While world leaders convene 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 the green agenda is something remote from day-to-day business for UK SME owners.
However, an interesting statistic from the Grantham Institute’s 2021 ‘Global Trends in Climate Change Litigation Policy Report’, showed the number of climate change-related court cases has more than doubled since the Paris Agreement. In fact, as at 31 May 2022, there were 2,002 cases of climate change litigation globally.
Katie Allard, associate in the Dispute Resolution team at Kingsley Napley LLP explains that UK companies and business owners are not immune. Earlier this year, ClientEarth started legal action against Shell PLC’s 13 executive and non-executive directors, seeking to hold them personally liable for failing to properly 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 truly aligns with the Paris Agreement is a breach of the directors’ duties under sections 172 (the duty to promote the success of the company) 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 up the floodgates to further ESG (Environmental Social and Governance) related claims; enabling action to be taken against not only businesses, but also the individuals who control the companies and make the decisions if a case can be made that there has been a failure to meet climate related responsibilities.
There are several factors behind the growing trend in ESG litigation which might be brought by private individuals, as well as climate activist groups.
A developing ESG Regulatory Framework globally. New obligations on companies in the ESG arena are emerging all the time and are a reason to hold companies to account. A new directive passed by the European Commission in February 2022 for example imposes a corporate due diligence duty on in-scope large companies operating in Europe to ensure that they contribute to sustainable development and the sustainable transition of economies by identifying, bringing to an end, preventing, mitigating and accounting for human rights and environmental impacts in their value chains.
Anticipated disclosure requirements in the US. The U.S. Securities Exchange Commission (SEC) is finalising rules to require climate change disclosure in the annual reports, prospectuses and registration statements of all public companies registered with the SEC, including any company (domestic or foreign) whose stock is listed on any U.S. stock exchange. Where the US leads other financial regulators may follow.
Growing climate-related group actions. Climate Group litigation such as the dirty diesel cases against various car manufacturers are on the rise in the UK, as are the size of such claims. The fact Volkswagen 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 group actions attractive to litigation funders and litigants.
Increased funding options. The growth of the litigation funding market is helping to support many ESG related claims. There are now estimated to be £13bn of litigation funds operating in the UK market place.
Crackdown by Watchdogs. UK authorities are beginning to crackdown on how organisations 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 material information about its environmental credentials in two high street adverts that appeared the run up to COP26. Earlier in the summer the Competition and Markets Authority (CMA) launched its first so called greenwashing investigations under the Green Claims Code into the eco-friendly and sustainability claims made by ASOS, Boohoo and George at Asda about their fashion products, including clothing, footwear, and accessories. We can expect to see more regulatory scrutiny of green marketing in other sectors future.
Business owners should therefore be alive to the risk of litigation from:
- Investors who rely on false or misleading statements about ESG practices when deciding whether to invest in a business or a fund.
- Shareholders of private limited companies relying on ESG information that turned out to be false or misleading.
- Shareholders in listed companies relying on false or misleading information published in listing particulars, the prospectus, annual reports and accounts, directors’ reports, strategic reports and corporate governance statements.
- Shareholders of a subsidiary relying on a parent company to exercise a degree of supervision and control of its subsidiaries, but when it does not in fact do so. The failure to exercise an appropriate degree of supervision and control may constitute the abdication of a responsibility that it has publicly undertaken through its ESG disclosures, and thus leave it liable to claims.
Bringing claims in such scenarios will not be straightforward, and claimants will likely face some tricky 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 as to their duties and seek independent legal advice immediately if they are concerned by the actions or decisions of their fellow directors.
It would also be prudent to ensure regular internal risk assessments are carried out including due diligence on supply chains, with external auditing and validation recommended if this is practical. And business planning for a low carbon/carbon neutral economy should be realistic, achievable and transparent to lessen the risk of misrepresentation.
As the recent so-called backlash against ESG demonstrates, businesses are being held to account if they over-promise or under deliver on green and climate related strategies.
It is an unenviable path for business owners to walk, but the risk of green litigation can no longer be ignored. It now deserves a place on the business agenda.