In recent years, environmental, social, and governance (ESG) standards have become increasingly important to investors. The Confederation of British Industry (CBI) estimates that two-thirds of investors consider ESG factors when determining whether to invest in a company, thereby, highlighting how important ESG is for businesses seeking to expand. Consequently, it is now common practice for businesses to adopt ESG frameworks, encompassing guidelines, principles, pledges, and aims. Whilst these frameworks are useful for businesses to encourage investment, they also pose significant risks to the business if they are departed from. Where businesses make certain ESG pledges, and fail to uphold these, this creates the risk of claims or class actions in relation to these broken pledges. Class actions are known as Group Proceedings in Scotland.

In the United States, there have been several high profile ESG related class actions. A notable case concerns Starbucks, where the National Consumers League, an advocacy group representing consumers and workers on marketplace and workplace issues, filed a class action in the District of Columbia. The National Consumer League alleges that Starbucks falsely presented itself as an ethical corporation, citing independent investigations in Brazil, Kenya, and Guatemala that revealed human rights violations in Starbucks' supply chain. Michelle Burns, the Starbucks' Executive Vice President of Global Coffee, Social Impact and Sustainability, issued a public notice regarding this dispute and set out that Starbucks intended to "aggressively defend" this claim. The risks that arise for Starbucks include the costs of defending such an action, the exposure to the sums sought/cost of settlement, and, more importantly, reputational damage.

In contrast, UK businesses facing greenwashing allegations have largely been dealt with by regulators rather than through class actions. The Advertising Standards Agency, the Financial Conduct Authority, and the Competition and Market Authority have the power to conduct investigations in relation to greenwashing and to impose penalties on businesses.

However, the landscape is shifting, and UK companies must prepare for the possibility of an increasing number of class actions being raised, including in relation to ESG issues, similar to those seen in the US.

Particularly, there is likely to be an increase in shareholder ESG class actions in the UK. UK Shareholders can raise class actions on the following bases:

1. Class actions under the Financial Services and Markets Act 2000

    UK shareholders can raise class actions against listed companies under section 90 and section 90A of the Financial Services and Markets Act 2000. Proceedings can be raised on the basis that the company provided misleading or incomplete ESG statements.

    2. Derivative claims against directors

      Class actions can be raised on the basis that directors have breached their duties. Under section 172 of the Companies Act 2006, directors are required to promote the success of the company by having regard to the "impact of the company's operations on the community and the environment". Failure to uphold these duties can form the basis for legal action.

      Factors driving the likely increase of shareholder ESG class actions in the UK

      Shareholder ESG class actions in the UK are likely to increase due to several reasons. Since 6 April 2022, UK private limited companies and LLPs with over 500 employees and £500 million in turnover are obliged to disclose climate-related financial information. This is contained within the PLC or LLPs Non-Financial and Sustainability Information Statement. Therefore, there will be more publicly available information regarding the climate-related financial information of PLCs or LLPs. As a result, if a large PLC or LLP has made an environmental pledge, and the failure to comply with the pledge is apparent in the climate-related financial disclosure, then shareholders may have a clear basis to raise a class action based on misrepresentation. Additionally, the increased reporting obligations will assist those who may make claims based on a director breaching section 172 of the Companies Act 2006. Shareholder ESG class actions are also likely to increase due to the increase in litigation funding in the UK, coupled with increased shareholder awareness of ESG issues.

      As highlighted by the Starbucks example, ESG class actions pose significant risks for businesses. To reduce the risks of ESG class actions the following strategies should be implemented:

      • All ESG pledges should be carefully constructed.
      • There should be regular audits in place, which can clearly defend the pledges.
      • Where possible, ESG pledges should be made in quantifiable terms, rather than general statements.

      Contributors

      Craig Watt

      Partner & Solicitor Advocate

      Ishani Mukerji

      Trainee Solicitor