Global Trends in ESG Disputes
14 November 2022
14 November 2022
This article was first published in ICLG - Class and Group Actions.
At some point in the last five years, three letters took over the worlds of corporate and finance: ESG. At the same time, people began to talk about “ESG disputes” and “ESG litigation” as a distinct phenomenon. These terms were typically taken to mean disputes inspired by, or consistent with, society’s focus on sustainability. In reality, a broad spectrum of claims could fall within the categories of “environmental, social and governance”, from headline-grabbing climate change litigation and allegations of human rights abuses, to securities and consumer litigation arising from allegations that companies have misrepresented the sustainability of their products or services.
Litigation against companies often generates the most headlines, but governments have frequently found themselves the target of claims, too. In the same way as companies have moved to address ESG disputes in a coordinated way, drawing on legal, PR, and strategic advice, ESG claimants have also coordinated their approach. It is not uncommon for claimant law firms to team up with NGOs or other civil society organisations and litigation funders to bring claims.
A number of factors coincided in the late 2010s that have led to a rise in ESG-related disputes: in particular, the social and financial impacts of climate change have become clear and undeniable. There was also a marked rejection of the status quo amidst the wreckage of the global financial crisis. In addition, there was a questioning of society’s expectations of the role of business, ideas that had prevailed since the 1980s. Social media has served as a further platform for these concerns, ensuring that companies, and governments, remain focused on ESG.
Much of what is said above relates to disputes arising from allegations that a company has done something wrong (or, put another way, something not ESG friendly). But claimants also seek fertile ground in allegations that a company has not done enough; for instance, in relation to mitigating climate change. A further spin on this is claims arising from allegations that companies have represented that they are doing something when they are not, or are more ESG friendly than they actually are. This is the world of “greenwashing” (misleadingly representing that the company, or its products, are greener” than they are) or “greenwishing” (described by one author as the “hope that voluntary sustainability efforts are closer to achieving the necessary change than they really are”1).
Despite the occasional instance of a backlash against ESG and its increasing dominance of the business world, it is clear that the prominence of sustainability, and of businesses being held to account for their actions and activities within their supply chains, will continue. Equally clear is that disputes arising from the ESG agenda are here to stay.
In this chapter, we explore seven global trends in ESG disputes. First, we set the scene by explaining why ESG disputes are likely to attract class and group actions, and the forms that ESG disputes often take.
“ESG disputes” is a broad topic and encompasses private law claims where claimants seek to recover damages against companies. In those instances, the damages sought may be for environmental damages, violation of human rights, personal injury or damage to property, or secondary claims arising from a company misrepresenting its sustainability credentials to customers or investors.
These sorts of disputes often relate to conduct where the harmful impact causes damage to a very large class of claimants. In such claims, proof of breach, causation and loss is likely to involve very difficult and expensive forensic work, both in the assembly of evidence and the analysis of its economic effect. The likely cost compared to the level of loss suffered on an individual basis, and the resources available to the corporate defendant, mean that it will rarely, if ever, be wise or proportionate for an affected claimant to litigate alone.
In this context, the central rationale for any class action regime is that it enables claimants to benefit from the same economies of scale as are enjoyed by the defendant, by allowing numerous individual claims to be combined into a single claim brought on behalf of a class of persons.
Without such a procedural device, what may in aggregate be very substantial harm is likely to go unredressed. As Judge Posner put it in Carnegie v Household International Inc,2 a decision of the US Seventh Circuit Court of Appeals:
“The realistic alternative to a class action is not 17m individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”
Although it is difficult to generalise, the main types of claims being brought under English law, and that of many other common law jurisdictions, include:
To date, many of these claims have been brought by individual claimants (ESG activists or directly affected persons), but companies face an increasing risk of action by investors and regulators, too.
ESG factors also inspire contractual claims: as ESG becomes ever more important, ESG standards are being incorporated into supply contracts, manufacturing contracts and joint venture agreements, leading increasingly to inter-company disputes in relation to the application of such standards.
In other (civil law) jurisdictions, the situation is similar to that described in the UK. In Germany, for example, the Federal Constitutional Court dealt with claims against the state, assessing whether the legislator is taking sufficient action to fight climate change by reference to constitutional rights relating to the future protection of citizens’ lives and well-being.3 The automotive industry has also seen cases brought by climate organisations against car manufacturers, alleging unfair competition practices based on manufacturers’ failure to comply with greenhouse gas emissions regulations.4
The conventional view among lawyers is that litigation seeking damages for climate change allegedly caused by companies, for example, a fossil fuel producer – without evidence of a direct connection between activities and harm – is very difficult. This is because any claimant would face significant evidential difficulties in attributing the particular harm caused to the defendant’s actions. That said, developments in recent years in so-called attribution science may foreshadow claims of this nature. In a recent paper titled “Filling the Evidentiary Gap in Climate Litigation”,5 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.”
This is currently being put to the test in a long-running case before the German courts brought by Saúl Lliuya, a Peruvian farmer, against the utility company RWE. Mr Lliuya seeks a declaratory judgment and damages on the basis that RWE has knowingly contributed to climate change by emitting substantial volumes of greenhouse gases, and thus bears some responsibility for the melting of mountain glaciers near Mr Lliuya’s home town. The claimant contends that RWE is liable to reimburse him a portion of the costs he and the local Peruvian authorities are expected to incur by 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 industrialisation.
The Regional Court of Essen initially dismissed the claim,6 reasoning that there was no demonstrable chain of causation in the light of the complex relationship between particular green¬house gas emissions and particular climate change impacts. This was in line with the position adopted by US courts. For example, in Native Village of Kivalina and another v ExxonMobil Corporation and others,7 the US District Court for the Northern District of California reasoned that:
“[T]here is 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 Hamm8 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:
If the claimant succeeds on these evidential points, there will be a powerful precedent for the proposition that a private company can be held liable for particular climate change-related damages arising from greenhouse gas emissions. This may open the door for new waves of class and group actions. However, despite the progress made in the German litigation, there have been no decisions by common law courts along these lines.
Another trend we are seeing is claimants increasingly pursuing litigation with the aim of pressurising both companies and governments to increase their efforts to reduce greenhouse gas emissions:
The Sharma and Pabai cases raise interesting questions as to whether other common law courts (such as the English courts) would be willing to find, and impose, such a duty of care on the equivalent decision makers. Finding an analogous duty of care in English law would require a significant, and almost certainly controversial, development of the established principles of tort law by the English courts.
There have been a number of cases brought in the English courts against UK-based companies with subsidiaries operating in jurisdictions perceived to present access to justice concerns, such as certain countries in Africa and South America. The claimants seek to recover damages from the UK-based parent company on the basis of alleged pollution or environmental damage, or alleged violations of human rights, by its subsidiaries abroad:
Where parent company liability is not available, aggrieved claimants have sought to hold UK-based companies liable for actions of overseas companies that are not subsidiaries of the defendant, but form part of the defendant’s supply chain – even if there is no direct contractual relationship between claimant and defendant.
For example, the English Court of Appeal recently refused to strike out a claim where the relationship between claimant and defendant was not only remote, but the existence of a duty of care was far from obvious. In Begum v Maran (UK) Limited,16 the Court of Appeal considered a claim brought by the widow of a man who had fallen to his death while working in a Bangladeshi shipyard. 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 widow claimant argued that the defendant had, and breached, a tortious duty of care 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 endanger human health, damage the environment and/or breach related interna¬tional regulations. While the Court acknowledged that this was an unusual basis for a damages claim, it nevertheless concluded that it could not be said that the claim would certainly fail.
Claimants, particularly in the US, increasingly base their claims on regulatory standards and consumer protection legislation:
Falling within the “G” of ESG, data protection has increasingly become the focus of claimant law firms and litigation funders as a potentially fertile area for class actions. In the UK, however, the Supreme Court put the brakes on this growing area in late 2021 in Lloyd v Google LLC,20 a representative action brought by Richard Lloyd on behalf of more than 4 million users of iPhones.
The central allegation was that Google sold data generated from the iPhone users’ browsers to advertisers without the users’ consent, and the essence of the action was that Google was obliged to pay a fixed sum to affected data subjects simply because they had suffered a “loss of control” of their data.
In a unanimous decision, the Supreme Court found that Mr Lloyd’s claim should not be allowed to proceed. A key aspect of the Court’s decision was its examination of the “representative action” procedure pursuant to Rule 19.6 of the Civil Procedure Rules (CPR), which requires the person bringing the claim to have the “same interest” as the other claimants that the lead claimant represents. In this case, Mr Lloyd argued this was satisfied on the basis that all the other claimants had suffered the same “loss of control”, and no claim was advanced for financial damages or distress by any claimant.
The Supreme Court ruled that an individual assessment of Google’s liability in respect of each claimant would have been required. As a result, a representative action was not the appropriate vehicle for the claim – the individual claimants did not have the same interest because the nature of the breach differed for each claimant.
The Court also held that where damages would require individual assessment, there might still be scope for representative action on a “bifurcated” basis:
What this means in practice remains difficult to say. A significant number of representative actions are brought with the support of litigation funding, but it is questionable whether funders will be willing to fund actions brought on a bifurcated basis. Unlike a recovery of damages, a legal declaration provides no financial return for the funders. Also, the second stage would effectively be an “opt-in” process, which has practical limitations and typically attracts low take-up and participation rates. So, while the Supreme Court opened the door for a bifurcated process to be pursued, the practical and commercial impediments may mean it remains shut.
The case is significant in that it makes data-based claims significantly more challenging to bring in the UK pursuant to the representative action procedure. It has also changed the data breach litigation landscape in the UK, with many claims that were stayed pending the outcome of Lloyd v Google, including against TikTok, YouTube and Meta, having since been discontinued.
Claimants and funders are not, however, entirely giving up the fight, given the potential upsides if a claim can get off the ground. Google has again found itself the subject of a significant data claim, this time concerning its AI subsidiary, Deep-Mind. In a case filed earlier this year, the lead claimant alleges that the Royal Free London NHS Foundation Trust transferred approximately 1.6 million patient records to Google and DeepMind between September 2015 and April 2022. Importantly, the representative claimant’s cause of action is misuse of private information, rather than being grounded in data protection legislation. The representative claimant is still, however, seeking loss of control damages, and arguing that this loss of control was common across the whole class, such that they have the same interest for the purpose of CPR 19.6.
In demonstrating that the appetite remains for large-scale, mass data-based actions, the class’ funder was quoted as saying that the funder has “performed a significant amount of due diligence and has concluded that the case is worth pursuing”.21 It appears that the claimant class believes that it can distinguish Lloyd v Google because the Supreme Court “specifically carved out” misuse of private information.
We have also seen innovative and novel data-based claims being brought as breaches of competition law. This is not entirely surprising post Lloyd v Google, and given the opt-out regime that exists in the UK’s Competition Appeal Tribunal. In particular, Meta is facing an opt-out class action filed earlier this year on behalf of 45 million Facebook users between 2016 and 2019.22 The allegations centre around alleged abuse of dominant position and unfair pricing in setting the price for the provision of social networking services, and the damages being sought could be as high as £2.3 billion.
ESG risks have already been a focus of shareholder activism, with shareholders seeking to hold companies to account and influence their behaviour through resolutions and voting at 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 that may be construed as untrue or misleading, and could be said to have led to the investor’s loss.
The FSMA applies to UK-listed securities. Under section 90 of the 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 section 90A and Schedule 10A, 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.
The case of ACL Netherlands BV (as Successor to Autonomy Corporation Limited) and others v Lynch and another 23 was the first UK claim to go to trial under section 90A and Schedule 10A. Although not strictly an ESG-inspired claim, section 90A and Schedule 10A were relied on by the buyer of a listed company in a post-closing M&A dispute. The UK High Court made several findings that clarified the scope of section 90A and Schedule 10A. Among these were two elements that may act as a deterrent against bringing claims for inaccurate ESG disclosures:
Action related to a failure to adequately disclose climate risk has also been taken in Australia. For example, an Australian pension fund member brought a claim against the Retail Employee Superannuation Trust (REST), arguing that REST had, among other things, failed to exercise its powers in the best interests of its beneficiaries by failing to provide adequate disclosure about the risks of climate change to its investments. This claim settled shortly before trial, with REST agreeing to make further climate change-related disclosures in the future. In a similar vein, O’Donnell v Common-wealth of Australia and others,24 a class action brought on behalf of government bondholders, is currently before the Federal Court of Australia. In this case, the claimants allege that the government has engaged in misleading or deceptive conduct by failing to disclose climate change risks to investors in bond issue documents.
Derivative claims by shareholders on the basis of the directors’ duty to act in the shareholders’ best interest, as required by the UK Companies Act 2006 and fiduciary duties, are also gaining traction, but have been unsuccessful so far. In McGaughey and another v Universities Superannuation Scheme Ltd and others,25 academic staff claimed against their pension fund. The claimants argued that the directors were obliged to create a credible plan to divest of fossil fuel investments. The English High Court refused the claimants’ application, reasoning that the claimants had failed to demonstrate that the company had suffered loss that was reflective of their own loss. In relation to fossil fuel invest-ments specifically, the Court found that the claimants had not established a prima facie case that the company had suffered any immediate financial loss, and had not presented a causal connec¬tion between fossil fuels investment and changes in claimants’ benefits.
Also in the UK, the environmental law charity ClientEarth has generated attention by threatening a derivative action against the directors of Royal Dutch Shell plc.26 The basis for the claim is the allegation that Shell’s directors are failing to promote the success of the company by not preparing it properly for the transition to net zero.
Besides the developments in the case law outlined above, there have also been a number of recent legislative initiatives that are likely to promote future ESG claims:
Early litigation in this area occurred under the French Duty of Vigilance Law when, in March 2021, an international coalition of 11 NGOs commenced proceedings before the Saint-Étienne Judicial Court against French supermarket chain Casino, making allegations surrounding Casino’s involvement in the cattle industry in Brazil and Colombia. In the claimants’ view, deforestation is a negative “side product” of Casino’s operations in Brazil and Colombia. The claimants further allege that Casino is still being supplied with cattle from deforested areas or from farms established on indigenous territories. On this basis, they seek an order from the Court compelling Casino to establish, implement and publish a detailed vigilance policy that fully complies with the Duty of Vigilance Law, as well as to pay compensation to Brazilian indigenous groups for loss of opportunity as well as moral damage resulting from Casino’s failure to adhere to its duty of vigilance. The outcome of this case will give a first important indication of the potency of the above-outlined legislation to promote future ESG claims.
ESG litigation has generated significant interest from litigation funders, attracted by the variety of potential claims, substantial damages, and pressures on defendant companies to settle litigation to avoid reputational harm, thus reducing litigation risk for the funder.
One report into litigation funding in the UK and Europe described ESG claims as “the key driver of growth in litigation funding in the UK and continental Europe in the coming years”.28 Much of the growth in this area is likely to come from class and group actions, a subset of commercial dispute resolution in which litigation funders have historically been highly active.
1. Raj Thamotheram, “Greenwish: Wishful Thinking in the ESG World”, IPE Magazine (September 2019), https://www. ipe.com/greenwish-wishful-thinking-in-the-esg-world/ 10032963.article.
2. 376 F 3d 656, 661.
3. Cases 1 BvR 2656/18, 1 BvR 288/20, 1 BvR 96/20 and 1 BvR 78/20.
4. Case 17 O 789/21.
5. Rupert F Stuart-Smith and others, “Filling the Eviden-tiary Gap in Climate Litigation”, Nature Climate Change (28 June 2021), https://www.nature.com/articles/s41558-021-01086-7.
6. Case 2 O 285/15.
7. Case 4:08-cv-01138.
8. Case 5 U 15/17.
9. Case C/09/571932 / HA ZA 19-379.
10.  FCA 560.
11.  FCAFC 35.
12. Claim no VID622/2021.
13.  UKSC 20,  3 All ER 1013.
14.  UKSC 3,  3 All ER 191.
15.  EWCA Civ 951.
16.  EWCA Civ 326,  1 CLC 514.
17. Case 7:22-cv-06247.
18. Case 2:21-cv-04786.
19.  FCAFC 162.
20.  UKSC 50,  3 WLR 1268.
21. Sam Clark, “Google and DeepMind UK Claimant Lays out Arguments in Tough Class-Action Environment”, MLex (16 August 2022), https://mlexmarketinsight.com/news/ insight/google-deepmind-uk-claimant-lays-out-arguments-in-tough-class-action-environment
22. Claim no 1433/7/7/22.
23.  EWHC 1178 (Ch).
24. Claim no NSD858/2021.
25.  EWHC 1233 (Ch),  Pens LR 8.
26. “We’re Taking Legal Action against Shell’s Board for Mismanaging Climate Risk”, ClientEarth (15 March 2022), https://www.clientearth.org/latest/latest-updates/news/ we-re-taking-legal-action-against-shell-s-board-for-mis¬managing-climate-risk.
27. “Calling for a New UK Law Mandating Human Rights and Environmental Due Diligence for Companies and Investors” (22 October 2021), https://media.business-hu-manrights.org/media/documents/UK_BUSINESS_ STATEMENT_MHREDD_OCT21_FINAL.pdf.
28. Neil Rose, “ESG Key to Expanding Litigation Funding Market, Says Report”, LegalFutures (18 July 2022), https:// www.legalfutures.co.uk/latest-news/esg-key-to-expand-ing-litigation-funding-market-says-report
Authors: James Clarke, Partner; Tom Cummins, Partner; Martin Eimer, Partner; Tim West, Partner; Jonas Weissenmayer, Junior Associate