ESG and Group Action Developments: What You Need to Know

March 27, 2024

This Insight discusses the growth and development of class and collective actions and considers future trends in the United States, the European Union, and the United Kingdom.

Recent Developments in the United States

Recent years have seen an increase in class actions concerning consumer products, especially in relation to claims for alleged “greenwashing.” Clothing, food and beverage, and personal care products have been the frequent target of these claims, often in cases where the company asserts that a product is “natural,” “sustainable,” or made with recycled content. There has also been an increase in cases challenging companies for their supply chain integrity, including fair trade, labor practices, and animal welfare.

In the United States, these cases typically are pursued as class actions. Plaintiffs usually allege that companies charge a premium over and above a comparable product that was not sold with such marketing claims. Such claims are prevalent across the United States, but are particularly frequent in California, New York, and Florida.

Companies facing these claims will incur actual litigation costs from lawyers and experts. They also are at risk of reputational harm.

FTC Green Guides

The Federal Trade Commission’s (FTC’s) “Green Guides” are a primary source of guidance for environmental marketing in the United States. The guides address the applicability of Section 5 of the FTC Act, 15 USC 45(a) to environmental advertising and labeling claims. These are often cited by plaintiffs in greenwashing cases. They were first issued in 1992 and last updated in 2012, with a further revision forthcoming. 

Best Practices to Avoid Claims

Companies can take steps to help mitigate risk. For example, consider how a statement could be misrepresented or misinterpreted by a third party to facilitate a false advertising claim. Ensure that statements are capable of objective support and are verifiable and supported by evidence. Use aspirational statements over statements that can be construed as a promise. Finally, work with legal counsel to evaluate these statements before they are published.

Group Actions in the European Union – A Rapidly Evolving ESG Framework

The European Union has a rapidly evolving environmental, social, and governance (ESG) framework of reporting and due diligence. Much of the reporting is still new and is being introduced in a staggered way, depending on factors such as the size of the business. The Corporate Sustainability Reporting Directive (CSRD) stipulates that companies in the European Union need to report on the ESG impact of their businesses.

The proposed EU Supply Chain Directive—the Corporate Sustainability Due Diligence Directive (CSDDD)—is still at the proposal stage, with debate over the levels of diligence and how far duties will go up the chain. The CSDDD will introduce an additional duty of care for companies or their directors to prevent or mitigate ESG risks caused by their business activities.

At the member state level, there is a more complex picture across the differing jurisdictions with their own consumer protection rules. There are individual national supply chain laws, duty of care laws, or duty of vigilance laws, with the most advanced jurisdictions being France, Germany, and the Netherlands.

In terms of litigation, there is a clear push at the EU level to promote and harmonize collective actions. The new Representative Actions Directive proposes to bring under its umbrella the new EU rules on consumer protection, which are in the works, as well as the harmonized Green Claims Directive. It will allow certain public bodies, or organizations that are designated by member state governments, to bring consumer actions and also obtain injunctive relief.

The CSDDD proposal also contains provisions that extend the statute of limitation back 10 years and grants non-governmental organizations (NGOs) and trade unions the explicit right to bring actions on behalf of plaintiffs. This is further backed by recent case law of the European Court of Justice that somewhat extended the concept of the protective norm allowing to bring a representative action based on EU rules.

There are also national rules on representative actions, as the EU Directive only gives minimum standards, and member states can go beyond these standards, but they have to ensure access to representative actions and effective enforcement of any remedies.

Mitigation in the European Union

Training employees on the definitions of ESG is essential, as what constitutes ESG is not always consistently understood. Businesses need to be diligent in all of their ESG claims. If any statements are made, they need to be reviewed and substantiated. Companies should make risk assessments of areas most exposed to ESG risk. It is also good practice to track claims against the business from an early stage, as this helps anticipate trends and reduce future risks. Finally, ensure that a response plan is in place if a crisis does emerge.

Group Actions in the United Kingdom

As with the European Union, the ESG landscape in England and Wales is undergoing a period of transformation. At present, the regulatory framework is something of a patchwork with various reporting requirements and duties originating from a variety of sources, including legislation and “codes of practice.” It is likely that in the coming years, there will be increases in the number of formal compulsory reporting requirements. The extent of this increase may depend on the outcome of the upcoming UK General Election.

The English courts have been asked to consider ESG claims. For example, in a landmark decision from 2021, the UK Supreme Court concluded that it was—at least—arguable that a parent company owed a duty of care in respect of alleged environmental damage and human rights abuses carried out by its foreign subsidiary, providing important guidance on how future claims of this type might be brought in England and Wales.

Similarly, in late 2023, the High Court of England & Wales rejected an application by an investor for permission to bring a derivative claim against an energy company and its directors for allegedly failing to manage climate change risks. Further, in 2022, the Court of Appeal rejected an attempt by academics seeking permission to bring a similar claim against the directors of a university pension scheme for its alleged failure to divest from fossil fuels.

Will England and Wales become a key jurisdiction for ESG-related group claims? At first glance, this might appear to be unlikely, since compared to other jurisdictions (such as the United States and Australia), there is not a strong tradition of group actions in England and Wales. This is primarily due to the perception that pursuing group actions is challenging because of a variety of factors, including the “loser pays” cost regime and the limited availability of procedural routes for pursuing opt-out class actions, particularly outside the context of competition (i.e., antitrust) claims.

However, the appetite for collective actions in England and Wales is growing. This is being driven by three factors:

  • There is an increased level of activity reflecting expansion of the market. Specialist law firms are being joined by litigation funders and other service providers, such as claim management companies, all of which are bringing experience of pursuing class actions from other jurisdictions. A recent UK Supreme Court judgment questioning certain litigation funders has done little to inhibit the influx of litigation funding capital and is, in any event, set to be overturned by government legislation.
  • There appears to be increasing judicial willingness to accommodate large class actions and adopt pragmatic procedural solutions to facilitate those claims.
  • The courts are providing further guidance on the procedural routes for bringing claims providing “blueprints” to market participants who now have a greater understanding of the likely demands of pursuing class actions

Types of ESG group claims being pursued in England and Wales:

  • Environmental: The English courts may become a significant jurisdiction for environmental disaster claims, following a key Court of Appeal judgment that revived a £5 billion claim brought in connection with the collapse of a dam in Brazil. The Court of Appeal concluded that the claim could be pursued in the United Kingdom because the remedies available to the claimants in Brazil were not obviously sufficiently adequate to render the English proceedings wasteful. The decision signals that English courts will, in the right circumstances, accommodate large and complex group litigation, and some consider this to be a good sign for a future environmental disaster claims market in the English courts.
  • Social: Equal pay claims have historically been a key driver of these claims. It is expected that these claims are likely to grow as reporting requirements expand.
  • Governance: The current main avenue for ESG group actions is securities litigation, which is on the rise in England and Wales despite there being limited judicial guidance on key concepts such as the definition of “reliance” (required for certain types of securities cases) and the methodology for calculating loss. Litigation funders and claim management services are at the forefront of driving the growth in this area of the market, including by marketing securities litigation to institutional investors as being part of their stewardship activities aimed at highlighting breakdowns in corporate governance. Whether this area of the market will continue to grow may hinge on judicial decisions on key concepts (such as what is required to show reliance) and on the available procedural routes for bringing securities litigation claims. For example, in a recent judgment, the High Court concluded that a claim brought by a large group of institutional investors could not be brought as an opt-out action—a decision that is set to be the subject of a closely watched appeal.

Looking to the future, it is clear that there is an increased public awareness of group actions, and surveys have indicated that the public (particularly consumers) are increasingly willing to participate in them. High-profile examples of group claims (including a claim that was the subject of a highly popular TV documentary) are contributing to this increased appetite. This growing momentum is only likely to increase as far as the ESG landscape is concerned, due to the wider public interest in those topics.

Other relevant factors are likely to include the settlement of high-profile ESG group actions (such as the settlement of a Dieselgate case), the pursuit of high-profile ESG claims (such as a competition class action against water companies), and shifts in regulator or legislative focus—such as to “greenwashing,” new pay equity reporting requirements, or the regulation of PFAs—that could open doors and/or provide hooks for future class actions.