Greenwashing: investor protection

In relation to investor protection, regulators are demonstrating increasing willingness to investigate and penalise companies in relation to their ESG disclosures (referred to in some contexts as ‘greenwashing’ – we address another form of greenwashing in the “Greenwashing in public messaging” section of this graphic). They have made clear that inaccurate, misleading or insufficient ESG disclosures may give rise to liability under existing reporting frameworks or statutory obligations, such as annual corporate reporting or mandatory reporting standards for listed companies. Liability risk could also materialise under market abuse regulations, if disclosures created a false market.

• Illustrative example: The U.S. Securities and Exchange Commission investigated, and settled charges against, an investment adviser for historical misstatements and omissions relating to the use of ESG considerations in making investment decisions for certain mutual funds it managed: see further details here.

• Illustrative example: The Australian Securities and Investments Commission has similarly recently provided guidance on the questions to ask when offering or promoting sustainability-related products: see here.

New and incoming ESG disclosure regimes also pose risks. Businesses which are subject to multiple reporting frameworks face additional challenges in navigating these, given they are often similar, but different. For example, the Corporate Sustainability Reporting Directive, which comes into effect from 2023 and introduces an extensive disclosure obligation on sustainability topics for a wide range of EU and non-EU companies generating a certain amount of the business in the EU, whilst the IFRS’s non-financial counterpart the ISSB is also working on its own global standards for companies’ climate and sustainability-related disclosures. In 2022, the US Securities and Exchange Commission published its own proposal for climate disclosures in annual reports and registrations.

Some countries already have statutory liability provisions for misleading statements that cause investors loss, which can form the basis of investor claims (e.g. s.90A FSMA claims in the UK). In the UK, in certain circumstances, liability may also arise under common law principles such as negligent misstatement or misrepresentation.

Greenwashing: advertising

Advertising watchdogs are taking an increased interested in ESG and sustainability claims in all forms of advertising, to guard against the risk of “greenwashing”.

• Illustrative example: In the UK, the Competition & Markets Authority has produced a “Green Claims Code”, and the Advertising Standards Authority (ASA) has published guidance relating to rules on misleading environmental claims and social responsibility. Stringent monitoring is already being demonstrated by an increase in rulings on greenwashing complaints. These rulings make clear that “green claims” made about business activities need to be set in a proper context to avoid being misleading and that such claims made about products must be substantiated and take into account their full lifecycle. Additionally, the ASA has been researching consumer perceptions of “carbon neutral” and “net zero” claims and published an eLearning module addressing rules on environmental claims and social responsibility.
• Illustrative example: The Netherlands Advertisement Code Commission ruled that elements of Dutch airline KLM’s “Fly Responsibly” marketing campaign violated provisions on misleading marketing.

ESG-related/sustainability claims are also subject to increasing scrutiny by third parties. Regulatory scrutiny can act as a prompt for follow-on third party litigation.

• Illustrative example: Following the Netherlands KLM ruling referenced above, FossielVrij NL, Reclame Fossielvrij and ClientEarth filed a claim in the Amsterdam District Court against KLM in relation to the same campaign.

As an alternative to litigation, third parties can use “soft law” standards to lodge formal and high-profile complaints about statements that are perceived to be “greenwashing”. In particular, countries adhering to the OECD Guidelines for Multinational Enterprises have National Contact Points (NCPs) that act as a non-judicial grievance mechanism for instances of non-compliance with the Guidelines and these are being used for this purpose.

• Illustrative example: NGOs have lodged a complaint at the UK NCP regarding statements made by a UK-based energy company in relation to its carbon omissions and the environmental impact of its business activities: see here.

Individual accountability

Shareholders can bring derivative claims against directors for breach of their duties, for example the duty to promote the success of the company for members and in doing so have regard to various matters, including the company’s impact on the “community and environment”. Similarly, beneficiaries of trusts may also have potential claims for breach of trust against trustees managing relevant investments.

• Illustrative example: In the UK, a derivative action has been brought against the directors of the trustee of the Universities Superannuation Scheme (USS), for alleged breaches arising from a failure to divest away from fossil fuels. Although the High Court in England did not give permission for the USS claim to proceed (see here for more details), other claims may be viable on different facts.

• Illustrative example: In Australia, two members of the HESTA super fund instructed lawyers to send a letter to the fund’s trustees and directors alleging that they are in breach of their legal obligations as a result of various ESG issues, including failure to divest from companies with expanding investments in fossil fuel projects, voting against shareholder proposals requiring such companies to disclose plans to reach net zero, and engaging in allegedly deceptive conduct in relation to statements regarding HESTA’s own environmental credentials.

Challenges to corporates

Claimants are using high-profile litigation claims to obtain court orders requiring companies to cease activities that are alleged to be inconsistent with relevant duties of care, human rights and net zero commitments.

• Illustrative example: The District Court in The Hague ordered Shell to reduce its global carbon emissions by 45% by 2030 compared with 2019 levels, as explained in detail here. The decision is currently being appealed by Shell. The NGO who brought the claim has indicated that it is prepared and willing to take similar action against other major companies, as outlined here.

• Illustrative example: Against a background of the Shell decision above and a German Federal Constitutional Court ruling in 2021 that the provisions of the German Climate Change Act were incompatible with fundamental rights, Deutsche Umwelthilfe, an NGO active in environmental protection, and Greenpeace have launched or supported lawsuits against three car manufacturers to stop the production of combustion engine cars by 2030. The Regional Court of Stuttgart dismissed the NGO’s climate lawsuit against Mercedes-Benz, although the NGO indicated that it would appeal the decision: see here.

Alternatively, third parties may use non-judicial grievance mechanism under the OECD Guidelines (overseen by the National Contact Points set up in each country that adheres to the OECD Guidelines), to seek declarations of ESG failures by companies.

Historical ESG harms

Companies may face claims for “ESG harms” (e.g., environmental damage, or adverse human rights impacts) that have allegedly occurred. Such claims are typically based on “duty of care” arguments and/or non-compliance with specific legislation (e.g., environmental laws, modern slavery laws). Where the harm has arisen from the operations of a multinational company’s overseas subsidiary, there is a growing trend for a claim to be brought in the parent company’s home country, with the parent company included as a defendant. This may occur even where claims have been brought in the local jurisdiction as well.

• Illustrative example: In the UK, there have been claims against parent companies by claimants affected by an oil spill in Nigeria (Jalla v Shell), tea workers in Kenya (against James Finlay Ltd) and Malawian tea workers (Against PGI Group Ltd): see here.

• Illustrative example: Also in the UK, the Supreme Court decided that a mass tort claim was arguable against a UK parent company arising from its subsidiary’s activities (Okpabi v Shell), following a similar Supreme Court case regarding the liability of parent companies for their subsidiaries (Vedanta v Lungowe): see here.

• Illustrative example: In Canada, the British Columbia Court of Appeal allowed a claim to proceed to trial against a Canada-based parent company in relation to a Guatemalan subsidiary (Garcia v Tahoe Resources, noting the claim settled before reaching trial).

Liability risk in this area is continuing to develop. For example, the EU is proposing to introduce a new mandatory ESG due diligence regime, which if adopted in its current proposed form will include provisions in relation to civil liability, potentially making claims against parent companies easier to bring.

If litigation is not an option, or a claimant wishes to avoid the costs risk associated with litigation in many countries, they may use “soft law” measures to lodge formal and high-profile complaints about businesses who are responsible for ESG harms. In particular, countries adhering to the OECD Guidelines for Multinational Enterprises have National Contact Points (NCPs) that act as a non-judicial grievance mechanism for instances of non-compliance with the Guidelines. Although NCPs cannot award damages or impose other penalties, they can make declarations of non-compliance with the OECD Guidelines (which can cause reputational damage).

Challenges to states

Although companies are facing an increasing amount of litigation in relation to ESG issues, a significant proportion of climate litigation claims are still brought against national governments. Challenges are being brought in relation to government contracts and licences awarded, where these are considered to be inconsistent with the government’s net zero commitments under the Paris Agreement (energy and infrastructure projects are particular targets). Climate policy more generally has been challenged in a number of jurisdictions. When successful, these claims can drive a change in government policy or regulatory oversight, which can quickly affect the environment in which businesses operate.

• Illustrative example: The UK High Court has recently ruled that the UK Government failed to take into account material considerations when formulating climate policies in its Net Zero Strategy and ordered it to submit a revised analysis to Parliament before the end of March 2023 explaining how the policies in the Net Zero Strategy will contribute to the UK’s emissions reduction targets: see here.

• Illustrative example: An NGO in Belgium has filed an action again the central bank of Belgium alleging that the European Central Bank’s quantitative easing programme is “exacerbating the climate crisis”, which is currently being appealed after it was dismissed at first instance: see here.

• Illustrative example: Inhabitants of the Tiwi Islands (Australia) applied for an injunction to prevent South Korea export credit agencies funding an offshore gas development. This action proved unsuccessful, but the gas project was later blocked by the Federal Court of Australia on the basis that the offshore gas regulator had failed to recognise the traditional owners as interested parties who needed to be consulted: see here.

• Illustrative example: A Japanese Investor brought a successful ICSID claim against Spain alleging that changes to Spain’s solar power regime breached the Energy Charter Treaty: see here.