19 August 2021
In the second episode of our mini-series on energy and resources disputes, Myfanwy Wood and Tom Cummins, Partners in the disputes resolution team at Ashurst delve into ESG litigation.
Myfanwy and Tom discuss what is ESG litigation, why it is currently in the spotlight and companies and investors should prepare themselves in light of the new ESG litigation landscape.
"ESG issues are something that everyone should be monitoring very carefully. As you've said the cost of companies getting ESG wrong are high and they potentially result not only in financial damage if there is a claim for damages but it really is that reputational harm that affects the entire business. So, even if a claim is ultimately unsuccessful or any threat of action taken against a company doesn’t actually occur, the fact that is has been there can have lasting reputational consequences." says Myfanwy.
Hello, and welcome to the second episode of our Ashurst Podcasts Series on Energy and Resource Disputes. we are Tom Cummins and Myfanwy Wood and we're both partners in the dispute resolution team at Ashurst. In this series, we've been providing key updates and insights in relation to disputes in the energy and resources sector. And in this second episode of the series, we're going to explore ESG litigation. So we're going to ask, what is ESG litigation? Why is it currently in the spotlight? And probably most importantly from a practical perspective, how should companies and investors prepare themselves in light of this new ESG litigation landscape. You all listening to Ashurst Legal Outlook. Now Myfanwy, I think probably the best place to start is to define for our listeners what we mean by ESG litigation?
Thanks Tom. I think that's right. So, ESG really is a broad umbrella term and the abbreviation stands for Environmental Social and Governance factors. So broadly speaking, it's to do with good corporate citizenship. ESG is often understood to be a framework for understanding just how sustainable a corporates business is. So, in other words how focused it is on longer-term benefits for the broader community and environment, in addition to the short-term profit making. And when we're talking about ESG litigation, we're meaning litigation which arises out of ESG issues and I just want to note that we're using the term litigation generically. We're not talking specifically about disputes resolved in a courtroom, because of course disputes in relation to environmental, social and governance factors can take a form other than court proceedings, the most obvious example being international arbitration. Now, when it comes to the substance of these disputes and if we take English law as an example, ESG disputes can arise from things such as claims brought in tort.
So we're talking here about negligence, nuisance, conversion of property, statutory claims. So, this is claims that might be brought under a consumer protection legislation. We've got equitable claims so, this would be unjust enrichment, breach of fiduciary duties by directors or trustees, criminal claims also administrative law claims. So, these would be challenges to planning decisions or environmental permits and approvals. And then finally, we would look also at contractual claims. So, this is where ESG is becoming increasingly important and the ESG standards are likely to be incorporated into things such as supply agreements, manufacturing contracts, joint venture agreements and so if you have a breach of one of those provisions in a contract that would also fall under the ESG litigation umbrella.
Absolutely and that maybe putting the contractual claims to one side, a question one might ask is who is usually or typically bringing ESG related litigation claims? As I think we've described, ESG litigation is a very broad topic. So, the answer to that question depends on the type of disputes you're looking at. But, the classic ESG related case is probably one brought by individual claimants or non-governmental organizations in relation to ESG issues and broadly falls into one or more of the following three categories. Firstly, you have private law claims where damages are sought. Then you have private law claims, which are not trying to gain monetary compensation but, seeking to change a company or a state's behavior or bring about an alternative outcome. And finally you have public law claims directed at administrative decision-making so, for instance, judicial review in England and quite often when you get an ESG related issue, you get a mixture of these types of claims.
But when you were speaking about the private law claims so seeking damages, are they the claims that we're talking about where a claim has been brought against the parent company for example for alleged harm caused by the subsidiaries?
That's a good example. And that's an example of a private law claim that is brought in order to try to win an award of damages and so for instance in England, over the last few years we've seen a real trend of claimants trying to recover damages from English based parent company alleging pollution or environmental damage or violations of human rights by the English companies subsidiaries in a particular jurisdiction. For instance the Lungowe case, which went to our Supreme Court involved a group of Zambian claimants bringing claims and torts against an English headquartered mining company in its Zambian subsidiary and the allegations there were in relation to personal injury, damage to property, loss of income et cetera arising from discharges from a Zambian copper mine which was owned and operated by the Zambian subsidiary of the UK parent. And the claimants in these cases typically base their claims against the parents on the level of control exercised by that parent over the activities of its subsidiary and they say, "Look at the public statements of the parent company, they evidence that the parent company is exercising that degree of control over what the subsidiary is doing."
So that's a very distinctive category of claims in this particular area. I think it's probably also worth just mentioning claims arising from reporting and disclosure obligations by companies, we've already seen ESG risks giving rise to shareholder activism, you have shareholders seeking to hold companies to account and to influence the behavior of companies through their general meetings. But you also may have litigation if for instance investors suffer financial loss on their investment. And this is an area where if we use a little bit of jargon, you often hear this term greenwashing. So, companies making themselves appear more environmentally friendly or more ESG friendly than they actually are and misleading investors in this way can lead to litigation against companies.
Now the final part I just wanted to mention in this section of the podcast is climate change litigation and this is probably what people think about when you mention ESG litigation but, hopefully one of the key points that we're getting across to our listeners is that ESG litigation is much broader than climate change issues. I think it's fair to say the conventional view amongst English lawyers is that, claims seeking damages for the consequences in relation to climate change caused by companies are going to be difficult as a matter of English law, unless you can prove to some evidence of a direct connection between what the company has been doing and the harm that the claimant has suffered.
And that's simply because any claimant would face significant evidential difficulties attributing that the harm that claimant has suffered to the defendant's actions and that is the case even though recent years have seen pretty significant developments in causation and attribution science which might be thought to help claimants making out claims of this nature. So, that's just a series of examples of archetypal damages claims that you get in this space. Myfanwy why don't you say a word or two about claims which are directed less at financial compensation, but more at changing the behavior of companies.
Thanks, Tom. I think a really good example of this... so what we're talking about here is where a claim is not specifically brought to obtain damages, but it is seeking to change the company or an entity's behavior was a case that was actually handed down in May this year so, 2021 and it was in The Hague District Court of the Netherlands and it's potentially a very significant judgment for the development of ESG litigation. So, the claim was bought against an international oil company by various pressure groups and the court ruled that the multinational must reduce its net CO2 emissions by 45% by 2030, compared to 2019 levels and to zero by 2050 in line with the Paris climate agreement.
Now, the claim was bought on the basis of human rights law and I just want to note here that it was a Dutch court that was very much considering human rights implications for the specific Dutch claimants. Regardless of this, it does seem likely that we will see an increase in such claims in the future and I know also it's a really interesting space to watch here because the oil company has recently confirmed that it will appeal this judgment. So, it's a bit of a watch this space but, I don't think that takes away from the fact that these type of claims are probably going to increase worldwide.
I think that's right Myfanwy, I think that can only be a trend that we see in this era. It's probably also worth mentioning as an overview of the final category of Clayton's public law claims which are directed at administrative decision-making by public bodies for instance, judicial reviews we've seen in England and I think in this jurisdiction in England, this category of litigation has been the most prevalent when it comes to ESG related claims. And to give an example of that not from the energy sector, but from the infrastructure sector is the judicial review claim which was brought by a non-governmental organization in relation to the UK policy regarding a third runway at our Heathrow Airport and in that case the high court initially held that the government had breached its duty on the planning law by failing to consider climate change factors.
But, the Supreme Court at our highest appellate court ultimately concluded the government had acted rationally and in compliance with its legal obligations, meaning that Heathrow Airport is able to go ahead and apply for development approval for that third runway. And in the energy sector, we've seen similar claims arising from the UK government's strategy in relation to oil and gas, less advanced than the Heathrow claim but, we have seen and those claims have been both focused on domestic oil and gas production, but also internationally so, for instance challenges to the UK providing export finance for the development of gas resources overseas and even when these claims are unsuccessful and don't result in a positive judgment for claimants, they tend to attract publicity and involve considerable legal expense.
And I think now's probably a good time because the examples that we've given her have really been focused on environmental issues and climate change, but as we've said a number of times now, it is a misconception that ESG matters are all about climate change and whilst environmental issues are very important, we also can't lose sight of the social issues and governance issues which are equally as important in the ESG landscape. So, just to round things off, it's probably a good time to run through what these issues may be. So, if we're talking about social issues, this would include things like working in safety conditions, human rights infringements, diversity and inclusion, consumer protection, modern slavery and the list can increase and I suspect it will over the next few years.
The next category would be governance issues and this might include things such as anti-bribery and corruption practices or financial crime, also data protection and then obviously directors' duties and corporate reporting obligations. And just to note again and we've said this a few times just in the overlapping ESG litigation, there is considerable overlap between the three ESG branches when it does come to litigation. So, just because there might be an issue with governance, doesn't exclude there also been an issue with an environmental concern or a social issue concern.
Absolutely and I wanted to pick out what you said about the [inaudible 00:12:46] of ESG and in particular your reference to human rights issues and it's trend we have seen in our practice when we've been advising clients on these issues in the past year or so, has been an increasing focus on human rights issues and their implications for businesses and 2021 marks the 10 year anniversary of the UN endorsement of its guiding principles on business and human rights and these principles are a really good place to start when considering the impact of business activities on human rights. What they do is provide a framework for corporate human rights responsibility anchored around three pillars. So protect, states have an obligation to protect human rights. Respect, corporates must respect human rights and remedy. So, there must be an access to remedy for victims of human rights violations by businesses and where this becomes relevant for clients in the energy and resources sector is that multinational companies frequently refer to those guiding principles when they are promulgating human rights policies and codes of conduct.
And the principles themselves are guiding principles as the name suggests, they're not legally binding obligations but, because companies adopt them, they're often relied on by claimants in ESG litigation in this space and the claimants say, "Look, the principles reflect the standards of behavior which you have voluntarily agreed to exhibits and talk" claims like the Zambian litigation we discussed earlier, where claims were brought against the UK parent company in respect of activities in Zambia and one of the things that claimants look at is the UN guiding principles and the extent to which parent companies have said, "We're going to comply with these, these form a fundamental part of our human rights policy."
I think when we're talking about these guiding principles, it's probably a good point now just to talk perhaps about the alternatives to court litigation because for example, we've got the operational grievance mechanisms, which are the mechanisms that are recommended by the UN guiding principles on business and human rights and they perform two key functions. So, in the first instance they support the identification of adverse human rights impacts as part of an enterprise's ongoing human rights due diligence and in the second instance, 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. So, we refer to them as OGMs and they're often established by companies to enable grievances to be addressed without the need for the formal judicial process. And when we're on the subject another acronym in this space is NCP, which means National Contact Points.
NCPs are set up by governments which have agreed to implement the OECD guidelines for multinational enterprises and an interested party can file a complaint with a relevant NCP, and the NCP then makes an initial assessment and if the complaint is accepted it then seeks to negotiate a settlement between the interested party and the company. Now, NCPs are not able to impose penalties on companies, but may publish details of the complaint and the NCPs assessment of it, which can lead to adverse publicity or can even be picked up in future litigation for example. And then finally, just to touch on my example at the beginning of this podcast about the role of international arbitration. I think a really good example of this is the Hague rules on business and human rights arbitration, which were launched in The Hague in 2019.
And now these provide for the administration of arbitration's arising from human rights disputes and the rules themselves based on the UNCITRAL rules of arbitration, but are really tailored to reflect the nature of human rights disputes. And they were put together actually following the disputes that arose you might remember in 2013 the Rana Plaza garment factory collapse in Dhaka, where global fashion brands, retailers and trade unions concluded at a court on fire and building safety in Bangladesh and this actually led to the disputes being resolved by confidential arbitration and specifically arbitrations against two fashion brands which were heard in The Hague and which actually settled in 2018. So Tom, with all of this I suppose the really obvious question is, what can companies and entities really do in this ESG landscape to help mitigate the risk of any ESG litigation?
I think that's right, we obviously provided quite a cancer-free of legal landscape. It's, it's a vast and multifaceted topic but, trying to zero in on some practical takeaways, I had a number of points I wanted to make. Number one is I think for GCs, lawyers, risk advisors and companies, be across the activities of your company and look at what the company is doing, where does the risks exist and don't confine this analysis to the immediate company's activities, look at the activities of subsidiaries, contractors anybody who is in the supply chain because ESG litigation risks can arise at any of those points. Point two and related to the first point is, try to regularly conduct risk assessments across the business. As we know risk assessments always lie at the heart of managing risk and showing that compliance is well thought through and ensure that those risk assessments are tailored to the particular jurisdictions in which a business has its operations.
Point three is, monitor closely legal developments in particular jurisdictions in which the business operates. There may be case law there may be other legal developments that suggests a direction of travel that may be relevant to developments in ESG litigation risks. Point four is, keep an eye on and consider the potential cost of participants in ESG litigation and their different agendas. So, you might have claimants that are affected directly or indirectly by a company's operations, you might have investors in a company that might bring claims, counter parties to the contract that might bring ESG related claims, you have NGOs and pressure groups and finally you have third party funders who are active in this area and maybe ready to finance damages, claims against companies in return for a share of any judgment against the company. Point five is, anticipate and be prepared for regulatory and Legal change.
There's only likely to be more legislation in this area which increases the risk of litigation and enhances the need for companies to be actively preparing themselves an example of that touching on the human rights theme is that EU is working on mandatory human rights and environmental due diligence legislation which is expected to enter law in the next couple of years and will have a significant impact on the way companies with a connection to the EU address these issue.
Finally, point six. Think creatively and strategically about resolving these claims if you are caught up in ESG litigation. I think in the same way that claims may differ from the type of litigation companies have previously faced so, may the paths to resolution and any settlement should really bear in mind both the litigation aspects of the dispute, but also the broader ESG concerns that come out of ESG issues being raised. So, damage to the reputation of a company, access to capital for a company, can you recruit the best and the brightest if you're associated with negative ESG publicity? Do consumers have an issue with your brand if you're associated with it with ESG issues? So, it's not a pure litigation analysis zero-sum game of win or lose, it's quite a lot more complicated than that.
These are really good points, Tom. And what we really need to be emphasizing is that ESG issues are something all entities and corporates should be monitoring carefully. The cost to companies of getting ESG wrong are high, potentially resulting not only in financial damage but also reputational harm effecting the entire business. Even if a claim is ultimately unsuccessful, any threat or action taken against a company can have lasting reputational consequences. So, really companies should be thinking about the ESG strategy now and not waiting until litigation threat is present to take action.
Thank you for listening. This was part two of our dedicated miniseries, Exploring Energy and Resources Disputes. To hear more Ashurst's podcast including our dedicated channel on all things ESG, please visit ashurst.com/podcast. To ensure you don't miss future episodes subscribe now on Apple Podcasts, Spotify or your preferred podcast platform and while you're there, please feel free to keep the conversation going, leave us a rating or review. Thanks again for listening and goodbye for now.