The rising risks and impacts of climate litigation

Businesses are central to the effort to beat climate change and drive the ESG (environmental, social and governance) agenda. National governments have signed up to the Paris Climate Accord aim of achieving “net zero” emissions by 2050 and businesses, large and small, are under pressure to play their part. ESG is the conceptual tool they use to frame their contribution, either voluntarily or through regulation.

Increasingly, companies face regulatory pressure to act, especially on disclosures. Failing to keep up with the regulatory landscape of new rules raises the spectre of companies facing an ever-increasing risk of climate-related litigation and legal action that could inflict significant damage to reputations, brands, bottom lines and, potentially, even a company’s ability to survive.

Numerous examples now demonstrate that the risk from ESG litigation has arrived and is potentially here to stay, according to Alex Houston, a Director in our Crisis & Disputes team.

“As ESG and climate change issues increase in importance, alongside expanding demands for more disclosures, so the risk of litigation grows too.”

“Litigation can impact reputation, cause a loss in business, and potentially result in significant damages from legal action. That places a premium on getting ESG policies and disclosures right in the first place.”

That the ESG regulatory environment is in a state of transition is beyond doubt. Governments are in the process of imposing a wave of new disclosure rules that affects companies around the world.

Last year saw the UK impose reporting rules for companies under guidelines drawn up by the Taskforce for Climate-related Financial Disclosures (TCFD). It also pledged to adopt International Sustainability Standards after they were launched at the COP26 conference in Glasgow.

In Brussels, the EU has ushered in the Corporate Sustainability Reporting Directive (CSRD)to beef up non-financial reporting. That’s accompanied by the Corporate Sustainability Due Diligence Directive which will anchor environment and human rights considerations in companies’ operations, corporate governance and supply chains inside and outside Europe

Across the Atlantic there is also ESG activity as financial watchdogs in Washington consult on hotly contested mandatory climate-risk reporting rules for US companies.

In the meantime, litigation is already happening. In the Netherlands, Friends of the Earth has won a case in which a court ruled Shell, the energy giant, should do more to cut CO2 emissions. In the UK, another campaign group, ClientEarth, is also bringing a case against Shell, and against KLM over the airline’s sustainability claims.

UK regulators are at work too. The Competition and Markets Authority is investigating sustainability statements made by big-name online retailers ASOS and Boohoo. So, where do the litigation risks come from? There are a number of likely sources. As mentioned above, it could start with NGOs using the courts to pursue their campaign goals.

Greenwashing is a growing concern and competition authorities here, as indicated, are now set on holding companies to account.

Financial reporting watchdogs will be keeping a close eye on sustainability reporting as part of their enforcement work, and there is now a risk of warranty and fraudulent misrepresentation litigation based on ESG disclosures made during M&A deals.

“There are many sources from which litigation can stem,” Alex says.

That begs the question of what to do about it. “If someone were to ask for advice to avoid the risks of litigation, it is to get the ESG disclosures and policies right at the beginning.”

There are four essential components to getting it right.

1. First, disclosures aside, ensuring the material ESG topics for the company have been identified, with the support of internal and external stakeholders, and embedded within the organisations business strategy and cascaded through its businesses management systems.
2. Second, knowing and understanding the demands of current rules and regulations and keeping watch on those that are continually developing. “Companies must make sure they and their advisers understand the requirements and regulations,” says Alex, “particularly in light of the fact they are changing so much.”
3. A third move for companies is to ensure they have the right internal controls in place to head-off the kind of unwanted behaviours that would undermine ESG goals. “This goes for the supply chain too.”
4. Lastly, companies must ensure they capture robust and reliable information to underpin their disclosures. “If there is a challenge,” says Alex, “you’ll need that data to back up those disclosures.”

And if litigation does appear, having a team of experts ready to jump into action will be invaluable.

If there is any way of summing up how to manage the litigation risk, it is preparation.

“On a daily basis we see the threat from climate change:  rising sea levels, wildfires, extreme weather events, even the UK heatwave— it's all related,” says Alex. “That means companies need to be proactive because increasing importance is placed on ESG by the public, regulators and policy makers.”

“Falling short could lead to potential risks. But those risks can be mitigated, and that is done by being aware of the ESG demands and being prepared to collect and disclose information that is accurate and has integrity.”

Published October 2022