ESG litigation – litigation risks need to be approached strategically and in good time

Activists, shareholders and other actors are placing companies in Germany, Europe and throughout the world increasingly under pressure by bringing ESG (Environmental, Social and Governance) lawsuits. However, with the right strategy, companies can defend themselves successfully against ESG claims. In addition to considering how to prevent exposure to liability (keyword: compliance), companies should therefore also take into account the potential risks of litigation and include their lawyers in their strategic planning.

Moreover, since litigation is always accompanied by the risk of negative press, especially in the ESG field, it will often make sense to work closely with in-house and/or external PR experts in these cases.

I. ESG litigation – a phenomenon that increasingly needs to be taken seriously

It is frequently no longer just a matter of one person trying to enforce their contractual or non-contractual claims against another person. Instead, the environmental and social responsibility of companies is increasingly being made the subject of civil proceedings (private enforcement), with the remedies sought by claimants becoming ever more drastic.

• In the lawsuit brought by Peruvian farmer Lliuya against the energy company RWE, the farmer’s suit is directed (only) at requiring RWE to pay for part of the cost of protecting his home against flooding that he claimed had been caused by climate change.
• Royal Dutch Shell, on the other hand, was ordered by a court of first instance in the Netherlands to reduce the CO2 emissions of the entire group by 45% by 2030 in comparison to the 2019 figure. Royal Dutch Shell has appealed against this far-reaching encroachment on its business model and we will have to wait and see how the appellate court rules.
• In what are known as “climate change lawsuits”, claimants in Germany are seeking a similarly far-reaching judicial encroachment on the business models of automobile manufacturers Mercedes-Benz, Volkswagen and BMW as well as the energy company Wintershall Dea. The claimants are seeking to compel the defendant companies, in the interests of environmental protection, to make fundamental changes to their business models as from 2030. Noerr reported.

The examples given above are just a small sample of cases. Statistically, ESG litigation is a growing phenomenon. There are currently over 400 climate-change related suits pending against governments and over 100 against corporations and individuals, excluding those brought in the United States (Global Climate Change Litigation - Climate Change Litigation (climatecasechart.com)).

II. Trends in ESG litigation – what’s next?

The role companies play in tackling climate change and their responsibility for the overall societal transition towards greater sustainability and more social responsibility are increasingly in the public eye. Companies are increasingly confronted with lawsuits seeking to compel them to be more sustainable, to improve efforts to reduce greenhouse gas emissions and to be more socially responsible.

At the same time, legislators are enacting more and more regulations in ESG areas. These include, among others, the German Act on Corporate Due Diligence Obligations in Supply Chains, the planned EU Corporate Sustainability Due Diligence (CSDD) Directive and the EU Taxonomy Regulation (2020/852), to name but a few. The general efforts of EU legislators can be summarised under the name “European Green Deal”. As a result of these new legal requirements, companies will face the risk of additional litigation, in which they could be held liable for being deficient or too slow in effecting transformation.

Companies should prepare for litigation in a wide range of areas. There is already a growing trend in the following fields:

• Climate change litigation: Environmental organisations and individuals working with them want to impose civil liability on companies that are (large-scale) emitters to compel them to reduce their greenhouse gas emissions.
• Lawsuits by activist shareholders: Activist shareholders want to oblige management boards to do more to combat climate change. For example, the environmental organisation Client Earth acquired shares in Shell and then sued its board of directors in the High Court in London. The lawsuit was aimed at compelling the board to redirect Shell along a stricter emissions-reduction path (Redirecting Shell | ClientEarth). In this case, the court dismissed the claim solely on the basis of the written evidence. Nevertheless, it granted Client Earth’s request for a trial. What the outcome of the case will be remains to be seen. It is also possible that shareholders will bring lawsuits based on the scope of the Act on Corporate Due Diligence Obligations in Supply Chains.

• Greenwashing: The Taxonomy Regulation defines “greenwashing” as the practice of advertising financial products as environmentally sound to obtain a competitive advantage, even though the products do not meet basic environmental standards. In the area of investment funds in particular, consumer organisations have sought injunctions on behalf of investors Greenwashing bei der Geldanlage: Werbung mit Nachhaltigkeit | Verbraucherzentrale Baden-Württemberg (verbraucherzentrale-bawue.de).
• Liability for damages due to environmental pollution: It is also conceivable that companies could be held liable for environmental pollution that they cause.

In addition to being directed against private companies, ESG-related lawsuits are also directed against countries and governments. The common goal of these lawsuits is to compel the parties sued to adopt more ambitious climate policies. There are currently over 80 such lawsuits pending worldwide.

III. ESG litigation – reputational risk

ESG lawsuits are associated with risks. The “climate change lawsuits” have shown that defendants do not have much time to respond to such proceedings or develop adequate defence strategies. Within just three weeks of sending Mercedes-Benz a cease-and-desist undertaking (with a penalty clause) to sign, Deutsche Umwelthilfe initiated legal proceedings against it.

At the same time, the issues concerned in these types of cases often have a global dimension and entail considerable risk of liability. The claim brought by the Peruvian farmer Lliuya against RWE before a German civil court makes this evident. There is also a risk of claimants engaging in “forum shopping” (König/Tetzlaff, RIW 2022, 25).

Moreover, from a legal perspective, this area is often unchartered territory. There is a lack of case law or any recognised standards of liability. For example, lawsuits aimed at greenhouse gas emissions have been based on the protections that must be afforded by the state, as formulated in Article 20a of the German Basic Law, or interference with property rights or tort. In the Royal Dutch Shell case, the court relied on unwritten norms of what can be considered socially acceptable behaviour as grounds for liability.

The group of potential claimants is large. The various options for actions brought by associations in the ESG area are being expanded even further with the introduction of the new representative actions for redress.

IV. What matters is a timely interdisciplinary approach.

Time can be a decisive factor in this environment. Companies that have involved litigation lawyers early on, i.e. when obtaining compliance advice, will be ready right away for any litigation to come. This is especially true in the ESG sector, given the increasing risk of litigation.

Working together with litigation and PR experts from the outset can be crucial in avoiding, even in cases with a positive outcome before court, reputational damage that can result from biased reporting amounting to public shaming by the media.