How a Chief Sustainability Officer Can Help Businesses Navigate the Rise in ESG and Climate Litigation

As UK companies face increased scrutiny over their environmental operations, Miriam McGilvray, Associate, Corporate Affairs Practice and Dr. Daniel Summerfield, Director of ESG and UK Client Services, Pomerantz LLP, discuss the current landscape of ESG, climate litigation and how CSOs can make the difference.

How have issues surrounding ESG emerged recently?

The good news is that over the last few years, sustainability and ESG have become mainstream issues among investors and corporations globally. The bad news is that the significant number of varying definitions, approaches and global standards are causing confusion among investors, concerns among companies and consternation among regulators. Further, we are witnessing an increase in litigation in many jurisdictions as investors, NGOs and customers challenge companies on climate-related matters.

There is a growing realisation that the road to net zero under the 2015 Paris Climate Agreement will be increasingly difficult, even if a company has set a detailed pathway. Recent market turmoil has led to a slowdown in the drive towards streamlining sustainability standards as well as in meeting previously disclosed targets.

This recent study by Universities Superannuation Scheme and University of Exeter outlined four climate scenarios leading up to 2030 that focus less on the climate itself and more on the unpredictability of politics, markets and extreme weather events. Only in the most optimistic of the four scenarios does it seem possible that global emissions will be halved by the end of the decade, despite best intentions.

What do you believe are the main business challenges for a modern CSO to address?

As a result of this ever-changing context, companies face a heightened challenge to ensure that their corporate climate commitments are supported by adequate plans and policies, as they are increasingly scrutinised for greenwashing and climate-washing. If and when regulators agree on global standards expected of companies in disclosing ESG activities and extolling their own sustainable virtues, pension funds and investors will have additional signposts for such scrutiny.

Among other attributes, today’s CSO needs to be a talented strategist able to identify ESG matters which could upset an organisation’s performance and risk profile. Long-term value creation is key, along with the reporting and management of realistic and achievable climate goals.

In your experience, what is the scope of ESG litigation?

As a means to remedy ESG concerns, litigation may target shortfalls in climate commitments and introduce corporate governance reforms which would not have been achieved otherwise. When used effectively, securities litigation can future-proof the companies in which pension funds invest, and serve as a deterrent to any company that might be tempted to disregard their shareholders’ or stakeholders’ best interests.

Climate-washing litigation has increased in many countries, with 26 cases filed in 2022 compared with fewer than 10 in 2020, according to a recent report by the Centre for Climate Change Economics and Policy (“CCCEP”) and the Grantham Research Institute on Climate Change and Environment (“Grantham”). These cases cover various types of misinformation, including challenges to corporate climate commitments, claims about product attributes, overstated investments or support for climate action and failure to disclose climate risks.

What are the main factors in the rise of ESG class actions in European and UK courts?

Class actions, where several or more people affected by the same legal issue join together in litigation, have traditionally been the preserve of the US legal system. However, recently there have been many interesting developments in case law and legislation across Europe, as well as funding arrangements to cover the costs associated with litigation in ‘loser pays’ jurisdictions. This suggests there may be more options for global investors who are seeking legal redress. English courts seem increasingly willing to actively consider these cases. Class action litigation remains a fairly immature market in the UK, but it is evolving, particularly in the area of ESG litigation, as it is now easier for investors to pursue group actions in the UK.

While these developments surely have an impact on companies, investors also need to monitor the situation and their commitments carefully. With legal and regulatory actions on the increase, institutional investors’ and pension funds’ actions are also now subject to greater scrutiny and in some cases, legal and regulatory actions. The aforementioned CCCEP/Grantham report identified 28 “turning off the taps” litigations outside the US from 2015 to May 2023. These are cases “aimed at preventing the flow of finance to high emitting or harmful projects or activities”. Twelve of these were filed against private parties, including banks and pension funds.

The challenge going forward will be for CSO leaders to closely work with senior legal teams to find the right balance between meeting legal, regulatory and reporting expectations and promoting their corporations’ ESG credentials. Odgers Berndtson’s global network of corporate communication search specialists allow organisations to successfully engage world-class professionals with the expertise to lead in this complex landscape.

Dr. Daniel Summerfield has been the Director of ESG and UK Client Services at Pomerantz since 2022, and has over 20 years of professional experience as a pensions, investment and public affairs professional with a strong background in ESG/sustainability, stewardship and engagement, reputation management and stakeholder relationships.

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