The rise of ESG litigation
On 29 November 2020, the Swiss people voted in favour of an initiative to hold companies liable in civil court for damages created throughout the supply chain of their products. If a company or one of its suppliers pollutes the environment or uses child labour, the company could be sued in civil court. Nevertheless, the initiative won’t become law since it needed not just a majority of the popular vote but also the majority of cantons (states) to approve it. For the first time in 65 years, an initiative won the popular majority but failed to pass the hurdle of the “Ständemehr”.
While this ballot measure failed, it showed that companies are increasingly held accountable not only in the public court but also in legal courts for their actions. As always, when it comes to litigation is at the forefront of what is likely to spread to the UK and Europe.
On the one hand, there is an increasing number of ridiculous lawsuits where young people sue oil companies for advancing climate change and thus ruining their future. We can safely ignore this kind of performative actions. What is more interesting is for example the pending class action lawsuit in Texas courts against Exxon. This lawsuit claims that Exxon published a document claiming to use a specific cost of carbon emissions in its project calculations. Disclosures from other lawsuits, however, showed that the internal calculation of Exxon used a different, lower cost of carbon emissions. The effect is an artificial inflation of the share price of Exxon with a potential violation of securities laws due to stock price manipulation. We will see how that lawsuit turns out…
Meanwhile, Brazilian mining company Vale was sued in New York State court for violations of securities laws since the company in its ESG pages made specific statements about its practices for the monitoring of dam stability. When one of the company’s dams failed, the statement in their ESG reports and ESG webpage was used to sue the company for its misconduct. The company settled for $25m.
But it’s not just what the company does, but also what its suppliers do that counts. US food company Chiquita was sued in 2014 by consumer advocates that it claimed on its website that it protects all water sources for its banana plantations and does not use chemical weed control. However, when it emerged that one of the company’s suppliers had contaminated local drinking water sources, the courts allowed suits against Chiquita for making false product claims.
The general rule seems to be that courts won’t allow plaintiffs to sue a company for purely aspirational statements but will allow suits to go forward for concrete statements of current practices and for any statements of fact.
As more and more ESG disclosure becomes mandatory in the UK and across Europe that means that companies will face litigation risk if they do not live up to the standards they pretend to follow in their annual reports and on their websites. And if they can be shown to disclose false data on their climate risks that could be grounds for legal action as well. In the end, the threat of lawsuits for false product claims or even security law violations means that in the future, companies will have to monitor their ESG risks much more closely than they do today. If a food company learns that its suppliers use child labour, for example, it better creates a regulatory statement since this kind of information is by now clearly moving the share price, and not disclosing this information to the public could in extreme cases be construed as violations of securities laws.
ESG is not just a topic for corporate management and investor relations, but increasingly also for the legal departments of a company and I am not sure how up to date corporate lawyers are on this subject and how well prepared listed companies are.