Yesterday Client Earth announced a first of its kind lawsuit against the Board of Directors of Shell plc. The lawsuit alleges that Shell has failed in their duties to adequately consider climate risk and prepare for the transition economy. Client Earth is bringing this lawsuit in the UK and has the support of institutional investors holding more than 12 million shares in the company. This case is likely to be the first of many in 2023 as litigation risk grows around ESG.
Last year helped set the stage for increased ESG litigation. We saw new regulations introduced by the SEC, more ESG shareholder proposals, numerous greenwashing claims brought by consumers, and the groundwork of the Anti-ESG movement. In 2023 ESG developments show no sign of slowing down, and many of the seeds planted in 2022 are likely to result in more litigation in the coming year.
Norton Rose Fulbright published their 2023 Litigation Trends last month. This report is an annual survey of in-house counsels that provides insights into what legal departments are expecting to see in 2023. Among the results, in-house counsels reported growing concern over legal exposure arising from ESG. Particularly those in the Financial Services sector and Food and Beverage industry reported ESG as their second greatest area of concern for 2023.
Let’s examine some of the driving factors behind this heightened anxiety.
ESG litigation seems to stem from one general theme: growing pains. Regulators, shareholders, or consumers, companies are seeing heightened scrutiny around ESG. Some companies’ ESG programs do not meet these new stakeholder expectations and therefore those stakeholders may resort to litigation to push companies forward.
Regulations are intensifying across various aspects of ESG including disclosures, sustainable finance, plastic waste, and green labeling. More intense regulation across multiple jurisdictions increases the number and scope of legal requirements. Companies that are unaware or unprepared for new regulations can run afoul of these new requirements and find themselves in regulatory trouble. However, it’s not just regulators that companies have to worry about.
Shareholders are taking note of the economic opportunities and risks inherent in ESG. Advocacy group “As You Sow” sent shareholder resolutions to five major US banks requesting that the banks disclose their climate transition plans. Additionally, shareholder activism is on the rise focusing on biodiversity initiatives. On the whole, shareholders are increasingly asking for more detailed disclosures on a variety of ESG issues. This opens up litigation risks for companies that fail to disclose, or inadequately disclose on these issues.
As if regulators and shareholders weren’t enough, additional pressure is mounting from the public. Class action cases alleging greenwashing are becoming more common as consumers accuse companies of misrepresenting their ESG efforts. So far these cases have been met with mixed success as companies like Coca-Cola and Allbirds have successfully fended off potential class action suits. While companies have been holding their ground, that may change as Norton Rose Fulbright states that “the California plaintiffs’ bar has figured out the blueprint for how to bring [greenwashing] cases.”
With all of these groups demanding more from companies when it comes to ESG, there is one notable group demanding less. Growing anti-ESG sentiment can be seen among prominent Republicans at both the state and national levels. Multiple Attorneys General have made threats of anti-trust enforcement for those engaged in ESG pacts. Various Republican controlled states have chosen to stop investing their public funds with ESG aligned investors. At the national level the House Financial Services Committee has just announced an ESG working group which is likely to be hostile to company ESG efforts. This is particularly tricky: many stakeholders demand action on ESG, while the anti-ESG movement demands inaction. This creates a catch-22 for companies as each side presents its own potential litigation risks.
What this Means
ESG litigation is likely to heat up to a boil before things standardize and simmer down. To avoid being caught in the crosshairs of potential plaintiffs, be sure that you are keeping up with regulatory and litigation trends. Know where your company’s ESG litigation risks lie. Be sure that all messaging from your company aligns with reality – even if reality is not as positive as you would like. Disclosures should be validated and carefully reviewed to avoid inconsistencies which can result in legal risk.
This year is likely to be a big year for ESG litigation. Members of PracticalESG should consider familiarizing themselves with our Compliance Subject Area where we track trends in regulatory enforcement and civil litigation. Additionally our Shareholder Activism Subject Area keeps up with the latest in shareholder ESG proposals. Finally, our Anti-ESG subject area stays on top of the latest trends in the anti-ESG movement. Resources like these can help you identify trends and manage your ESG legal risk.