Investors, consumers, and employees are increasingly looking beyond bottom-lines and assessing what businesses are doing to address climate change, tackle human rights abuse and improve diversity. These are only a few of a myriad of environmental, social and governance (ESG) concerns that are causing a surge in scrutiny over companies’ statements and actions in recent years. Rapid geopolitical developments are also driving greater accountability and compliance requirements for corporations.
This awakening has coincided with a significant increase in class action activity in Europe. The number of class actions filed in the region jumped by over 120 percent between 2018 and 2020, as U.S.-style opt-out mechanisms became more widely available in countries such as the U.K. and the Netherlands. The advancement is set to continue as EU member states implement the EU’s Representative Action Directive, a legal framework for consumer representative actions, by the end of 2022.
A recent survey conducted by Alvarez & Marsal showed how these two legal trends are converging. Seventy one percent of in-house lawyers interviewed said they expect a drastic uptick in group actions this year, with ESG seen as one of the ripest areas for such actions. Similarly, 43 percent of respondents rated shareholder activism as a potential trigger for group action, as shareholders continue to hold companies accountable for climate inaction and social wrongdoing.
Until recently, ESG class action litigation had largely focused on climate change or catastrophic environmental events. For example, the diesel emissions scandal gave rise to the biggest collective action of its kind in Britain, with more than 90,000 customers suing German carmaker Volkswagen. The Anglo-Australian mining group BHP Billiton faces three class actions in the U.K. over a dam collapse in Brazil, which killed 19 people and sent a flood of mining waste into local communities in 2015.
However, the scope of ESG class action litigation has broadened recently to include corporate actions related not only to climate but to other issues such as human rights, the use of resources in supply chains and businesses’ impact on society. This is only likely to intensify as companies continue to commit to voluntary and mandatory standards to support their transition to sustainable practices and net-zero.
Recent regulation on ESG disclosure is also creating new dispute areas, increasing the risk of collective litigation based on public reporting or advertisement. This is already happening in other jurisdictions, in particular in the U.S., where investors are pursuing large-scale claims against companies for inaccurately representing their ESG credentials.
In the U.K., the Competition and Market Authority (CMA) published last year its Green Claims Code, aimed at protecting consumers from misleading environment claims, the so-called greenwashing. Fashion retail, travel and consumer goods sectors could be particularly vulnerable to greenwashing class action risk given their consumer-facing nature.
The social aspect of ESG should also become an area of heightened attention for companies in coming years. Customers and consumers are increasingly interested in what businesses are doing for the communities they operate in. More than that, their expectations around business conduct have never been higher – even if firms comply with minimum standards for corporate social responsibility, the overall sentiment is that it is not enough.
As collective redress regimes and the ESG agenda continue to evolve, group action is likely to become a popular route to litigation, and companies must act now. To mitigate the threat of being targeted, businesses need to devise and implement robust compliance policies to ensure no wrongdoing is happening in the first place. Their actions and commitments in relation to all aspects of ESG must also be able to withstand public and regulatory scrutiny.
There is more that businesses can do to address, and get ahead of, ESG related risks. Promoting employee resource groups and giving them the funding and decision-making authority to pursue local social and environmental activities not only strengthen those efforts but drives employee engagement.
Ensuring good governance through the independent oversight of an external board made up of individuals from a range of backgrounds and representing different aspects of society is also an increasing trend, with many boards actively seeking to better balance the number of female and non-white members.
Risk assessments, and properly reviewing and acting upon their findings, as well as comprehensive insurance options should also be considered for further protection. Finally, if a business does find itself under attack from a class action it should ensure it has adequate council and support.
Daniel Barton, is managing director, disputes and investigations, at Alvarez & Marsal