April 28, 2024 • 12 mins
As companies around the world embrace ESG as part of their overall strategy, the level of scrutiny is on the rise. Regulatory reporting and transparency requirements also mean we are seeing an increase in ESG litigation.
Business leaders face a myriad of issues and regulatory standards that are different from country to country. In this podcast, we discuss those standards and what companies should be thinking about to avoid future litigation.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Khushaal Ved (00:04):
Welcome to A Matter of Law, a Hogan Lovells series
that takes a deep dive into the latest developments that
are shaping the legal world. Our team of lawyers will
provide insight into crucial and rapidly evolving issues and address
the risks that can lead from the boardroom to the courtroom.
Sophie-Isabelle Horst (00:32):
I'm Sophie- Isabelle Horst, counsel at Hogan Lovells. As more
and more companies embrace ESG as part of their overall strategy,
the level of scrutiny by employees, shareholders, and government agencies has
been on the rise. Regulatory reporting and transparency requirements, also
mean we are seeing an increase in ESG litigation. What
(00:55):
does this mean for companies around the world? Here to
discuss this with me, are David Foster, a partner in
our Washington, D.C. office, as well as Nicole Saurin and Carla Wiedeck,
who are both counsels in our Munich office. Carla, let's
start with you. ESG is relevant to many stakeholders, from
(01:15):
consumers to shareholders, from people that are affected by climate change,
to companies that see their business model questioned. It is
easy to see how this could lead to disputes. Could
you tell us what the most important topics in ESG
litigation are?
(02:07):
Nicole, I'd like to pick up with you. Let's talk
about greenwashing first. What exactly is greenwashing?
Nicole Saurin (02:15):
There's no universally accepted definition of greenwashing. In general, it is understood to be any favorable, but incorrect or incomplete ESG-related disclosure by a company. The classic case of greenwashing would be a company saying a product is more environmentally friendly than it is. But some now use this term even more broadly, in a sense that it encompasses allegedly misleading statements about things like human rights of people in supply chains, or animal welfare or other ESG-related topics. Allegations of greenwashing have been made against many companies across many industries.
Sophie-Isabelle Horst (03:42):
What about in the EU?
Nicole Saurin (04:26):
To help standardize rules across the European Union, the European Commission gave out a proposal of a new law last year, which has, on the 12th of March 2024, been voted upon by the European Parliament. This law is called the Green Claims Directive and is part of the European Green Deal. This directive, is intended to cover voluntary claims by companies towards consumers about the environmental impacts, aspects, or performance of a product, or of the trader itself. The directive would also make an important contribution towards the guarantees of a high level of environmental protection, as embodied in article 37 of the European Charter of Fundamental Rights.
Carla Wiedeck (04:59):
Even prior to this directive, there has been a recent increase in the number of greenwashing lawsuits we see in Europe. And there are consumer protection associations that have been very active. We have seen many lawsuits which are often directed against advertising claims or product descriptions. The plaintiffs usually attack statements that portray the positive impact of the product on the environment, for example through statements such as climate neutral. The problem typically is that they cannot prove they are climate neutral, or when it is not entirely clear how the consumer would understand the claim made.
David Foster (05:47):
Recent years have definitely seen an uptick in disputes about climate change. In one significant recent example, a group of youths successfully sued the state of Montana for failing to protect their right under the state constitution to a clean and healthful environment. However, the most significant disputes arguably have occurred in the financial arena, where a number of investigations and lawsuits have focused on the issue of whether and when it is appropriate for fiduciaries, like asset managers, to take climate issues into consideration when making investment choices. This has been a significant source of controversy, particularly over the last year or so.
Sophie-Isabelle Horst (05:48):
What about in the EU?
Nicole Saurin (06:37):
In the European Union, cases are often brought by the very same consumer protection associations. However, the cases differ in terms of the objective and the legal basis of the claims. They are characterized by the fact that consumer protection associations directly sue energy, and or vehicle producers mostly on the basis of the German Constitution and the Paris Agreement, because they considered the business model of these companies to be harmful to the climate. So far, German courts have dismissed all such civil suits, with the argumentation that it is the legislators responsibility to ensure that effective rules are in place to prevent climate damaging business models, provided that producers act in accordance with the requirements of existing legislation.
Sophie-Isabelle Horst (06:41):
How has climate litigation been affected at the regulatory level?
Carla Wiedeck (06:43):
So a major innovation in this context is the instrument of class actions in the European Union. The instrument has already been proven to be a well-established form of legal action in the United States. So in the EU, we've introduced the Representative Actions Directive which aims to make representative actions effective and regulates the use of collective actions to ensure they are not misused against companies. Under this directive, it is possible that ESG class actions will arise, alleging, for example, misleading statements and disclosures where the information that has allegedly caused consumer harm would relate to companies’ ESG commitment .
Nicole Saurin (07:58):
In addition to that, ESG-based climate litigation will benefit from an expansion of substantial duties, in particular the breadth and openness of national tort law can serve as a gateway for ESG-related duties. In this context, fundamental rights obtain special importance. Fundamental rights can be invoked as violated rights in the context of tort law for example. This means that the jurisprudence of the Federal Constitutional Court, on the one hand, and the jurisprudence of the European Court of Justice and the European Court of Human Rights, on the other hand, are becoming more influential in the context of climate litigation under tort law.
Sophie-Isabelle Horst (08:06):
In particular in the U.S., we see more and more anti-ESG movements. David, could you give us an overview of the current situation?
David Foster (09:12):
ESG is definitely a controversial topic in the United States. On the one hand, many corporations, asset managers, investment professionals and ordinary people think ESG considerations are important, both in the investment context and elsewhere. This point of view is similar to the views of ESG that we commonly think of as being prevalent in Europe, and it's widely held by many in the United States as well. But on the other hand, there are others in the U.S. who have expressed the view that ESG is a bit of a Trojan horse, that climate activists have used to inject politics or about climate issues and other issues as well, into corporate governance and decision making. Under this latter view, some have alleged that when asset managers or directors of corporations take climate issues into account, they are putting left leaning politics ahead of the financial interests of investors. We have seen this theory emerge in a few contexts, and proponents of that theory have included state attorneys general and members of Congress.
Sophie-Isabelle Horst (09:17):
Carla, do you see or expect similar movements in the EU?
Carla Wiedeck (09:49):
So far there has been no movement in the EU comparable to that in the U.S., experience shows, however, that most developments in the U.S. market are reflected with some delay in the European and especially the German market. Nevertheless, it can be expected that any anti-ESG movement in Europe will be different from that in the U.S., it is more likely that an anti-ESG movement in the EU would focus on the issue of the extent to which environmental aspects need to be taken into account, rather than questioning the need to consider this issue at all.
Sophie-Isabelle Horst (09:57):
Finally, can you tell us what steps should companies be taking to ensure they don’t fall foul of future ESG litigation?
David Foster (11:29):
That's a tough question, because there really isn't a step that can ensure that a company doesn't fall afoul of a future ESG litigation. Because, as we've discussed, what we're seeing is a world in which some actors, both in the EU and in the United States, are pushing very hard in one direction, and other actors are pushing very hard in the opposite direction. And so the thing that I think is most important for clients, and others to do to avoid ESG litigation risk, or at least to keep it to a minimum, is really to focus on having a good, robust process in place for considering and making decisions that are informed about what they're saying about ESG and what they're committing to do and not to do. It's important to have a unified process, that's the least risky approach. And to loop in attorneys as well as sustainability professionals, or environmental experts as companies are making decisions about ESG goals and communicating about them. It's also important because we're seeing such diversity in the way that the world is thinking about ESG to employ a global approach, because what works in one country might not work in another. And what you say about ESG won't necessarily stay in one country. Even if you put it in one country's language, it could get translated, it could be put on the internet. And exposure can arise in other places in the world where it was unintended.
Carla Wiedeck (11:48):
I agree with David. Those risks do not stop at national borders and ESG litigation can arise even in the most unexpected jurisdictions. Therefore having a team approach globally is very important. We have that approach in place at Hogan Lovells, and we think that this is a way clients too should tackle this issue.
Khushaal Ved (11:51):
Thank you for joining us. For more information on this
podcast or any other topics we've covered so far, head
to the website, hoganlovells.com.
Welcome to A Matter of Law, a Hogan Lovells series
that takes a deep dive into the latest developments that
are shaping the legal world. Our team of lawyers will
provide insight into crucial and rapidly evolving issues and address
the risks that can lead from the boardroom to the courtroom.
Sophie-Isabelle Horst (00:32):
I'm Sophie- Isabelle Horst, counsel at Hogan Lovells. As more
and more companies embrace ESG as part of their overall strategy,
the level of scrutiny by employees, shareholders, and government agencies has
been on the rise. Regulatory reporting and transparency requirements, also
mean we are seeing an increase in ESG litigation. What
(00:55):
does this mean for companies around the world? Here to
discuss this with me, are David Foster, a partner in
our Washington, D.C. office, as well as Nicole Saurin and Carla Wiedeck,
who are both counsels in our Munich office. Carla, let's
start with you. ESG is relevant to many stakeholders, from
(01:15):
consumers to shareholders, from people that are affected by climate change,
to companies that see their business model questioned. It is
easy to see how this could lead to disputes. Could
you tell us what the most important topics in ESG
litigation are?
(02:07):
Nicole, I'd like to pick up with you. Let's talk
about greenwashing first. What exactly is greenwashing?
Nicole Saurin (02:15):
There's no universally accepted definition of greenwashing. In general, it is understood to be any favorable, but incorrect or incomplete ESG-related disclosure by a company. The classic case of greenwashing would be a company saying a product is more environmentally friendly than it is. But some now use this term even more broadly, in a sense that it encompasses allegedly misleading statements about things like human rights of people in supply chains, or animal welfare or other ESG-related topics. Allegations of greenwashing have been made against many companies across many industries.
Sophie-Isabelle Horst (03:42):
What about in the EU?
Nicole Saurin (04:26):
To help standardize rules across the European Union, the European Commission gave out a proposal of a new law last year, which has, on the 12th of March 2024, been voted upon by the European Parliament. This law is called the Green Claims Directive and is part of the European Green Deal. This directive, is intended to cover voluntary claims by companies towards consumers about the environmental impacts, aspects, or performance of a product, or of the trader itself. The directive would also make an important contribution towards the guarantees of a high level of environmental protection, as embodied in article 37 of the European Charter of Fundamental Rights.
Carla Wiedeck (04:59):
Even prior to this directive, there has been a recent increase in the number of greenwashing lawsuits we see in Europe. And there are consumer protection associations that have been very active. We have seen many lawsuits which are often directed against advertising claims or product descriptions. The plaintiffs usually attack statements that portray the positive impact of the product on the environment, for example through statements such as climate neutral. The problem typically is that they cannot prove they are climate neutral, or when it is not entirely clear how the consumer would understand the claim made.
David Foster (05:47):
Recent years have definitely seen an uptick in disputes about climate change. In one significant recent example, a group of youths successfully sued the state of Montana for failing to protect their right under the state constitution to a clean and healthful environment. However, the most significant disputes arguably have occurred in the financial arena, where a number of investigations and lawsuits have focused on the issue of whether and when it is appropriate for fiduciaries, like asset managers, to take climate issues into consideration when making investment choices. This has been a significant source of controversy, particularly over the last year or so.
Sophie-Isabelle Horst (05:48):
What about in the EU?
Nicole Saurin (06:37):
In the European Union, cases are often brought by the very same consumer protection associations. However, the cases differ in terms of the objective and the legal basis of the claims. They are characterized by the fact that consumer protection associations directly sue energy, and or vehicle producers mostly on the basis of the German Constitution and the Paris Agreement, because they considered the business model of these companies to be harmful to the climate. So far, German courts have dismissed all such civil suits, with the argumentation that it is the legislators responsibility to ensure that effective rules are in place to prevent climate damaging business models, provided that producers act in accordance with the requirements of existing legislation.
Sophie-Isabelle Horst (06:41):
How has climate litigation been affected at the regulatory level?
Carla Wiedeck (06:43):
So a major innovation in this context is the instrument of class actions in the European Union. The instrument has already been proven to be a well-established form of legal action in the United States. So in the EU, we've introduced the Representative Actions Directive which aims to make representative actions effective and regulates the use of collective actions to ensure they are not misused against companies. Under this directive, it is possible that ESG class actions will arise, alleging, for example, misleading statements and disclosures where the information that has allegedly caused consumer harm would relate to companies’ ESG commitment .
Nicole Saurin (07:58):
In addition to that, ESG-based climate litigation will benefit from an expansion of substantial duties, in particular the breadth and openness of national tort law can serve as a gateway for ESG-related duties. In this context, fundamental rights obtain special importance. Fundamental rights can be invoked as violated rights in the context of tort law for example. This means that the jurisprudence of the Federal Constitutional Court, on the one hand, and the jurisprudence of the European Court of Justice and the European Court of Human Rights, on the other hand, are becoming more influential in the context of climate litigation under tort law.
Sophie-Isabelle Horst (08:06):
In particular in the U.S., we see more and more anti-ESG movements. David, could you give us an overview of the current situation?
David Foster (09:12):
ESG is definitely a controversial topic in the United States. On the one hand, many corporations, asset managers, investment professionals and ordinary people think ESG considerations are important, both in the investment context and elsewhere. This point of view is similar to the views of ESG that we commonly think of as being prevalent in Europe, and it's widely held by many in the United States as well. But on the other hand, there are others in the U.S. who have expressed the view that ESG is a bit of a Trojan horse, that climate activists have used to inject politics or about climate issues and other issues as well, into corporate governance and decision making. Under this latter view, some have alleged that when asset managers or directors of corporations take climate issues into account, they are putting left leaning politics ahead of the financial interests of investors. We have seen this theory emerge in a few contexts, and proponents of that theory have included state attorneys general and members of Congress.
Sophie-Isabelle Horst (09:17):
Carla, do you see or expect similar movements in the EU?
Carla Wiedeck (09:49):
So far there has been no movement in the EU comparable to that in the U.S., experience shows, however, that most developments in the U.S. market are reflected with some delay in the European and especially the German market. Nevertheless, it can be expected that any anti-ESG movement in Europe will be different from that in the U.S., it is more likely that an anti-ESG movement in the EU would focus on the issue of the extent to which environmental aspects need to be taken into account, rather than questioning the need to consider this issue at all.
Sophie-Isabelle Horst (09:57):
Finally, can you tell us what steps should companies be taking to ensure they don’t fall foul of future ESG litigation?
David Foster (11:29):
That's a tough question, because there really isn't a step that can ensure that a company doesn't fall afoul of a future ESG litigation. Because, as we've discussed, what we're seeing is a world in which some actors, both in the EU and in the United States, are pushing very hard in one direction, and other actors are pushing very hard in the opposite direction. And so the thing that I think is most important for clients, and others to do to avoid ESG litigation risk, or at least to keep it to a minimum, is really to focus on having a good, robust process in place for considering and making decisions that are informed about what they're saying about ESG and what they're committing to do and not to do. It's important to have a unified process, that's the least risky approach. And to loop in attorneys as well as sustainability professionals, or environmental experts as companies are making decisions about ESG goals and communicating about them. It's also important because we're seeing such diversity in the way that the world is thinking about ESG to employ a global approach, because what works in one country might not work in another. And what you say about ESG won't necessarily stay in one country. Even if you put it in one country's language, it could get translated, it could be put on the internet. And exposure can arise in other places in the world where it was unintended.
Carla Wiedeck (11:48):
I agree with David. Those risks do not stop at national borders and ESG litigation can arise even in the most unexpected jurisdictions. Therefore having a team approach globally is very important. We have that approach in place at Hogan Lovells, and we think that this is a way clients too should tackle this issue.
Khushaal Ved (11:51):
Thank you for joining us. For more information on this
podcast or any other topics we've covered so far, head
to the website, hoganlovells.com.
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