ESG-related litigation on the rise in Europe

Corporate Europe has been far more successful in its efforts to resist the kind of litigation persistently faced by its rivals in North America up till now.

But the rise of ESG accompanied by tougher new national and EU laws such as the Corporate Sustainability Due Diligence Directive (CSDD) could mean the tide is turning.

A trio of senior lawyers from international law firm CMS, based in Belgium and the Netherlands, provided risk managers at Commercial Risk’s annual Benelux conference with a highly informative review of the coming rules and regulations and latest cases – not least the groundbreaking case brought against Shell by Friends of the Earth Netherlands. The conference focused on ESG and was held in association with Belgian risk management association Belrim and Dutch association Narim.

There has of course been much talk of ESG-related litigation on the rise and not least the implications for directors and officers. Some accuse the lawyers of ‘bigging it up’ in an effort to drum up business but the evidence is mounting that it is for real.

Following the excellent overview provided for Belrim and Narim members by the CMS team – senior associate Tom Reingraber, senior associate Oskar van de Weijer and partner Virginie Frémat – Allianz Global Corporate & Specialty (AGCS) provided some interesting facts, figures and an outlook.

In its latest D&O market report, the insurer says regulatory action or litigation risks due to ESG-related issues are a “major concern” for boards, driven by increasing reporting and disclosure requirements around such topics, which could trigger claims in case of an inadequate response or non-compliance.

AGCS points out in the report that, in addition, companies and their boards also face the prospect of increasing litigation from environmental or climate groups, activist investors or even their own employees as in the Shell case.

“Climate change litigation is increasing, with over 1,200 cases filed internationally in the last eight years, compared with just over 800 cases between 1986 and 2014. Most of these were filed in the US but there are increasing filings at international courts or tribunals: 2021 saw the highest annual number of recorded cases outside the US. Another risk is misrepresenting ESG credentials or achievements – so-called greenwashing – which can also lead to regulatory action, litigation, and shareholder suits,” states AGCS.

Vanessa Maxwell, global head of financial lines at AGCS, commented: “ESG-related information is increasingly becoming a key checkpoint for insurers when it comes to the risk assessment of a company. Those companies with strong ESG frameworks and governance will likely find insurers more willing to offer capacity.”

Reingraber and his colleagues agreed that the risk and litigation environment is changing fast for European and international corporations, along with the rise of ESG. They said they see a possible “contagious effect” in relation to ESG claims against companies.

Case law in Belgium and France is providing some high-profile examples of this, as in the Netherlands, said the CMS team.

One example is the case of VZW Klimaatzaak v Kingdom of Belgium & Others. On 17 June 2021, the Brussels Court of First Instance pronounced its long-awaited judgment in this closely watched case, which challenged the Belgian state’s (in)action on climate change.

The court ruled in favour of the claimant association Klimaatzaak and found that Belgium’s current mitigation policies were insufficient to adequately address the effects of climate change.

This was deemed a violation of both the general duty of care recognised under Article 1382 of the Belgian Civil Code, as well as Articles 2 and 8 of the European Convention on Human Rights (ECHR), which protect the right to life and the right to private and family life.

The CMS team pointed out that this case was similar to the previous and also successful case brought by Dutch environmental group Urgenda Foundation and individuals against the Dutch government. However, the Belgian court declined to issue an injunction ordering the government to set the specific emission reduction targets requested by the plaintiffs.

This ruling has been appealed by VZW Klimaatzaak and it will be continued on 14 September 2023.

Another recent high-profile case was announced days before the opening of the COP27 meeting in Egypt in October this year, by leading French action groups against BNP Paribas.

“Oxfam France, Friends of the Earth France and Notre Affaire à Tous are putting BNP Paribas on notice for failing to comply with its climate duty of vigilance. The three NGOs request BNP Paribas to immediately stop supporting – both directly and indirectly – new fossil fuel projects and to comply with the Paris Agreement’s goal of limiting global warming to 1.5°C. BNP Paribas has now three months to comply with the law. In the absence of a satisfactory response from BNP Paribas, the NGOs will turn to the judge and take the multinational to court before the Paris Judicial Court,” announced Oxfam at the time.

The CMS team explained that the groups cite “la loi sur le devoir de vigilance”, which obliges large French companies to identify risks and prevent serious environmental and human rights violations that may result from their activities.

“This is the first step towards the first climate litigation case in the world to target a commercial bank for its high-risk activities in the oil and gas sector,” explained Fremat.

Moving onto the Netherlands, the CMS team explained the country has also seen some very significant action in this fast-developing area.

As noted above, the big one from a state perspective was Urgenda Foundation vs State of the Netherlands, first brought in 2015.

In this case, the Dutch environmental group and 900 Dutch citizens sued the Dutch government, requiring it to do more to prevent global climate change.

The court in the Hague ordered the Dutch state to limit greenhouse gas (GHG) emissions to 25% below 1990 levels by 2020, finding the government’s existing pledge to reduce emissions by 17% insufficient to meet the state’s fair contribution toward the UN goal of keeping global temperature increases within 2°C of pre-industrial conditions.

The court concluded that the state has a duty to take climate change mitigation measures due to the “severity of the consequences of climate change and the great risk of climate change occurring”, explained the CMS team.

It was a tort claim so the Dutch State has a duty to take climate change mitigation measures under ECHR Article 2 (right to life) and Article 8 (right to respect for private and family life).

Climate change is, of course a global problem, but this case found the Dutch State is responsible for “its part”. The CMS team explained that this was the first decision by any court in the world ordering a state to limit GHG emissions for reasons other than statutory mandates.

It was confirmed by the Court of Appeal in 2018 and the Dutch Supreme Court in 2019, and many suspect that follow-up litigation will follow.

The other big case directly relevant to Dutch corporations – and their risk managers – is Milieudefensie (Dutch Friends of the Earth) et al v Royal Dutch Shell plc, brought in 2021.

Under this ruling, Shell has an “obligation of result” to reduce CO2 emissions generated worldwide by its group’s operations (scope one). Shell also has a “significant best-efforts obligation” to reduce CO2 emissions generated worldwide by its business partners (scope two and three). It needs to ensure a reduction of CO2 emissions of 45% by 2030, compared to 2019.

As the Dutch Friends of the Earth repeatedly pointed out, Shell is not complying with the demands, so its policies are “incompatible with the reduction obligation, implying an imminent violation”, pointed out the CMS team.

Shell has, of course appealed the decision and hearings will take place in 2023/2024. This again implies “possibly a contagious effect in relation to ESG claims against companies”, said the CMS team during the Commercial Risk event in Antwerp last month.

Banks, asset managers and other investors are, of course, lobbying hard to persuade legislators to keep them out of the requirements of legislation such as the EU’s Deforestation Directive and the CSDD.

But they are also facing up to action from the campaign groups in the Netherlands.

In September 2021, Fossielvrij NL (Fossil Free NL) announced action against pension fund ABP in relation to its fossil fuels investment policy.

“Pension fund ABP adds fuel to the fire by investing €15bn in the fossil fuel industry. This is the money of teachers and civil servants, who are obliged to build up a pension with ABP. The pension money goes to major oil giants such as Shell and Exxon, companies with coalmines, companies that drill in the vulnerable Arctic and that produce the polluting shale gas,” stated the group.

“All over the world, people are revolting against the companies in which ABP invests. In Argentina, for example, the indigenous Mapuche community is fighting against Shell because dangerous earthquakes occur when it is drilling for shale gas,” continued Fossielvrij NL.

“That is why ABP must stop financing the climate crisis. ABP is obliged to invest in the interests of its own pension participants. Instead of investing in climate chaos, ABP must contribute to a fast and just energy transition to guarantee a safe living environment for people in the global south, future generations and pension participants,” it added.

In October 2022, the fund announced: “Pension fund ABP will stop investing in producers of fossil fuels (oil, gas and coal). Reasons for this decision are recently published reports by the International Energy Agency and the UN Climate Panel. Groups of ABP pension participants and employers have shown broad support for this decision. ABP will divest from the fossil fuel producers in phases, the majority of which is expected to be sold by the first quarter of 2023. This concerns more than €15bn in assets, almost 3% of ABP’s total assets. The fund does not expect this decision to have a negative impact on long-term returns.”

Further, in January 2022, Friends of the Earth Netherlands sent an open letter to 29 other companies, asking them to reduce their CO2 emissions by 45%.

In addition, the CMS team pointed out, there is the problem of greenwashing, which also hit the headlines in the Netherlands in July 2022 when Fossielvrij NL started proceedings against Dutch airline KLM over its allegedly misleading advertising campaign.

All of this has big potential implications for the corporate D&O market of course.

As the CMS team pointed out, however, it has to be appreciated that this remains a still relatively tenuous link, for a number of core reasons:

• Primary responsibility and company liability
• External versus internal liability
• High threshold – personal liability needs “serious blame”
• No US-style (derivative) shareholders claims in Europe.

But Europe’s risk managers need to keep a close eye on developments as they face the following rising exposures:

• Greenwashing and erroneous disclosure/misleading information in annual accounts
• Internal liability, given a new corporate governance code possibly in 2023
• Liability for not adhering to court rulings as in the Milieudefensie case against Shell.

This ever-rising level of scrutiny by action groups, and the ongoing debate and action in Europe at national and EU level about class actions and consumer redress in general, mean that risk managers in the Benelux region and across Europe need to keep a close eye on developments. They will need to work ever closer with colleagues to ensure they are compliant, or potentially face significant reputational and financial damage on the back of the rise of ESG.