Siphokazi Kayana and Nomfundo Mkatshwa-Jackson take a look at the important lessons for South Africa on ESG Litigation from a global perspective
It has become necessary for companies to prioritise sustainability amidst the threat of climate change. Countries have thus sought to develop regulations in various fields including environmental footprint (i.e. emissions reduction), market/product communication, and financial reporting for companies. Partly as a result of those regulations, companies are increasingly being held legally accountable from different angles in respect of their responsibility and role in climate change—ESG Litigation.
In its current form, ESG Litigation focuses mainly on larger companies with a wide-reaching footprint. Companies are often publicly held accountable through various media channels and campaigns. It is not just environmental organisations that are taking action as consumers, investors, shareholders, and local communities are increasingly vocal about the need to take action. The primary goal of ESG Litigation is therefore to bring about behavioural change in companies.
International studies show that the number of climate cases are rapidly increasing. Climate litigation has doubled globally since 2015, bringing the total number of climate lawsuits to some 2 000—25% of which have been initiated in the period of 2020-2022.
Here are some of the key trends we’re observing with regard to the different angles of ESG Litigation:
Infringement of national and international climate law
An important ground for taking civil action against companies is on grounds of an unlawful act. On this ground, the unwritten standards of care are worked out in further detail based on soft law from international conventions including the 1992 UN Framework Convention on Climate Change and the European Convention on Human Rights, standards (UN Guiding Principles and OECD Guidelines for Multinational Enterprises), and the facts ensuing from investigative reports.
There is no international binding convention on business and human rights. In Europe, however, a great deal of ESG legislation is under preparation, including the Proposal of the European Commission of 23 February 2022 for a Directive on Corporate Sustainability Due Diligence. The legislative process is expected to take a while longer, as such, a final directive is not likely to enter into force until 2025 or 2026. The obligations to be embedded in this directive are, however, already largely part of existing soft law standards ensuing from previous international conventions.
Conversely, the regulations formulated by intergovernmental organisations are predominantly integrated into domestic laws, thereby heightening the potential for sanctions and legal disputes. The integration of such international regulations into national legislation holds significant importance, particularly for jurisdictions outside of the European Union, as it directly shapes the trends observed in ESG Litigation.
Greenwashing: Misleading market communication and financial information
The greening trend also entails the inevitable risk that companies advertise financial instruments and products as greener and more sustainable than they really are. Companies must be aware of the risk of providing misleading market communication and financial information, also known as ‘greenwashing’.
Greenwashing can be divided into several categories:
- Market and product information for consumers;
- Information for the investing public about ESG risk control; and
- Financial annual reporting.
Misleading product information may constitute a wrongful act
The CSRD Directive requires large companies to report on issues such as carbon emissions and social capital, but also about the impact that a company has on biodiversity and human rights violations in the supply chain.
Liability of the company for pollution of, and damage to, the direct environment
In the context of ESG Litigation, companies may, of course, also be held accountable by local communities for polluting, or causing damage to, the direct environment. This can be done through a class action. Such claims will be based on wrongful acts in combination with environmental legislation.
Shareholders’ actions at (listed) companies in order to influence the strategy
Studies show that shareholders are increasingly exercising their shareholders’ rights for ESG purposes to force the board of directors to take action, for example, their right to place items on the agenda, their right to speak or to vote on the appointment or dismissal of directors or their remuneration policy.
An example is the British investor Aviva Investors which, in January 2022, notified the boards of 1 500 companies in which it invests, spread over 30 countries, that it will base the remuneration and the retention of directors depending, in part, on their efforts in fighting the climate crisis and protecting human rights and biodiversity.
Personal liability of directors
A further trend that we see at an international level is that, in addition to holding the company liable as a means to exert pressure, the board of directors of a company is also held personally liable for compliance with the company’s ESG obligations. This relates to (i) personal involvement/negligence in violated standards; and (ii) improper climate change policy. In the spring of 2022, in the United Kingdom, the board of directors of a multinational company was held personally liable in civil proceedings for failing to pursue a proper climate policy with a view to achieving energy transition.
The need for action to protect our planet has prompted intergovernmental organisations and lawmakers to establish clearer standards determining the extent to which businesses can impact the environment while pursuing their operations. We are now aware that we stand at a crucial point in history, necessitating the implementation of rules that uphold the values of people, the planet, and profit in equal measure.
Siphokazi Kayana is the Head of Dispute Resolution and Nomfundo Mkatshwa-Jackson is the Senior Associate at international law firm CMS South Africa.