Introduction

This brief summary considers the private law legal remedies available to investors who wish to claim for losses suffered due to ESG-related causes, primarily focusing on litigation involving investor claims related to “E”, or, environmental issues. Investors are increasingly concerned that their investments meet ESG criteria, and many funds have strict ESG investment criteria. As one will note from the recent Shell cases mentioned below, “investors” could include activist shareholders, although their paths to success may be very limited. This note will be of primary interest to clients who are seeking remedies, but we also outline the position in the United States, where CANDEY has an office. The evidentiary challenges that face clients are also discussed as clients will need to  satisfy these for their ESG litigation to be successful.

ESG Litigation Risk

Increased regulatory requirements and related disclosures provide more widespread and detailed information on the status of corporate ESG compliance. Information that is misleading, omitted or deceptive can form a basis for an investor lawsuit. Unfortunately, companies often fail to manage their ESG-related disclosures carefully. Besides the need for compliance, robust ESG practices are essential for mitigating litigation and regulatory enforcement risks. We are of the view that, as the landscape changes, ESG litigation will inevitably be on the rise. As noted by Sustainability Fitch, increases in ESG-focused financing and ESG information have created more opportunities for investors to identify losses suffered. The most publicly prominent ESG litigation, but not necessarily successful, is class-action (group action) climate change litigation flowing from intensifying public concern towards environmental crises.

From a general perspective, investors claiming under ESG-related grounds would primarily claim that they were misled into relying on information that subsequently turned out to be false.  These grounds fall under two broad categories: (i) corporate disclosures of required ESG credentials, and (ii) untrue or misleading representations. Equally, investors may suffer loss where entities in which they have invested lose value due to penalties for ESG-related negligence or other incidents that cause their investments to be devalued. There are several remedies available to aggrieved investors, several of which are the focus of the remainder of this article.

United Kingdom 

Investors in publicly listed companies can bring claims under sections 90 and 90A/Schedule 10A of the Financial Services and Markets Act 2000 (FSMA). Those sections allow shareholders/investors to claim compensation on the basis that a company published misleading information to the market. Section 90 is broadly drafted and can be used against directors and possibly professional advisers responsible for the prospectus or listing documents. The standard of fault under section 90 is negligence, whereas under section 90A/Schedule 10A, a claimant needs to establish deliberate or reckless conduct, making claims under section 90A more difficult to bring. However, the government has indicated that the liability threshold under section 90 may be brought more in line with that of section 90A. Both sections present significant evidentiary challenges for investors, including aspects of their reliance on the ESG information, proof that the cause of the loss related to the ESG misinformation, and the appropriate measure of damages (loss).

Investors (shareholders) may be able to initiate claims against private and public companies under the following areas of law: first, under section 2(1) of the Misrepresentation Act 1967, in circumstances where an individual, having relied on a misleading statement from the defendant, was induced to enter a contract and subsequently suffered a loss. There must be a direct contractual link between the individual bringing the claim and defendant. The defendant will be held liable if it cannot prove it had reasonably believed the representation to be true. Second, investors also have remedies by way of fraudulent misrepresentation and negligent misstatement. A fraudulent misrepresentation claim could be available where investors suffered losses after being induced to buy investments as a result of a company’s ESG-related credentials that were made fraudulently with intent to mislead (i.e., someone who knew it was false or careless as to its truth). However, one needs to be cautious with regard to fraudulent misrepresentation claims. This is because, unlike under section 2(1), the burden of proof lies with the person bringing the claim, the investor must prove the defendant was ‘fraudulent’. A further note of caution is in relation to negligent misstatements: those bringing a claim must demonstrate that the company in question owes them a duty of care. Foreseeability, proximity and reasonable reliance tests must be satisfied for a claim to be successful.

Recent case law has made the hurdles of reliance and causation more difficult to overcome.[1] The claimant must prove awareness of a representation; reliance on a representation cannot be proven simply because, in the claimant’s mind, the representation was genuine. Reliance therefore remains a key barrier for investor litigants to overcome. Claimants will inevitably find it challenging to show documented, active appreciation for ESG disclosure when investing.

Finally, investors can bring derivative claims against directors of a company for breach of directors’ duties. These claims can be brought either under common law or section 463 of the Companies Act 2006. However, the relief is for the benefit of the company, not the shareholder-investor and it is a path with significant legal hurdles. Following on from its successful action in the Hague District Court, environmental charity ClientEarth commenced ESG litigation against Shell in relation to Shell’s failure “to adopt and implement a climate strategy that aligns with the Paris Agreement goal to keep global temperature rises to below 1.5 degrees Celsius.” ClientEarth specifically argued that Shell’s board of directors breached its duties under the Companies Act.[2] However, the English High Court refused permission for ClientEarth to continue its derivative action. The judgment describes in some detail the procedural and evidential hurdles that a claimant needs to address to enable it to pursue such an action successfully.[3]  The Court found that there was no established English law that required compliance with the Dutch order beyond the general duties owed by directors.  Besides several flaws in ClientEarth’s claim, the Court held that there was “a fundamental defect in ClientEarth’s case because it ignores the fact that the management of a business of the size and complexity of that of Shell will require the directors to take into account a range of competing considerations, the proper balancing of which is a classic management decision with which the court is ill-equipped to interfere.”

United States

Notwithstanding the political debate relating to ESG-focused investments in the United States, there is an increasing interest in ESG investor litigation in that jurisdiction by consumers, investors, and regulatory bodies alike. According to the United Nations Environmental Programme 2023 Global Climate Litigation Report, “[i]nvestors continue to file suits alleging that public disclosures relating to climate risk were misleading or fraudulent, both in relation to the risk that a transition away from fossil fuels poses to their business or investment assets and the risk of physical impacts to infrastructure, operations and supply chains associated with climate change” (commonly known as “greenwashing”).

The primary scope for investors to litigate is based on information set out in securities documentation. There are two components of particular relevance: (i) the requirement that prospectuses include accurate and truthful information about the issuer and the securities, and (ii) civil liability for the issuer that can be pursued by any investor purchasing securities based on misleading statements. Investors are also directing their claims towards the accuracy of company claims made by way of public statements or documents. Investor claims primarily relate either to challenging ESG company statements or challenging any improprieties surrounding company actions and operation.

New York v. Exxon Mobil Corp[4] is a recent example of the environmental element of ESG litigation that focused on the failure to make environmental disclosures, thereby misleading consumers about the oil companies’ products' role in causing climate change. Massachusetts v Environmental Protection Agency[5] was an earlier successful case regarding the “E” in ESG, but not many successful cases have followed. The unsuccessful claims appear to have encouraged investors and claimants to create new, innovative arguments. For example, fiduciary duty breaches are being alleged alongside fraud claims. Additionally, ESG litigation has been brought by plaintiffs in relation to consumer protection, fraud, competition, unfair trade practices, and human rights violations. Derivative actions, as in the United Kingdom, may also be initiated by shareholders based on corporate ESG disclosures.

Certain investment decisions driven by ESG criteria are facing a conservative backlash in the United States. A federal judge in Texas held that American Airlines violated federal law by basing investment decisions for its employee retirement plan on ESG and other non-financial factors.   The judge said American Airlines had breached its legal duty to make investment decisions based solely on the financial interests of the pension plan’s beneficiaries by allowing its asset manager and a major shareholder to focus on ESG factors.  The Biden administration in 2023 adopted a rule allowing certain plans to consider ESG factors as a "tiebreaker" between financially equal investment options. The rule replaced a regulation adopted during Republican President-elect Donald Trump's first administration that barred the consideration of any non-financial factors, which would likely be resurrected after Trump takes office for the second time.

Note: This is a general summary of an evolving field of law, and is made available for general discussion purposes only between CANDEY and its clients and prospective clients. This memorandum does not constitute legal advice and must not be relied on as such. It should also not be cited as legal or academic authority.

CANDEY is a boutique litigation law firm that has extensive experience and resources to evaluate and conduct investor-focused ESG litigation successfully, addressing the remedies that are available to investors. We can guide investors through the dispute process, particularly assessing early on the difficult procedural and evidentiary challenges that this type of litigation involves.

12 January 2025

[1]     Leeds City Council v Barclays Bank (2021).

[2]     Sections 172and 174, which require the board to act in a way which promotes the company’s success and to exercise reasonable care, skill and diligence, including for the members as a whole.

[3]     ClientEarth v Shell Plc & Ors. [2023] EWHC 1137 (Ch).

[4]     City of New York v. Exxon Mobil Corp. (2021).

[5]     Massachusetts v Environmental Protection Agency, 549 U.S. 497 (2007).