As world leaders gather in Egypt for COP 27 to discuss progress on the Paris Agreement, the legally binding international treaty on climate change adopted in 2016, it is easy to think that the green agenda is something far removed from day-to-day business for SMEs. from United Kingdom. owners
However, an interesting statistic from the Grantham Institute’s 2021 ‘Global Trends in Climate Change Litigation Policy Report’ showed that the number of court cases related to climate change has more than doubled since the Paris Agreement. In fact, as of May 31, 2022, there were 2,002 climate change litigation cases worldwide.
Katie Allard, an associate in the dispute resolution team at Kingsley Napley LLP, explains that UK companies and entrepreneurs are not immune. Earlier this year, ClientEarth launched legal action against the 13 executive and non-executive directors of Shell PLC, seeking to hold them personally accountable for failing to adequately prepare a climate strategy consistent with the Paris Agreement.
In the first case of its kind, ClientEarth claims that the board’s failure to adopt and implement a climate strategy that actually aligns with the Paris Agreement is a breach of directors’ duties under sections 172 (the duty to promote the success of the business) and 174 (the duty to exercise reasonable care and skill) of the UK Companies Act 2006.
It is anticipated that this landmark case will open the floodgates for more ESG (Environmental Social and Governance) related claims; allow action to be taken not only against companies, but also against the people who control the companies and make the decisions if a case of non-compliance with climate-related responsibilities can be brought.
There are several factors behind the growing trend in ESG litigation that can be brought by individuals as well as climate activist groups.
An ESG regulatory framework in development worldwide. New obligations for companies in the ESG arena are constantly emerging and are a reason to hold companies to account. A new directive approved by the European Commission in February 2022, for example, imposes a corporate due diligence duty on large companies operating in Europe to ensure that they contribute to the sustainable development and sustainable transition of economies by identifying, ending, prevent, mitigate and account for human rights and environmental impacts in its value chains.
Expected Disclosure Requirements in the US The US Securities and Exchange Commission (SEC) is finalizing rules to require climate change disclosure in annual reports, prospectuses and registration statements of all public companies registered with the SEC, including any company (domestic or foreign) whose shares are traded on any US stock exchange. Where the United States leads, other financial regulators can follow.
Increasing group actions related to climate. Climate Group litigation, such as dirty diesel cases against various car manufacturers, is increasing in the UK, as is the size of such claims. The fact that Volkswagen has agreed to pay £193m to settle the 91,000 legal claims brought against it in England and Wales following the ‘dieselgate’ emissions scandal is likely to make similar class action attractive to litigants and funders. of litigation.
Greater financing options. The growth of the litigation finance market is helping to support many ESG-related claims. There are now an estimated £13bn of litigation funds operating in the UK market.
Repression by the Watchdogs. UK authorities are beginning to crack down on the way organizations present their ESG credentials. In October 2022, for example, the Advertising Standards Authority (ASA) found that HSBC had misled customers by making unqualified claims and omitting important information about its environmental credentials in two commercials that appeared before COP26. Earlier this summer, the Competition and Markets Authority (CMA) launched its first greenwash investigations under the Green Claims Code into green and sustainability claims made by ASOS, Boohoo and George at Asda on its fashion products, including clothing, footwear. , and accessories. We can expect to see more regulatory scrutiny of green marketing in other sectors in the future.
Therefore, business owners should be aware of the risk of litigation from:
- Investors who rely on false or misleading statements about ESG practices when deciding whether to invest in a company or a fund.
- Limited liability company shareholders who rely on ESG information that turned out to be false or misleading.
- Shareholders of listed companies based on false or misleading information published in the listing details, the prospectus, the annual reports and accounts, the directors’ reports, the strategic reports and the corporate governance statements.
- Shareholders of a subsidiary who rely on a parent company to exercise a degree of supervision and control of its subsidiaries, but when in fact it does not. Failure to exercise an adequate degree of oversight and control may constitute a waiver of a liability that you have publicly assumed through your ESG disclosures and therefore subject you to claims.
Filing claims in such scenarios will not be straightforward, and claimants are likely to face some difficult hurdles, for example, when it comes to proving reliance on the statement(s) in question and quantifying losses.
However, it is important that directors are clear about their duties and seek independent legal advice immediately if they are concerned about the actions or decisions of their fellow directors.
It would also be prudent to ensure that regular internal risk assessments are carried out, including due diligence on supply chains, and external audits and validations are recommended if practical. And business planning for a low-carbon/carbon-neutral economy must be realistic, achievable, and transparent to reduce the risk of misrepresentation.
As the recent so-called ESG backlash demonstrates, companies need to be held accountable if they over-promise or under-deliver on green and climate-related strategies.
It’s an unenviable path for business owners, but the risk of green litigation can no longer be ignored. Now it deserves a place on the business agenda.
Lawsuits related to the environment: the sign of things to come