Out-Law News 4 min. read
25 Nov 2022, 10:38 am
Businesses that manage regulatory risk, put in place robust processes to avoid greenwashing, and invest in improving climate change understanding in the boardroom will minimise their exposure to climate-related litigation, a dispute resolution expert has said.
Speaking at the Climate Litigation and Activism Summit 2022 in London on Tuesday, Michael Fenn of Pinsent Masons said that while the volume of climate-related litigation in the UK has so far been lower than some had predicted, it could take just one successful claim against a major corporation to lead to an uptick in cases.
He said that third-party litigation funders stand ready to facilitate viable climate-related claims against businesses. Greenwashing actions under sections 90 and particularly 90A of the Financial Services and Markets Act 2002 (FSMA), for example, are expected to be an area for further claims and legal developments.
“There has been a lot of speculation that, as companies face increasing requirements and investor pressure to make ESG-related disclosures in their market-facing information, we will see shareholder actions brought under sections 90 and 90A of FSMA in respect of allegedly inaccurate statements about environmental credentials – often described as greenwashing,” said Fenn.
Fenn said that an ESG related claim under s90 of FSMA could potentially be brought on the grounds that a company’s prospectus contained a misleading statement or omission in respect of climate-related information and an organisation’s green energy credentials, and that this caused loss to an investor purchasing securities in the company. A claim under s90A could be mounted on the basis that other “published information” by the company, such as annual reports, contained a misleading statement or dishonest omission in respect of climate-related information, which an investor relied on, suffering loss as a result. Investment firms committed to ethical investment and environmental activists who bought shares based on the company’s ESG claims could be potential claimants in such cases.
In addition to greenwashing claims, the other two key areas in which Fenn foresaw a possible rise in future climate litigation are directors’ duties claims and claims seeking to compel companies to reduce their emissions.
In the former category, claims could be brought against directors for breach of their duties under the Companies Act where they have failed to address climate change-related risks appropriately, to the detriment of the company. But so far there hasn’t been any precedent, as the one issued climate-related directors’ duties claim Fenn was aware of had not obtained court permission to proceed. For the latter category, although there is a landmark decision in the Hague last year in which a court ordered a private energy company to cut its emissions, that decision was based on a duty of care found to be owed under the Dutch civil code, and there is no similar code on which citizens could rely in England and Wales.
Fenn explained that many of these claims would be challenging for claimants to bring. For example, both in FSMA and directors’ duties claims, claimants would need to prove that they had suffered financial loss, which would not be straightforward. However, despite this - and the small number of UK cases at present - Fenn emphasised that the risks of climate change litigation are not overstated.
“This is a new and developing area. It may only take one major case to spark a wave of claims and legal developments,” said Fenn.
“Even if litigation brought in this area is ultimately unsuccessful, it may achieve activist claimants’ strategic objectives of raising the public profile of an issue and causing reputational embarrassment to a business, thereby leading it to re-consider its climate change-related policies and practices,” he added.
The other reason why businesses cannot afford to rest on their laurels, according to Fenn, is that even where claimants are not using court litigation they are deploying a range of other legal means to drive behavioural change among organisations. Regulatory complaints to regulatory bodies, such as the Competition and Markets Authority and the Advertising Standards Authority, and boardroom activism, are two main methods that have been increasingly utilised by activists.
“The UK environment for climate change litigation remains relatively benign at present, but businesses may not be able to keep it that way,” said Fenn. He explained that the key practical steps for businesses to take in order to minimise their exposure to climate-related litigation involve managing regulatory risk, putting in place robust processes to avoid greenwashing, and improving climate change understanding in the boardroom.
According to Fenn, the regulatory environment in the UK is fast-paced and active. It presents businesses with a major challenge to keep on top of the web of different regulatory rules, principles and standards with which they must comply, particularly around climate change-related reporting and disclosures, but they must comply and manage regulatory risks effectively.
In light both of the regulatory environment and the potential rise in s90 and s90A securities litigation, Fenn said it is important to make sure that all statements made about climate-change related matters are subject to proper due diligence and scrutiny. Keeping a robust record of this verification process is strongly advisable.
Lastly, he noted that – particularly given the potential personal exposures for directors - boards must ensure that they have sufficient understanding of climate-related issues to make the right strategic decisions for the business, keeping in mind the many risks in this area. He recommended that businesses designate ESG “champions”.
The Climate Litigation and Activism Summit was hosted by City and Financial Global. It took place at the Cavendish Conference Centre on 22 November 2022. The purpose of this event was to provide companies and their advisers with a thorough analysis of the key issues and practical guidance on how to effectively mitigate the risk of litigation and activism relating to climate change.