ESG litigation: Shape up or ship out

Environmental, social and governance, or ESG, is a set of criteria used to assess a company's impact on society and the environment, as well as its corporate governance practices. 

E: The environmental aspect to ESG deals with the organisation's impact on the environment, such as climate change, resource depletion, water waste and water pollution, air pollution and deforestation. S: The social element relates to an organisation's impact on people such as working conditions, workplace culture, health and safety in the workplace, employee relations, diversity and income inequality. G: Governance relates to how an organisation behaves internally and is largely focused on the processes of decision-making, reporting and transparency. 

The ESG litigation snowball 

ESG litigation is on the rise globally against corporations and other entities, including governments. Increased regulatory requirements, growing investor demands and the global climate crises have led to the rising need for companies to manage and report ESG performance.

Such growing rules and regulations, alongside existing legislation, have increased ESG-related litigation risk for companies. Growing awareness, increasing inquiries and heightened supervision of ESG-related issues has led to a snowball effect in ESG-related litigation and enforcement actions as consumers, regulators, stakeholders and investors seek to hold companies accountable for their environmental and social policies and actions. The principal litigation risks arise from legal activism, often issued to trigger greater scrutiny of a company's ESG impact and compliance. 
The potential financial and reputational damage from ESG litigation is significant, making it a rising concern for businesses globally

Environmental and Social Marketing Litigation: “greenwashing”

An increasing number of companies are being accused of making false or misleading statements about the environmental impact or social benefits of their products or practices. A potential liability occurs when ESG disclosures are false, misleading or cannot be substantiated. Especially consumers, non-governmental organisations and interest groups increasingly target companies for falsely representing their products or services being eco-friendly.  

Fossielvrij NL v. MSC Cruises The Netherlands BV – Dutch Advertising Code Committee ruling 30th September 2024 (2024/00298)
Environmental organisation Fossielvrij NL filed a complaint with the Dutch Advertising Code Committee against MSC Cruises, one of the world's largest cruise operators, claiming violation of the Dutch Advertising Code. MSC cruise ships featured the slogans #SaveTheSea and “Cruising the blue in a green way” on their sides and MSC advertising stated their ships are "powered by one of the cleanest marine fuel: ‘Liquified Natural Gas’ (LNG)”. Fossielvrij NL stated that cruising is one of the most environmentally damaging leisure activities to date, making it misleading to run advertising which claims cruising is sustainable and environmentally friendly. The Advertising Code Committee considers that greenhouse gas emissions from sailing on LNG can be less when compared to cruising on conventional fossil fuels but this does not mean that LNG can be said to be a “clean fuel” since the process of mining and producing liquid gas is environmentally harmful in itself (fracking, leakage, methane pollution), which information is clearly withheld. According to the Committee, presenting cruising as sustainable and eco-friendly could mislead consumers about the real sustainability aspects of the advertised cruise trip and wrongfully encourage them to make choices they would otherwise not have made. It finds MSC Cruises in breach with the Dutch Advertising Code, resulting in the recommendation to stop advertising in such a manner. 

Fossielvrij NL v. Koninklijke Luchtvaart Maatschappij NV (“KLM”) – Court of first instance Amsterdam ruling 20th March 2024 (C/13/719848 / HA ZA 22-524)
A few months earlier than the MSC Cruise complaint, environmental organisation Fossielvrij NL sued Dutch aviation company KLM claiming it is in violation with consumer law by making advertisement claims under its ‘Fly Responsibly’ campaign which presents the airline as “creating a more sustainable future” and “on track to reduce its emissions to net zero by 2050”. Customers are offered the opportunity to “buy” carbon offset – labelled ‘CO2ZERO’ – in compensation of the pollution their flight will produce, by funding reforestation projects or KLM’s purchase of biofuels. Fossielvrij NL stated that there is no such thing as ‘flying responsibly’ at present, KLM only seeking company growth and increased flight sales, while if truly concerned with reducing emissions it should be reducing the number of flights. The Court rules in favour of Fossielvrij NL, considering that advertising which suggests flying is or can be sustainable and stating that the purchase or contribution of a ‘compensation’ product (such as planting trees) reduces or compensates part of the climate impact of flying are misleading to consumers, violating the law on unfair commercial practices.

Werner & Mertz Benelux Consumer v. Ecover NV a.o. – Court of Appeal of Brussels ruling 28th June 2019
The Court of Appeal of Brussels considered a claim concerning an advertisement of a soap bottle which allegedly was made 50% out of plastic recycled from the ocean, while in reality the plastic was recovered from ocean beaches and the percentage of this plastic processed in new bottles was lower than 50%. Considering that the average consumer has no knowledge of recycling techniques and that in their decision to buy, these consumers may not distinguish between floating plastic and plastic that has already washed ashore, the Court held that the advertisement did not constitute a misleading commercial practice and did not prohibit further use of this advert since the average consumer would interpret the environmentally friendly claims in a general sense, not influencing their decision to buy this bottle or not. 

The risk of greenwashing litigation will only increase in the future, as new European regulations have now been adopted which will test sustainability claims even more strictly (Directive (EU) 2024/825 on empowering consumers for the green transition through better protection against unfair practices and through better information). 

Climate Change Litigation

The growth in climate change litigation globally has continued. With climate change progressing and increasing, there has been a parallel increase in litigation targeting companies or authorities for their contributions or neglect towards global warming and other climate-related changes. Since the Paris Agreement was reached in 2015, 86 climate lawsuits have been filed against the world’s largest oil, gas and coal producing corporations. The number of cases filed against fossil fuel companies each year has nearly tripled.
Climate Change litigation seeks to require public authorities or companies to introduce more effective policies to mitigate climate change or to hold actors accountable for their role in contributing to the crisis and its impacts. 

Hugues Falys a.o. v. TotalEnergies (The “Farmer Case”) – Commercial Court of Tournai (Belgium), pending
On 13th March 2024, a summons was filed against TotalEnergies with the Commercial Court of Tournai by mr. Hugues Falys, a Belgian farmer stating his farm, located in Lessines close to the Belgian-French border, has suffered a number of extreme weather events including heatwaves and droughts resulting in major losses, extra workload and uncertainty for the years to come as a result of the contributing of TotalEnergies to climate change, being one of the companies that emits the most greenhouse gases in the world. The legal basis for his claim is Belgian extra-contractual civil liability (articles 1382 and 1383 of the former Civil Code). This is the first time a citizen has taken a multinational to court in Belgium over a climate dispute.

In order to repair past damage and prevent the occurrence of future and certain damage, the plaintiffs request that TotalEnergies be ordered to (i) immediately halt investment in new fossil fuel projects (gas and oil), (ii) reduce its GHG emissions linked to the production and delivery of fossil fuels by at least 60% by 2030, (iii) reduce both oil and gas production by 47% by 2030 and (iv) adopt and communicate a realistic transition plan, including the above three points, based on the best current scientific knowledge and aligned with the objectives of the Paris Agreement. The plaintiffs request that all these injunctions be accompanied by a penalty of one million euro per month of delay in complying with the injunctions to be issued. The case is currently pending and the Court's verdict is awaited with great interest.

Klimaatzaak VZW v. Belgian government a.o. – Court of Appeal of Brussels ruling 30th November 2023
In this landmark case the Court of Appeal of Brussels ruled that the climate policies and actions of the Belgian Federal Government, the Brussels Metropolitan Region and the Flemish Region failed in view of the reduction of global greenhouse gas emissions. In doing so, the governments violated Articles 2 (right to life) and 8 (right to respect for private and family life) of the European Convention on Human Rights (ECHR), as well as their duty of care according to Belgian law. As a remedy, a court order was imposed to achieve a minimum of 55% greenhouse gas emission reduction by 2030 which is the most ambitious emissions reduction order imposed on a government by a standing judgment and a reference case for global litigation regarding climate change and corresponding governmental responsibilities. 

The Court’s reasoning is strongly influenced by the reasoning of the Dutch Supreme Court in the Urgenda climate case, in which was stated that the ECHR requires governments to take the minimally required measures to do their part in preventing the crossing of a dangerous climate threshold for the right to life and private life of citizens.

Verein KlimaSeniorinnen Schweiz a.o. v. Switzerland – European Court of Human Rights ruling 9th April 2024
In light of the national Urgenda (The Netherlands) and Klimaatzaak (Belgium) cases, also the European Court of Human Rights (ECHR) recently had the opportunity to rule in a matter of climate change.

In the Verein KlimaSeniorinnen Schweiz a.o. v. Switzerland case a Swiss association of elderly members, concerned about the impact of global warming on their living conditions and health, filed a case against Switzerland before the ECHR.

The Court held that Article 8 of the ECHR (right to respect for private and family life) encompasses a right to effective protection by the state authorities against the serious adverse effects of climate change on life, health, well-being and quality of life. The ECHR found violations of Article 8 for Switzerland’s failure to implement sufficient measures to combat climate change. The Court ruled that Switzerland failed to develop the relevant domestic regulatory framework, including a failure to quantify national greenhouse gas (GHG) emission limits, on top of failure of reaching its past GHG emission reduction targets. Although the ruling is only directed at Switzerland, it will undoubtedly influence climate-related discussions and proceedings in other European jurisdictions.

Key notes and recommendations 

• Given the far-reaching impact of ESG there will definitely be more commercial and regulatory litigation across all industries and sectors. This should trigger a level of caution for all businesses to report accurately, not understating or overstating ESG compliance;
• Key scientific and legal emissions reduction deadlines are approaching and the consequences of climate change are materialising. In light of these circumstances, courts around the world appear increasingly willing to force governments to ‘do their part’ to avoid dangerous climate change. Government action can accelerate legislative processes and lead to firm legislative requirements being imposed on companies, which is to be prepared for;
• According to the Corporate Sustainability Reporting Directive (CSRD), reporting in Europe must comply with regulated standards and thus cease to be noncommittal;
• Check the ongoing Taylor Wessing ESG series on other ESG related topics such as corporate responsibility and reporting, social & employment, intellectual property, real estate and many more.