Authors: MLT Aikins ESG practice group
ESG-related litigation is now expanding to include allegations of inaction, contradictory messaging, misrepresentation and misleading investors, according to a new report.
As the business community digests the newly published ISSB Standards for ESG reporting, the fifth annual Global Trends in Climate Change Litigation offers insights from 51 countries around the world, including Canada. The report analyzes claims, judgments and outcomes from state, national and international courts, highlighting ESG-related legal risks for corporates and governments.
Overview of global climate litigation
More than 1,500 climate litigation cases have been filed globally since the Paris Agreement in 2015. Of the total 2,341 cases recorded in the Sabin Center’s climate change litigation databases, 190 were filed between June 2022-May 2023, which represents close to a 100% increase compared to the yearly average number of cases initiated between 2008-2015. The U.S. holds the top spot with the highest number of documented climate cases at 1,590. Australia is in second place with 130 cases, while Canada recorded 35 cases.
When it comes to the targets of climate litigation, attention is shifting to corporate actors. Approximately 20 cases filed by U.S. cities and states against Exxon, BP, Chevron, Shell, Suncor and others are now likely to go to trial after the Supreme Court decided the cases should be heard where they were originally filed or where the companies allegedly breached the law. More than 50% of these cases are expected to have a favorable outcome for climate action. Even where cases are withdrawn or have an unfavorable result, they still may have indirect impacts supporting climate action.
New avenues and venues
The avenues, range and complexity of legal ESG arguments are expanding. Claimants are not only filing cases at the state, regional and international level, they are also combining requests and expectations, and using a variety of approaches and legal statutes.
To start, the traditional approach of employing the “polluter pays” principle is evolving. Compensation is being sought in 17 cases for past and present losses related to climate change, as well as to cover the cost of climate change adaptation and even the protection of carbon sinks being used to offset emissions.
Recent cases rely increasingly on existing legal protections such as consumer protection laws and constitutional rights to healthy environments. Since such laws exist in more than 150 countries, it’s not a surprise that this has become a common approach. For example, a case that focused on the risk posed by heat waves received media attention and is now pending before the European Court of Human Rights.
The outcomes sought by claimants are not limited to financial awards. Increasingly, many cases are asking courts to issue judgments requiring governments and companies to align their strategy, investments and operations with net-zero commitments. In the past year, three requests were filed with the International Court of Justice, the International Criminal Court (ICC) and the International Tribunal for the Law of the Sea, respectively. The outcomes of these cases – together with a deforestation case filed in 2021 before the ICC and several pending cases before the European Court of Human Rights – will influence future litigation at the international, regional and state level.
The summary report also points out that recent climate litigation covers a broad spectrum of alleged wrongdoings and problematic behaviors. These include breaches of regulatory law and civil law, as well as fraud and corruption involving climate funds and the voluntary carbon markets.
Closing in on climate-washing
The past year saw more than 25 “climate-washing” cases challenging the accuracy of net-zero narratives. These cases involve the accuracy of climate commitments, product attributes, investments in climate action and climate risks discussed in public disclosures. Between 2020 and 2021, the number of climate-washing cases nearly tripled, and that trend has continued in 2023.
Today, the public and regulators alike are scrutinizing advertising campaigns, online content and ESG reports for false, misleading or exaggerated claims related to climate-friendly or low-carbon strategies, operations and products. Claimants are using a variety of approaches, including filing complaints before the U.S. Securities and Exchange Commission (SEC).
In February, Global Witness filed a complaint with the SEC alleging that Shell misled investors in public disclosures that overstated the company’s investments in renewable energy. While similar cases exist in other jurisdictions, the trend of engaging the SEC to review the disclosures and practices of foreign companies is worth noting. In 2023, two of the SEC’s highest-profile cases include a record-setting penalty handed to a Brazilian mining company for misleading investors, and the ongoing investigation into green bonds offered by JBS. Here in Canada, similar reviews of greenwashing are underway. In 2022 and 2023, the Canadian Competition Bureau initiated investigations into Canada’s largest bank, the Canadian Gas Association, Shell and the Pathways Alliance following complaints of greenwashing.
In the past year, regulatory bodies south of the border have created new investigative initiatives to tackle climate-related disclosures. The U.S. Federal Trade Commission has litigated environmental claims, while the U.S. Commodity Futures Trading Commission recently indicated it would pursue greenwashing investigations and enforcement actions under the Commodity Exchange Act through a new Environmental Fraud Task Force announced on June 29, 2023.
To address climate-washing risks proactively, the SEC’s Climate and ESG Task Force, established in 2021, is now developing initiatives to proactively identify ESG-related misconduct. Here in Canada, a similar approach is underway without a formal title. Provincial securities commissions are reviewing public ESG disclosures and providing guidance to avoid misleading statements and greenwashing. This practice may be a precursor to a new phase of climate-washing litigation or a helpful tactic to mitigate the risk of climate-washing.
Energy is most exposed
The energy sector is facing a variety of allegations focused on operational resiliency, with an increase in litigation focused on investment decisions. In the past year, 28 cases have sought to prevent the financing of high-emitting or harmful projects or activities. Those cases are almost evenly split between public bodies or state-owned financial institutions and private parties including banks and pension funds.
In some cases, corrective actions come faster than the court decision. For example, only three months after a claim was filed against BNP Paribas in France this spring, the company announced several climate-related commitments: first, reducing its oil exploration and production financing by 80% by 2030; and second, phasing out all financing of new oil and gas field developments.
There are also new cases focused on the operational resiliency of energy assets, including renewable energy sources such as wind turbines. Financial loss resulting from the 2020 winter storm in Texas was the focus of a case settled in 2021. After years of appeals and deliberations, the Supreme Court determined that the operator of a wind farm was liable for the farm’s failure to prepare for severe winter conditions after numerous warnings, even though the storm was considered a force majeure event. This is categorized as a “failure-to-adapt” case, meaning the respondent failed to adapt its property or operations to the physical risks relate to climate change or failed to consider transition risks. There were 14 such cases in the past year, and that number is expected to rise.
As energy and agriculture companies worldwide tackle net-zero commitments, a key factor of litigation is the reliance on scientific data related to climate change, including the Intergovernmental Panel on Climate Change’s 6th Report issued in 2021 as well as resources such as the Climate Action Tracker. So-called “attribution science” will continue to evolve and may support plaintiffs’ ability to establish causation related to adaptation and financial loss.
Pressure on personal liability
Following the media attention given earlier this year to the ClientEarth v. Shell’s Board of Directors case, concerns have grown among corporate officers and directors around their potential personal liability for ESG failures. While the case was dismissed by United Kingdom High Court, the report suggests a similar claim could be successful if heard “in a more amenable country, by a large asset owner such as a pension fund against a company that had no net zero strategy, or had failed to implement such a strategy.” In the past year, eight cases have sought to advance climate action by focusing on personal responsibility, either civil or criminal, for failing to manage climate-related risks.
Looking ahead, the success of such claims could increase as nations adopt or adapt regulations for corporate governance to expand the duties of officers and directors to include the evaluation of environmental risks and the future interests of the company. One such example is Fiji’s Climate Change Act, which now specifies that as part of the duty to act with reasonable care and diligence under the Companies Act, directors must consider and evaluate climate change risks and opportunities to the extent that they are foreseeable and intersect with the interests of the company.
Here in Canada, amendments made to the Business Corporations Act in 2019 did not go quite as far, but added the environment and long-term interests to the list of factors directors and officers may consider in determining the best interests of a corporation.
The increase in climate-washing cases hints at growing scrutiny of corporate accountability. According to the report, this movement may gain even more momentum from work being conducted by the UN Secretary General’s High Level Expert Group on Non-State Actor Net Zero Commitments, whose recommendations could result in corporate entities being held to a more formal set of standards for their directors and officers.
As was widely expected, ESG-related litigation has continued to rise. With mandatory ESG reporting soon coming into effect in many jurisdictions around the world, this upward trend will likely continue for the foreseeable future.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.