Heading towards ESG class actions

Hogan Lovells

Hogan Lovells

[co-author: Timon Rauner]

For more than twenty years, the European Union (EU) witnessed the development of collective redress mechanisms to address mass claims situations. To ensure the proper implementation of these mechanisms in the Member States, the EU recently adopted a Directive creating an harmonised set of rules for this type of actions. The new rules may encourage the rise of ESG litigation.

Development of class actions within the EU

With Directive (EU) 2020/1828 on representative actions for the protection of the collective interests of consumers ("the Representative Actions Directive"), the EU has taken another step forward in the "New Deal framework for consumers", as it promotes Europe-wide harmonisation in the field of collective redress.

The Representative Actions Directive aims to both (i) strengthen consumer confidence in the internal market by making representative actions effective and (ii) regulates the use of collective actions to avoid abusive procedures against companies.

The Representative Actions Directive creates a minimum framework for consumers to bring a collective action to obtain injunctive relief or compensation in the event of a breach of the provisions of one of the currently 66 EU directives and regulations listed in its Annex I. The scope is quite wide. And the Representative Actions Directive does not preclude Member States from going beyond that scope for the purpose of domestic actions.

Besides, Annex I is not set in stone as each time a new EU act relevant to the protection of the collective interests of consumers is adopted, the lawmakers will consider whether to add the new text to Annex I.

Under the provisions of the Representative Actions Directive, only a qualified entity, according to the criteria in force in each Member States, will have the possibility to introduce a representative action based on one of these texts.

The Representative Actions Directive adopted on 25 November 2020, repealing Directive 2009/22/EC , shall be transposed in each Member State by 25 December 2022, but at this stage, transposition measures remain disparate.

Development of ESG litigation

Environmental, social, and governance (ESG) issues are of unprecedented importance for companies in a context where legal proceedings related to these issues are increasingly common and can take many forms.

The increase in ESG-related litigation is correlated with the development of European regulations touching open various areas that make a company acting responsibly and sustainably. For some years now, companies meeting certain thresholds (often related to their size, sector of activity or business volume) are subject to increasing reporting, classification or due diligence obligations on a wide range of ESG issues. For instance, several obligations arise from the EU Non-Financial Reporting Directive, the Sustainable Finance Taxonomy Regulation or, in the foreseeable future, from the Draft proposal for a Directive on Corporate Sustainability Due Diligence.

So far, most ESG litigation has focused on environmental standards. For instance, the courts have witnessed a wave of claims brought against governments and public authorities (notably in France and the Netherlands) in connection with climate change. Their respective governments have been held liable for breaching their duty to mitigate climate change.

In March 2021, the German legislator was obliged by the German Federal Constitutional Court in a remarkable decision to adopt certain climate protection measures. According to the Constitutional Court, the German legislator has the duty to protect future generations from the risks of climate change. This requires state authorities to find solutions at the international level as well and therefore, in particular, to comply with international agreements on climate protection.

Such actions are not limited to governmental bodies. Public and private companies may be in the focus, too.

In addition to the need to comply with regulatory requirements, companies are under pressure from stakeholders to act with increased vigilance to prevent ESG related non-compliance. Litigation risks may occur in connection with e.g. greenwashing or social washing. In additional to substantial damages, another major risk arising from ESG litigation relates to the reputational impact that this type of litigation may have. This is why companies should carefully consider ESG factors when assessing litigation risks.

Heading towards ESG class actions

The range of claims that may be brought by stakeholders under the collective redress mechanism is broad and may include several ESG issues.

Under the Representative Actions Directive, it is possible that ESG class actions will arise on the allegation of misleading and unfair information, where the information that allegedly has caused consumer harm would relate to companies’ environmental, social or governance commitments. Greenwashing claims for example could make their way into a class action on the basis of the Representative Actions Directive.

In order to protect themselves against the development of such actions, companies should therefore ensure that the statements they issue regarding their commitments in terms of diversity, inclusion, respect for human rights, leadership or governance and prevention of environmental risks, are not misleading and, in particular, are consistent with the requirements arising from the ESG regulations enumerated in Annex I of the Directive on Representative Actions.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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