Legal development

ESG Litigation - Get Ready Respond and Resolve

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    This was originally published by Ashurst on 25 January 2021 and updated for Emerald Insight on 11 October 2021. 

    ESG. Rarely have three letters assumed such prominence in the business world in such a short space of time. The abbreviation for environmental, social, and governance factors has risen to the top of the agenda across a range of industries, as companies grapple with how to demonstrate that in addition to profit-making, they create broader value (or, at least, do not cause harm) to the world.

    Often thought of as a synonym for climate and environmental consciousness, ESG is in fact a broad umbrella term. Defined variously depending on the context in which it is used, it spans factors as diverse as emissions and waste disposal, human rights and employee relations, and financial crime and corporate governance. Put simply, it is often used as an index of “good corporate citizenship”.

    "Often thought of as a synonym for climate and environmental consciousness, ESG is in fact a broad umbrella term."

    Where has this focus come from? Enhanced regulatory frameworks since the global financial crisis of 2007 to 2008, increased enforcement activity, the rise of ethical consumer and societal attitudes to ESG issues, amplified by social media and rejection of the status quo, and a growing awareness of the systemic and financial consequences of climate change and environmental damage have all contributed. The costs to companies of “getting ESG wrong” are high, potentially resulting in not only financial damage, but also reputational harm affecting the entire business. The disruption wrought by COVID-19 will likely enhance, not diminish, these risks.

    Here we focus on the litigation risks associated with this increased focus on ESG, and how companies can get ready, respond, and ultimately resolve some of the more likely claims involving ESG issues. While it’s not possible to cover all potential legal claims against companies which may arise from the ESG universe in this article, we look broadly at the litigation risks arising from ESG factors in England together with relevant experience in other jurisdictions which is likely to influence future litigation in England and potentially elsewhere.

    What are ESG factors?

    ESG factors may include:

    EnvironmentalSocialGovernance

    Climate change impacts: mitigation and adaptation

    Environmental management practices

    Waste disposal

    Energy generation and efficiency

    Working and safety conditions

    Human rights infringements

    Diversity and inclusion

    Consumer protection

    Modern slavery

    Anti-bribery and corruption practices

    Financial crime

    Data protection

    Directors’ duties and corporate reporting obligations

    What is the impact of ESG factors?

    The recent Volkswagen emissions scandal is said to have cost the company around USD 33.3 billion in fines, penalties, financial settlements and buybacks in jurisdictions around the world. While eye-watering fines and criminal prosecutions make the headlines, much of the risk of getting ESG issues wrong is commercial rather than legal in nature, including loss of market capitalization and access to capital, damage to brand, damage to recruitment capabilities and potential disruption from activists. The financial services sector, under pressure from central banks and regulators, and informed by a desire to promote the sustainability of its own products, has pushed investee companies to be more ESG-aware. Regulatory requirements are also becoming an important driver for change, in particular the EU Taxonomy Regulation, which will make the question of whether or not financial products can be said to be ‘sustainable’ or ‘green’ an objective, rather than a subjective test.

    "Much of the risk of getting ESG issues wrong is commercial rather than legal in nature, including damage to brand, damage to recruitment capabilities, potential disruption from activists, and loss of access to capital."

    Investors are increasingly focusing on and publicly committing to evaluating their holdings based on ESG criteria. This is causing a shift away from investment in companies that are not committed to mitigating ESG risks. Activist shareholders put pressure on companies to build a “green” reputation, exercising voting rights to push for greater ESG measures to be taken or for changes in corporate governance to take place and to adopt gold standards on ESG issues globally, and publishing score cards reporting on and comparing company performance on ESG issues. Consumers and NGOs may try to call for boycotts, or be the source of negative publicity through high-profile campaigning on climate change, modern slavery, respect for human rights and other ESG issues. They may also put pressure on regulators to intervene and investigate.

    Facing litigation

    The potential liability does not end with enforcement, fines and reputational damage. There are also litigation levers which those who are, or claim to be, aggrieved can pull; more and more class actions or group litigations are being brought in the ESG space. The principal causes of action that are relevant under English law (and that of many other common law jurisdictions) include: 

    • claims brought in tort (such as negligence, nuisance, conversion of property, and trespass to the person);
    • statutory claims (such as human rights claims against public authorities under the Human Rights Act 1998, claims under consumer protection legislation, claims against issuers oissuers of securities who may have misled investors about ESG risks under section 90 or 90A of the Financial Services and Markets Act 2000, and claims based on breaches of directors’ duties under the Companies Act 2006);
    • equitable claims (such as unjust enrichment and breach of fiduciary duties by directors or trustees);
    • criminal claims (such as facilitation of modern slavery or child labour, participation in money laundering, acquisition of criminal property); and
    • administrative law claims (such as challenges to planning decisions or environmental permits and approvals).

    There have been recent legislative attempts to enhance ESG compliance. For example, in France, the introduction of the Corporate Duty of Vigilance Law has not only placed obligations on corporations to report on their compliance with human rights and environmental laws and regulations, but also enables individuals and NGOs to obtain court relief compelling companies to stop non-compliant behaviour. Moreover, the UK government has announced plans to introduce new supply chain due diligence obligations in relation to deforestation through the Environment Bill, non-compliance with which could result in fines.

    It is likely that more will follow. The European Commission is preparing draft mandatory human rights and environmental due diligence legislation, with the European Parliament in March 2021 voting overwhelmingly in favor of a report calling for the urgent adoption of such legislation. Under the proposed framework, EU member states will have the power to investigate and fine non compliant companies. The UK Parliament’s Joint Committee on Human Rights has urged the UK government to advance legislation to impose a duty on all companies, including parent companies, to prevent human rights abuses, with failure to do so becoming an offence, along the lines of the equivalent provisions of the Bribery Act 2010 (which criminalize failure by commercial organizations to prevent bribery).

    It would be remiss not to mention contractual claims: as ESG becomes ever more important, ESG standards are likely to be incorporated into supply contracts, manufacturing contracts, joint venture agreements, etc. However, in this article we focus largely on non-contractual claims and not the mitigation of litigation risk in these contracts.

    What is the aim of ESG litigation, and how successful is it?

    The claims brought by individual claimants and NGOs in relation to ESG factors broadly fall into three categories:

    • private law claims seeking monetary compensation (damages);
    • private/public law claims seeking to change companies' (or states') behaviour and/or bring about alternative outcomes; and
    • public law claims directed at administrative decision-making, for instance judiical reiew.

    ESG litigation participants:

    Who?How?
    Individual, and groups of claimants (e.g. consumers)Bring proceedings against companies, financial institutions and/or governments
    Non-governmental organisations and pressure groupsPublicise ESG issues and may participate directly as claimants or interested parties in litigation
    Claimant law firmsRepresent claimants, and may take the lead in seeking and organising
    Litigation fundersFund litigation seeking monetary compensation, in return for a share of the damages or other return
    CompaniesDefendants, and sometimes claimants, in ESG litigation
    Financial institutionsTypically defendants in ESG litigation
    GovernmentsDefendants, and sometimes claimants, in ESG litigation
    Trade Associations and industry groupsTypically claimants or interested parties in ESG litigation (particularly judicial reviews)

    The claims brought by individual claimants and NGOs in relation to ESG factors broadly fall into three categories:

    1. private law claims seeking monetary compensation (damages);
    2. private/public law claims seeking to change companies’ (or states’) behaviour and/or bring about alternative outcomes; and
    3. public law claims directed at administrative decision-making, for instance judicial reviews.

    Here we look at some examples illustrating how such claims can be brought. While a number of these claims have been ultimately unsuccessful (albeit with more success in recent times), they have all attracted publicity and involved considerable legal expense. Increasingly they are shaping the law in this area and laying the foundations for future claims to go further and perhaps ultimately succeed. .

    "Claims increasingly are shaping the law in this area and laying the foundations for future claims to go further and perhaps succeed."

    Claims seeking monetary compensation

    Claims against UK parents of foreign subsidiaries

    In recent years, there have been a number of cases brought in the English courts by claimant law firms against English based companies with operations in jurisdictions perceived to have weak enforcement mechanisms, such as those in Africa or South America. Here, the claimants seek to recover damages from the England based parent company on the basis of alleged pollution and environmental damage, or alleged violations of human rights, by their subsidiaries abroad. For instance, in Lungowe and others v Vedanta Resources plc and another [1], a group of Zambian claimants brought claims in negligence against an English-based parent mining company and its Zambian subsidiary, alleging personal injury, damage to property and loss of income, amenity and enjoyment of land as a result of discharges from a Zambian copper mine which was owned and operated by the Zambian subsidiary. Similar claims were brought in Okpabi and others v Royal Dutch Shell plc and another [2] by a group of Nigerian claimants as a result of alleged oil leaks from pipelines and associated infrastructure operated by Shell’s Nigerian subsidiary. 

    The claimants in these cases typically base their claims on the level of control exercised by an English parent over its subsidiary which they say are evidenced in public statements in the parent company’s public documents, which are said to be made on behalf of their corporate group.

    "Claimants typically base their claims on the level of control exercised by an English parent over its subsidiary which they say are evidenced in public statements in the parent company's public documents."

    In the Vedanta case, the UK Supreme Court laid down useful guidance as to when a parent company can be held responsible for tortious acts committed by its subsidiaries abroad. The Supreme Court emphasized that liability of the parent company mainly depended on the extent to which, and the way in which, the parent company availed itself of the opportunity to intervene in, control, supervise or advise the management of the relevant operations of the subsidiary, or alternatively whether it publicly held itself out as so doing (regardless of whether it in fact did so). The fact that the parent company owned the majority of shares in the subsidiary merely showed that the parent company had the opportunity to so intervene in, control, supervise or advise, but did not of itself provide evidence that the parent company had in fact done so. This ruling was emphasized by the UK Supreme Court in its decision in the Shell case, where it found that (among other things) the question of how Shell’s vertical corporate structure operated in practice and the extent to which authority was delegated raised real issues to be tried in relation to whether Shell ought to be fixed with a duty of care for the acts of its subsidiary.

    In relation to foreseeability of harm, the claimants often simply allege that the parent company had knowledge of the acts said to have been committed by its subsidiary. However, the reality is often more complex and requires careful examination of the actual circumstances. For instance, in Kalma and others v African Minerals Ltd and others [3], assaults and killings were alleged to have been committed by state police forces, which were employed as security for a mine. It was on that basis that the High Court held (with the Court of Appeal agreeing) that no cause of action lay against the subsidiary or the English parent, as the relevant acts were committed by third parties outside their control. It is therefore far from obvious that a parent company can be held responsible for acts committed by third parties, especially when operational responsibility on the ground exclusively lies with the subsidiary company in the absence of the requisite level of control
    by the parent company.

    These cases also raise questions as to the standard of care to be met by the defendants. There is a growing trend of claimants relying on international standards, such as those arising under the UN Guiding Principles on Business and Human Rights, the UN Sustainable Development Goals, the UN Global Compact or the OECD Multinational Enterprises Guidelines, despite these international agreements not being directly enacted into domestic law and a lack of clarity as to the substantive obligations owed by companies under them. Claimants may be assisted in this endeavor by the care taken by public companies to follow the guidance included in these “soft law” instruments when reporting to the market about ESG compliance. This supports claimants’ arguments that these are the applicable standards by which companies have chosen to be judged.

    Jurisdiction of the English courts after Brexit

    Claims against English parent companies of foreign subsidiaries typically raise a threshold question of jurisdiction. Companies often argue that the court should not permit service out of the jurisdiction on the foreign subsidiary (thus making claims materially more difficult). However, it has been very hard to argue that the English court does not have jurisdiction over the English parent itself. This is because of the rules of EU law contained in the Brussels Recast Regulation which applied in England. With the UK leaving the EU and ceasing to be bound by EU law, these jurisdictional rules ceased to apply.

    It is as yet unclear what will ultimately replace the EU regime, but this may have a significant effect on cases concerning actions abroad being brought in England. If the English common law regime applies going forward, English parent companies will be able to argue that the English court should decline jurisdiction on the ground that a foreign court would be a more convenient and appropriate forum. While claimants will remain entitled to argue that the English courts should exercise jurisdiction because they would not be able to obtain justice in their home jurisdiction, this development is likely to make this variety of tort claims against English parent companies more difficult.

    Claims arising from reporting and disclosure obligations

    A feature of ESG litigation is claims which are directed not at the specific activities of companies in the ESG space, but at what companies have said to investors about these issues.

    In 2018, NY state’s Attorney General commenced proceedings against Exxon Mobil in the United States alleging that the oil major had misled investors about the risk of climate change regulation to its business. The lawsuit argued that Exxon had presented a “proxy cost of carbon” to investors to reflect the impact of future restrictions on its business, while at the same time basing business decisions on a lower, or no, cost of carbon. According to New York this made Exxon’s assets appear more secure and valuable than they in fact were. New York state sought damages, restitution for investors and other “equitable relief”. In 2019, Exxon prevailed, with the state judge concluding that New York had failed to prove that Exxon “made any material misstatements or omissions about its practices and procedures that misled any reasonable investor”.

    Could such claims succeed in England?

    ESG risks have already been a focus of shareholder activism, with shareholders seeking to hold companies to account and influence their behaviour through company general meetings. Litigation may follow if investors suffer a financial loss on their investments, for instance, if a company makes an ESG-related disclosure to the market, causing the share price to plummet. In such circumstances, it is likely that investors – aided by claimant law firms – will comb through a company’s disclosure for any statements which may have been untrue or misleading and could be said to have led to the investor’s loss.

    The Financial Services and Markets Act 2000 (FSMA) applies to UK-listed securities. Under s.90 FSMA a person responsible for listing particulars is liable to pay compensation to a person who has acquired securities to which the particulars apply and suffered loss as a result of any untrue or misleading statement in that document. Similarly, under s. 90 A and Schedule 10 A issuers may be liable in respect of published information (other than listing particulars) containing a misleading statement or dishonest omission in relation to securities. This liability may arise if a claimant acquired, continued to hold, or disposed of securities in reliance on the published information, and suffered loss.

    "It is likely that investors – aided by claimant law firms – will comb through a company's disclosure for any statements which may have been untrue or misleading and could be said to have led to the investor's loss."

    Each of these provisions of FSMA has previously given rise to high profile litigation: for example, in the case of s.90, litigation against the bank, RBS, arising from its financial crisis era 2008 rights issue, and under s.90A/Schedule 10A, against the retailer, Tesco plc, in relation to public statements about its trading profits in 2014. A bank also faced (unsuccessful) litigation on the basis of common law negligence and breach by the directors of the bank of their equitable duty to provide sufficient information.

    Although there have yet to be any publicly known claims in England by investors alleging breach of a reporting/disclosure obligation relating to ESG, this is likely to be seen as fertile ground for claimants, and their lawyers, in the future. Even if statutory claims are not available, common law claims for negligent misstatement could arise if a duty of care may be shown to be owed by a defendant to a claimant in relation to ESG information or advice.

    Climate change litigation

    Much of the commentary around climate change litigation focuses on direct claims against those responsible for greenhouse gas emissions.

    A recent example from Germany is an ongoing case brought by a Peruvian farmer (Mr Lliuya) against the utility, RWE. There the claimant seeks declaratory judgment and desamag on the basis that RWE has knowingly contributed to climate change by emitting substantial volumes of greenhouse gases and thus bears a degree of responsibility for the melting of mountain glaciers near the claimant’s home town of Huaraz. The claimant contends that RWE’s emissions are a nuisance and that RWE is consequently liable to reimburse him a portion of the costs he and the local Peruvian authorities are expected to incur as a result of establishing effective flood protections. Specifically, the claimant seeks to be reimbursed 0.47% of the total cost, which is said to reflect RWE’s estimated contribution to global greenhouse gas emissions since the beginning of industrialization.

    The Regional Court of Essen dismissed the claim, reasoning that there was no demonstrable chain of causation in light of the complex relationship between particular greenhouse gas emissions and particular climate change impacts. This was in line with the position adopted by US courts, where it was held in Native Village of Kivalina v ExxonMobil Corporation and others that ‘‘there was no realistic possibility of tracing any particular alleged effect of global warming to any particular emissions by any specific person, entity, [or] group at any particular point in time’’ . However, on appeal, the Higher Regional Court of Hamm ruled that the claimant’s case was meritorious in principle, and allowed the claim to proceed on to the evidentiary phase, where it seeks to establish whether:

    • the claimant’s home is actually threatened by flooding as a result of the recent increase in the volume of the glacial lake; and
    • how RWE’s greenhouse gas emissions have contributed to that risk.

    If the claimant succeeds on these evidential points, there will be a precedent for the proposition that a private company can be held liable for particular climate change-related damages arising from greenhouse gas emissions, potentially encouraging similar litigation.

    To date there have been no English court decisions on these lines. Despite the progress made in the German litigation, the conventional view among lawyers is that litigation seeking damages for climate change caused by companies – without evidence of a direct connection between activities and harm – is very difficult. This is because any claimant would face significant evidential difficulties attributing the particular harm caused to the defendant’s actions.

    That said, developments in recent years in so-called attribution science may foreshadow future claims of this nature. In a recent paper entitled “Filling the evidentiary gap in climate litigation”, academics from a number of institutions argue that:

    [. . .] greater appreciation and exploitation of existing methodologies in attribution science could address obstacles to causation and improve the prospects of litigation as a route to compensation for losses, regulatory action and emission reductions by defendants seeking to limit legal liability

    "Any claimant would face significant evidential difficulties attributing the particular harm caused to the defendant's actions."

    Claims seeking to change behaviour and/ or bring about alternative outcomes

    Claims seeking to change behaviour and/or bring about alternative outcomes. The most prominent case where claimants successfully forced a change in behaviour through litigation is the climate action brought by the Urgenda Foundation and 886 Dutch citizens in The Netherlands. In December 2019, the Dutch Supreme Court ruled that the Dutch government had a legal duty, based on international human rights law, to prevent dangerous climate change, and was obliged to cut the country’s greenhouse gas emissions by at least 25% by the end of 2020 compared to 1990 levels [8]. This is the first case in the world in which individual claimants succeeded in establishing that their government has a legal duty to prevent climate change, and required the Dutch government to immediately take more effective action. It remains to be seen if this approach will be followed elsewhere.

    In response to the judgment, the Dutch government intensified its efforts to achieve its emissions reduction target by the end of 2020.

    Following the Urgenda decision, a number of claimants (including Friends of the Earth Netherlands) commenced proceedings against Royal Dutch Shell in The Netherlands alleging that Shell’s contributions to climate change violated its duty of care and human rights obligations. The claimants sought to require Shell to reduce its CO2 emissions in line with the Paris Agreement on climate change. In May 2021, the Dutch courts found that Shell had an obligation to reduce CO2 emissions by 45% relative to 2019 by the end of 2030, applying a standard of care based on article 6:162 of the Dutch Civil Code as well as articles 2 (the right to life) and 8 (the right to family life) of the European Convention on Human Rights.

    The Dutch court decision against Shell is likely to be subject to appeal, albeit the court’s order is binding pending any such appeal. It has been described as a landmark judgment, representing the first time a lawsuit has successfully challenged the business model of a company like Shell.

    There have also been a string of decisions in European courts finding breaches by various governments of failing to meet climate-change obligations, including:

    • a February 2021 decision of the Paris Administrative Court against the French government [9], where the Court found that the French state was to be held liable for rises in global temperatures to the extent that its failure to meet obligations to curb greenhouse gas emissions had contributed to those rises, and that compensation for ecological damage was in principle available to the claimants;
    • a March 2021 decision of the German Federal Constitutional Court against the German government [10], where the Court ordered the German government to improve measures under the Federal Climate Protection Act in order to meet its 2030 greenhouse gas emission goals sooner; and
    • a June 2021 decision of the Brussels Court of First Instance [11], where the Court held that the Belgian government’s failure to take all necessary measures to avert detrimental effects of climate change had resulted in a breach of the government’s obligation to act with prudence and diligence under Article 1382 of the Belgian Civil Code, and also in breaches of articles 2 and 8 of the European Convention on Human Rights.

    There has further been litigation in Australia concerning the exercise of executive power in light of climate change.

    In Sharma by her litigation representative Sister Marie Brigid Arthur v Minister for the Environment [12], the Australian Federal Court held that the Commonwealth Environment Minister had a duty of care to avoid causing personal injury to Australian children through contribution to greenhouse gas emissions in determining whether or not to approve the expansion of a coal mine under the Environment Protection and Biodiversity Conservation Act 1999 (Cth). However, the Court declined to grant the injunction sought by the claimant children to prevent the approval of the mine expansion on the basis that the Environment Minister had to make her decision in light of the mandatory relevant consideration of the avoidance of causing personal injury to the claimants.

    Claims have also been brought in relation to the responsible approach to financial investment. In the Australian litigation of McVeigh v Retail Employees Superannuation Pty Ltd (REST) [13], a student claimed against his superannuation (pension) fund alleging that the fund had failed to provide sufficient information about climate change and explain its plan for mitigating those risks, in contravention of its statutory and equitable duties. The litigation settled with REST acknowledging that climate change was a material, direct and current financial risk to its fund and committing to a series of initiatives to manage this risk.

    Although the level of awareness of, and responsiveness to, ESG factors, and climate change in particular, has increased in recent years it remains possible that there will be litigation in the future arising from the duties of fiduciaries and others with responsibility for investments in respect of failing to act historically or falling short of what was expected. The theoretical basis for such claims has been well-studied and there is no shortage of NGOs, charities and claimant law firms intent on ensuring that ESG factors remain front of mind when investment decisions are taken.

    "There is no shortage of NGOs, charities and claimant law firms intent on ensuring that ESG factors remain front of mind when investment decisions are taken."

    Public law claims directed at administrative procedures, for instance judicial reviews or planning litigation

    This category of litigation has historically been the most prevalent in England. 

    An example is the judicial review claim brought by an NGO in relation to the UK’s Airports National Policy Statement. This claim, which resulted in a Supreme Court judgment in December 2020, has direct implications for the development of a third runway at
    Heathrow Airport as the National Policy Statement set out the policy support for that project.

    The Court of Appeal found in favor of the NGO on one ground related to climate change. The Court held that the government had breached its duty under the Planning Act 2008 to give an explanation of how the National Policy Statement took account of government policy in relation to the mitigation of climate change. The government did not appeal, but Heathrow Airport Limited, the airport’s owner did, as it was entitled to do as an interested party. The Supreme Court concluded that the government had acted rationally and in compliance with its legal obligations, noting that the report accompanying the National Policy Statement referenced the UK’s obligations under domestic and international law in respect of climate change. It allowed the appeal, meaning Heathrow Airport Limited will be able to apply for a development consent order for the third runway with the support of a lawful National Policy Statement. However, another campaign group has urged the Secretary of State to review the National Policy Statement in line with new emissions targets. While the government had ratified the Paris Agreement before the National Policy Statement was introduced in June 2018, it was not until a year after that the government passed legislation for a net-zero- emissions target, and at around the same time of the Supreme Court’s judgment the government committed to meeting an interim target by 2030.

    Although Heathrow Airport won a significant victory before the Supreme Court, this judgment is unlikely to dissuade campaigners from finding fruitful grounds for legal challenge against other major infrastructure projects because of the inherent tensions
    arising from sustainable development.

    Human rights sanctions and litigation

    Human rights sanctions and litigation. In addition to the tort and civil damages claims brought above, states have been granting themselves power to take action against those that violate internationally recognized human rights.

    For example, the United States’ 2016 Global Magnitsky Act authorizes the US President to impose sanctions on persons – anywhere in the world – responsible for serious violations of internationally recognized human rights (as well as corruption). The US has imposed sanctions on nearly 250 entities and individuals under the Act.

    In July 2020 the United Kingdom introduced its own Global Human Rights sanctions regime, as the first post-Brexit standalone UK sanctions. Then, in December 2020, the European Union followed suit, legislating so that it had the power to impose sanctions on those involved in, or associated with, serious human rights violations and abuses, no matter where they occurred in the world.

    The implementation of these new sanctions regimes has two major implications for companies:

    1. First, the imposition of human rights sanctions on individuals or entities may have direct consequences for companies. The UK has designated Myanmar Economic Corporation and Myanmar Economic Holdings Public Company Limited – two major, military controlled, conglomerates in the Southeast Asian nation – as asset freeze targets under its Global Human Rights sanctions regime. Foreign investors with ties to those companies have had to reassess their investments in Myanmar so as to avoid sanctions breaches.
    2. Second, the imposition of human rights sanctions may indicate the existence of underlying circumstances which could give rise to civil claims. A company with suppliers or counterparties targeted by human rights sanctions may find that this inspires claims against the company, on the basis that the company owed a duty of care to protect claimants from human rights abuses.

    Human rights type failures have also resulted in litigation before the English and European courts. For example, in Begum v Maran (UK) Limited, the English Court of Appeal considered a claim brought by the widow of a man who had fallen to his death while working in a Bangladesh shipyard, decommissioning an oil tanker. The claim was brought against the English agent for the owner of the ship in relation to the end-of life-sale of the tanker. The basis for the claim was that the defendant was liable for damages based on the existence, and breach, of a tortious duty of care. This approach relied on the well-known line of cases concerning liability for negligence which followed Donoghue v Stevenson. The claimant argued that the duty of care required the defendant to take all reasonable steps to ensure that its negotiated and agreed end-of-life sale and the consequent disposal of the tanker for demolition would not and did not endanger human health, damage the environment and/or breach international regulations for the protection of human health and the environment.

    The Court of Appeal only considered whether the claim should be struck out, and not permitted to succeed, not the substantive merits. But while the Court acknowledged that this was an unusual basis for a damages claim, it concluded that it could not be said
    that the claim would certainly fail.

    The rise (or not) of non-court remedies

    A number of bespoke non-court remedies are now being developed and made available to resolve ESG disputes extrajudicially, including through Operational Level Grievance Mechanisms (OGMs) and National Contact Points (NCPs), organized under the auspices of the OECD.

    OGMs are mechanisms recommended by the UN Guiding Principles on Business and Human Rights (UNGPs). They are defined as mechanisms which are “accessible directly to individuals and communities who may be adversely impacted by a business enterprise”. The UNGPs state that OGMs perform two key functions: first, they support the identification of adverse human rights impacts as part of an enterprise’s ongoing human rights due diligence, and second, they make it possible for grievances, once identified, to be addressed and for adverse impacts to be remediated early and directly by the business enterprise. OGMs are often established by companies to enable grievances to be addressed without the need for formal judicial processes.

    NCPs are set up by governments which have agreed to implement the OECD Guidelines for Multinational Enterprises (GMEs). The GMEs are a set of international standards on responsible business conduct. They describe a number of expectations from governments to businesses on how to act responsibly in fields including human and employment rights, environment, bribery, and consumer interests. An interested party can file a complaint with the relevant NCP. The NCP then makes an initial assessment, and, if the complaint is accepted, seeks to negotiate a settlement between the interested party and the company. NCPs are not able to impose penalties on companies, but may publish details of the complaint and the NCP’s assessment of it – leading to adverse publicity.

    International financial institutions have also set up their own integrity and complaints procedures in respect of projects they finance, and offer whistleblowing and complaints mechanisms that play a similar role to the NCPs in investigating conduct.

    Materials made public in an NCP process may form the basis for future litigation claims in national courts, and/ or may give rise to investor pressure and reputational harm.

    OGMs have been criticised by NGOs and others on the basis that they operate in the interest of multinational companies, who are spared the adverse publicity and potential financial exposure associated with legal proceedings. But, suitably designed, they can be effective mechanisms to ensure that the concerns of affected communities are properly investigated, and addressed. Key to the success, or otherwise, of OGMs appears to be the extent to which affected communities are brought in at the outset, to help scope the design and operation of the OGM. Ensuring that communities are properly advised and supported throughout the process, so as to overcome the inherent imbalance between local people and companies, is also vital. Companies should view OGMs not as a way of avoiding litigation, but as a means of ensuring that the legitimate grievances of affected communities are dealt with in a way which is proportionate, efficient and fair.

    Disputes resolved through the UK NCP indicate that outcomes vary widely, but that the process can be appropriate for solving smaller matters, as the examples below illustrate.

    • In 2010, the European Centre for Constitutional and Human Rights (ECCHR) complained that Cargill Cotton had bought cotton produced through the systematic use of child and forced labor in Uzbekistan. The UK NCP offered, and both parties accepted, to supervise a conciliation/mediation process. The parties agreed that they would inform each other and exchange views on a regular basis over a period of 12 months, after which they would meet to review the matter. As a result, the ECCHR dropped its request to Cargill Cotton to cease trading in Uzbekistan cotton (albeit it reserved the right to take further action if the issue remained unresolved). The UK NCP saw no need to carry out an examination of the allegations itself. This example demonstrates that the UK NCP can be a useful means in resolving smaller issues where there is no group of claimants seeking damages.
    • In 2014, the International Accountability Project (IAP) and the World Development Movement (WDM) complained that by pursuing plans to develop a mine in Bangladesh, GCM Resources was failing to respect the rights of communities who would allegedly be at risk of displacement. The UK NCP found that GCM Resources had partly breached its duty to develop self-regulatory practices and management systems that fostered confidence and trust in the societies it operated in. As a result, it issued the following recommendations: GCM should: (i) continue to update its plans in line with international best practice and undertake a human rights impact assessment; (ii) develop its communications plans on the basis of a full assessment of risks; and (iii)  find appropriate ways to re-engage with affected communities, increase the information available to them, and take account of their views.

    These examples demonstrate NCPs can successfully bring smaller issues requiring specific changes in company behaviour to a satisfactory outcome. 

    Finally, there is evidence of increased interest in arbitration as an alternative to litigation of ESG-related claims. 

    Following the 2013 Rana Plaza garment factory collapse in Dhaka, global fashion bands, retailers and trade unions concluded the Accord on Fire and Building Safety in Bangladesh. This provided for arbitration of claims related to the safe production of readymade garments in Bangladesh. In 2016, two Swiss trade unions commenced Permanent Court of Arbitration proceedings against two global fashion brands under the UNCITRAL Rules of Arbitration 2010. The arbitrations settled on confidential terms in 2018.

    In 2019 The Hague Rules on Business and Human Rights Arbitration were launched in The Hague. These provide for the administration of arbitrations arising from human rights disputes, and were drafted so as to provide an additional grievance mechanism to those set out in the UNGPs. The rules are based on the UNCITRAL Rules of Arbitration, but are tailored to reflect the nature of human rights disputes. Thus they contain provisions intended to ensure that where there is a significant imbalance of power (e.g. between a corporate and an individual) the conduct of the proceedings reflects this, so that the individual may present its case in fair and efficient proceedings.

    Each of the OGM, NCP, and arbitration mechanisms discussed above present opportunities for the resolution of disputes, avoiding court litigation. As ESG-related claims increase, companies should be aware of the options available to them and to claimants.

    How companies can get ready, respond and resolve

    What steps can companies take when surveying the landscape of ESG litigation?

    1. Understand how ESG litigation differs from claims companies may previously have faced. The main objective may be monetary compensation, or it may be to force companies to change course and act in a manner more consistent with ESG objectives.
    2. Recognise that ESG litigation risk is just one species of ESG risk: it has to be considered together with regulatory and enforcement risk, with reputational risk, damage to brand, challenges recruiting, potential disruption by activists and loss of access to capital.
    3. Consider the potential cast of participants in ESG litigation and their respective agendas: claimants affected by a company’s operations, however remotely, include investor claimants, counterparty claimants, NGOs and pressure groups, and third party funders, ready to finance monetary claims for a share of the returns.
    4. Anticipate and be prepared for regulatory change, and that there is only likely to be more legislation in this area, increasing the risk of litigation and enhancing the need for companies to be actively preparing.
    5. Appreciate that ESG litigation may not always be unwelcome. It may identify issues which would otherwise have caused greater and longer term harm to a company.
    6. Evaluate what management systems are in place or needed to address issues as they are identified, and how ESG performance is operationalised, monitored and verified.
    7. Recognise that much litigation in this area derives from alleged distinctions between what companies do and what they say they are doing and review public statements and regulatory announcements through that lens, understanding that potential claimants may be doing the same.
    8. Assess the way the company describes its relationship with subsidiaries, suppliers, and third parties impacted by its operations. Claims in tort often focus on the degree of control exercised by companies over others.
    9. Be alive to the potential for resolving ESG claims outside the court room, and what mitigation strategies could be deployed to avoid litigation. Keep on top of developments in relation to non-court remedies like OGMs, NCPs, and arbitration of claims.
    10. Think creatively and strategically to resolve claims. In the same way that claims may differ from the type of litigation companies have previously faced, so may the paths to resolution. Any settlement should bear in mind both the litigation aspects of a dispute, and broader ESG concerns including those around reputation and access to capital.

    Authors: Tom Cummins, Partner; Ruby Hamid, Partner; Eleanor Reeves, Partner; Thomas Karalis, Counsel and Matthew Harnett, Associate.

    Notes
    1. [2019] UKSC 20, [2019] 2 WLR 1051.
    2. [2021] UKSC 3.
    3. [2018] EWHC 3506 (QB); with the appeal at [2020] EWCA Civ 144.
    4. 2 O 285/15.
    5. 4:08-cv-01138.
    6. 5 U 15/17.
    7. Filling the evidentiary gap in climate litigation; Nature; 28 June 2021.
    8. 19/00135.
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