What to expect in 2023: ESG Litigation

As the new year approaches, we can examine significant litigation trends in order to predict how they may affect you, your business and the status of dispute resolution.  

Whilst this list is not exhaustive, there are some significant developments stated in this article that might be at the forefront of 2023. 

Environmental, Social and Governance (‘ESG’)

The term ‘ESG’ refers to a business’s overall social and environmental effect, as well as how strong and clear its governance is in relation to management, executive compensation, shareholder rights, audits and internal controls.  

• Environment: the environmental aspect relates to how a business conducts itself with regard to sustainability and what its impact is on the environment.  
• Social: relates to how a business interacts with its suppliers, clients, and workers as well as the wider society.  For instance, it takes into account well-being, equality, workplace culture and diversity and inclusion.  
• Governance: the term “governance” describes the procedures for making decisions, reporting, and organising a business.  This involves taking a close look at a business’s ethical practices and how transparent it is with its shareholders regarding its operations. 

Expectations 

Companies in the UK are required to disclose information on a variety of ESG issues.  Prospective investors and shareholders are getting more and more concerned with the ethics of their investments.  According to the Grantham Research Institute at London School of Economics, the number of climate litigation cases has doubled worldwide since 2015.  Given the current emphasis on climate change, environmental impact is likely to become a topic that is highly scrutinised as part of the corporate reporting of ESG.  Additionally, the ESG Regulatory Framework is continuously developing and disclosure obligations are becoming stricter, especially within the US.  This permits a legal justification for holding companies to account if they fall short of the necessary ESG credentials.  Thus, it is predicted that in 2023, ESG litigation will increase with both private organisations and climate activists filing claims.  

Types of Claims  

The types of claims that can arise from ESG litigation include but are not limited to: claims under company and securities laws, tort, misrepresentation/misstatement and breach of fiduciary duty.  Furthermore, group litigation actions are growing in popularity and environmental issue cases are gaining traction, for example, the diesel emissions claims against big-name car manufacturers such as Volkswagen and greenwashing claims both in the UK and the Netherlands against BP, Shell and KLM. These kinds of claims are becoming increasingly appealing as consumer activism in this area and litigation funding options both grow. 

Liability of parent companies

Numerous legal proceedings have already been filed against English parent companies on the grounds that their foreign subsidiaries are allegedly causing environmental damage.  For example, the landmark decision made in Okpabi and others (Appellants) v Royal Dutch Shell Plc and another [2021] UKSC 3 involved multi-national group of companies ‘Shell’ and the liability of its English-based parent company for alleged breaches of its Nigerian subsidiary.  The facts concerned were that Shell’s Nigerian subsidiary experienced an oil leak from pipelines and associated infrastructure which allegedly abused human rights and caused environmental damage.  The question in this case was whether the parent company, situated in England, owed a common law duty of care to the Nigerian citizens (the Claimant people who allegedly experienced substantial harm as a result of a systemic failure in health, safety, and the environment) on the part of its overseas subsidiary.  The Supreme Court overturned the Court of Appeal decision and found in favour of the Claimants.  The decision was determined by evaluating the level of control the English-based company exercised over its Nigerian subsidiary. This case should act as a warning to global group companies, and English parent companies should consider carrying out ESG audits of their overseas subsidiaries.

Liability for suppliers

Liability may also extend to the actions of  suppliers.  For example, Hamida Begum (on behalf of MD Khalil Mollah) v Maran (UK) Limited [2021] EWCA Civ 326 exposes potential liability concerns for companies due to an association  with the damaging actions of third parties.  Hamida Begum brought the claim on behalf of Mr Mohammed Khalil Mollah, a Bangladeshi shipbreaker.  The question was whether the claim against an English shipbroker could progress to trial on the substantive issues in English courts, despite including activities that occurred abroad.  In this case, a company based in the UK, Maran (UK) Ltd, sold a ship to a third party shipyard company in Chittagong Bangladesh, who then arranged for the ship to be disposed of improperly and in unsafe working conditions.  Following the sale, Maran (UK) Ltd had no further ties to the shipyard business and had no ownership or control over it.  However, for the purposes of the appeal, it was assumed that Maran was aware that the ship would be disassembled in Bangladesh as opposed to other shipyards in Turkey or China with greater health and safety thresholds.   

While attempting to dismantle the oil tanker in Chittagong, Mr. Mollah fell to his death.  The widow of Mr Mollah then filed a claim against Maran in the English courts which was subsequently dismissed by the High Court.  The case was then appealed to the Court of Appeal.  The issue related to the Maran’s liability for injury brought about to Mr Mollah by the actions of the third party shipyard company. The Claimant argued the following: (1) Maran is guilty for negligence caused by a recognised risk (according to the criteria under Donoghue v Stephenson); and (2) Because Maran established the risk, it is responsible for any harm caused by third parties.    The Claimant asserted that, due to its standing in the global shipping sector, Maran knew its conduct would put extremely vulnerable people at risk of significant harm and death.  She claimed that Maran was aware that the ship was to be dismantled in Bangladesh and therefore, the risk of harm was foreseeable.  The claimant further argued that it is fair, just, and reasonable to establish a duty of care in this instance and that it would be in the interests of the public to do so.   

The Court of Appeal allowed a claim for the claimant and stated that one of the major concerns at the “forefront of the development of the law of negligence” was the issue surrounding the defendant’s liability for the activities of a third party.  Therefore, companies may owe a duty of care to people exposed to hazardous situations if they choose to source their products or services from locations where it is likely that human rights, environmental, and health and safety breaches will arise. This case is likely to have significant ramifications and increase accountability for businesses who have typically leveraged supply chain complexity to avoid accountability and liability, and reduce costs.  

False disclosure claims

The U.S. Securities and Exchange Commission (‘SEC’) regulation are currently finalising policies on climate disclosures and ESG-related fund names. If these are implemented, this could lead to legal action and enforcement measures.  Multinational energy companies have already been sued by more than 20 states and local governments due to misleading disclosure statements regarding “the negative effects of… business practices on the climate”, and this trend may extend to the UK and the EU.  If companies make fraudulent claims regarding their ESG practices, investors might file claims against those companies, and shareholders might argue they were deceived into relying on fake ESG information. 

Mitigation  

To mitigate the risk of potential ESG litigation, companies should perform proper due diligence, perform risk assessments, set objectives and goals, and share transparency with shareholders and the public over operations.  

If you think that you could benefit from more information, contact our litigation team for further information.