas for improvement. To understand more about some of the points covered here, please take a look at the related articles covered, our ESG guide and contact either Sean Adams or Samantha Holland in our Litigation and Insurance teams to discuss any key issues this insight raises for your business.

This article shares some of the most important considerations in this area of ESG litigation and managing risk and is prepared based on extensive research and examples collated by our cross-sector team, with significant contributions from Charles Couvreur and Anabelle Percy.

 

Footnotes

1 For a more detailed look at why ESG credentials matter to investors, please see our recent article on how identifying and disclosing material ESG issues is now an essential aspect of corporate reporting and an integral part of the investment industry. This is expanded on further in our recently launched ESG guide 'ESG: The Investor perspective', which provides companies with practical insights to inform their approach to ESG engagement and reporting.

2 In Client Earth v Shell, environmental not-for-profit organisation Client Earth argued that Shell's board of directors were failing in their duty to act in the best interest (s172 CA 2006) of the company's members where their action on climate-related risks was concerned. 

3 For example, a group of Nigerian claimants brought a claim against Shell and its Nigerian subsidiary in Okpabi v Royal Dutch Shell, arising out of losses suffered due to alleged oil leaks from infrastructure operated by Shell's Nigerian subsidiary.

4 In Begum v Marand the widow of a deceased worker brought a claim based on knowledge of unsafe working practices down the supply chain. The defendant was a ship broker who negotiated the sale of a defunct oil tanker during the demolition of which the worker fell to his death in a ship yard. The Court of Appeal allowed the case to proceed on the basis that it was arguable the defendant owed a duty of care to the deceased


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