As a growing number of companies set sustainability goals and publish ESG-related data, investors, regulators and the public are exercising greater scrutiny of corporate sustainability efforts, whether real or alleged. Faranak Ghajavand and Beata Brachkov look at the key trends emerging in ESG litigation and what these mean for future disputes.

Climate is eclipsing governance and social issues at the top of the ESG agenda, given the urgent and existential threat of the global temperature rise. With increased scrutiny and stricter regulatory requirements regarding ESG disclosures, the risk of litigation for those companies falling foul also rises.

Claims based on climate change grounds have been brought since the 1980s, but scientific advances are making it easier to attribute the damages caused by climate change to companies’ activities. Those wishing to bring claims are relying on existing laws in sometimes innovative ways, with ESG claims based on a wide spectrum of legal grounds. These include tort, breach of fiduciary duty, claims for misstatement/misrepresentation, and under company and securities law.

Claims based on parent company liability

We have seen a number of cases brought against English-based parent companies on the basis of alleged environmental damage by their subsidiaries abroad. In Lungowe and others v Vedanta Resources PLC and another [2019] UKSC 20, a group of Zambian claimants brought claims in negligence against the Zambian subsidiary and its English-based parent arising out of losses caused by the subsidiary’s mining operations in Zambia.

Similar claims were brought by a group of Nigerian claimants against Shell and its Nigerian subsidiary in Okpabi and others (Appellants) v Royal Dutch Shell Plc and another [2021] UKSC 3 arising out of losses suffered due to alleged oil leaks from infrastructure operated by Shell’s Nigerian subsidiary. In both cases, the Supreme Court allowed the claims to proceed through the English courts by extension of the duty of care owed by the subsidiary onto the parent company. This was done by assessing the degree of control exercised by the English-based parent over its subsidiary.

Claims based on supply chain liability

In a similar legal vein, the duty of care owed by companies may be extended to include the actions of its suppliers. In Begum v Maran (UK) Ltd [2021] EWCA Civ 326, the widow of a deceased worker brought a claim based on knowledge of unsafe working practices down the supply chain. The defendant was a shipbroker who negotiated the sale of a defunct oil tanker, during the demolition of which the worker fell to his death in a shipyard. The Court of Appeal has allowed the case to proceed on the basis that it was arguable the defendant owed a duty of care to the deceased.

Claims for misstatement/misrepresentation

Several greenwashing claims, both in the UK and in the Netherlands and Germany, have been brought against companies such as BP, Shell and KLM for breaches of advertising standards and European consumer law. These say the companies’ alleged ‘carbon neutral’ practices give consumers the false and/or misleading impression that the climate impact of their high-carbon products is being reduced.

We expect to see similar claims, potentially structured by consumer claimants in group litigation, for misstatement/misrepresentation arising out of the sale of advertised ‘carbon neutral’ products aimed at setting off one’s carbon footprint. Claims might arise where such off-sets may not sufficiently address the negative environmental externalities of products and services offered by industries such as oil and gas or aviation.

Claims under the Companies Act 2006 for breaches of directors’ duties

ClientEarth’s recent claim against Shell’s board of directors is thought to be the first case in the UK where a shareholder claimant has taken action against a company’s board for failing to “properly manage climate risk”, thereby “breaching its legal duties”. ClientEarth says that despite committing to net-zero by 2050, Shell’s current strategy would result in a 4% rise in net emissions by 2030, which leaves the directors falling short of their directors’ duties. If successful, the case could have a huge impact on how UK boards devise and report climate strategies.

Claims under s90/90A of the Financial Services and Markets Act 2000 (“FSMA”)

There is an increased impetus for boards to assess ESG risks by complying with regulations or including ESG issues when devising investment strategies and making credit decisions. With this, we expect to see a rise in claims based on companies’ statements and disclosures on ESG rather than specific actions already taken. In 2008, the New York State attorney general commenced proceedings against ExxonMobil, alleging the company had misled investors about the risk of climate change regulation to its business. Similarly, earlier this year, the US Securities and Exchange Commission (SEC) fined Bank of New York Mellon $1.5m for misstatements regarding whether certain funds had undergone an ESG quality review. The SEC found that at the time of the relevant statements, numerous investments in those funds did not have an ESG quality review score.

Similar actions are possible in the UK under s90/90A of FSMA by shareholders of UK-listed companies who have suffered loss arising from the fall in a company’s share price. Liability may arise due to a company’s untrue or misleading statements relied on by shareholders in deciding to acquire, hold or dispose of certain securities. Similar to the RBS Rights Issue litigation or Tesco litigation, such actions will likely take the form of high-profile class actions.

Comment

So far, the class actions we have seen in England have been mass tort claims, such as the case against BHP brought by more than 200,000 victims of Brazil’s Mariana dam collapse in 2015, which led to the release of toxic mining waste. Despite some of the victims having recovered compensation in Brazil, the Court of Appeal has allowed the case to proceed in the English courts, saying that the recovered damages were modest ([2022] EWCA Civ 951).

On the other hand, in Jalla v Shell [2021] EWCA Civ 1389, relating to the largest-ever oil spill in Nigeria’s history, the Court of Appeal gave a more conservative ruling in relation to “opt out” class actions. It ruled that the case could not proceed as a representative action under Civil Procedure Rule 19.6 due to the lack of “same interest” among the victims as to damage. On that basis, ESG claims of this type seem likely to continue to proceed on an “opt in” basis either under the Group Litigation Order route or on a test-case basis. Such cases will need to be supported by philanthropists or litigation funders, who appear increasingly willing to invest in damages-based ESG cases on behalf of claimants who would otherwise not have the means to seek redress.

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