The growing risk of ESG class actions (and what to do about it)

Tim:

Welcome to this episode of our Litigation Trending Spotlight on Class Actions podcast series. Today our topic is ESG and, in particular, how ESG claims can give rise to class actions. My name is Tim West and I'm a partner in Ashurst London dispute resolution practise. I'm joined by Tom Cummins, one of my partners in London, and Martin Eimer, a disputes partner in Ashurst's Munich office.

Welcome, Tom and Martin. Tom, ESG has obviously been one of the most used acronyms in the world of business over the past five years or so, but shall we just start by clarifying what it is that we mean when we talk about ESG claims or disputes?

Tom:

Sure, Tim. As you say, ESG is a term that we have heard a lot of over the course of the past few years, and it's really a broad umbrella term. It dates back to the early 2000s when the UN produced a report on responsible investing and produced this label of ESG, or environmental, social and governance. And it's often understood to be a framework for understanding how sustainable a company's business is. So in other words, how focused is that particular business on the longer term benefits for the broader community and environment, in addition to its short term profit-making activities?

And I think a lot of people think of ESG as a synonym for climate consciousness and environmental consciousness, but in reality it's defined differently depending on the context in which it comes up. And it can span factors that are as diverse as emissions from vehicles, waste disposal, human rights concerns, employee relations issues, and financial crime and corporate governance issues. And I think we've seen an increased focus on ESG and sustainability issues over the course of the past two, three years, to a large extent because of the pandemic, because of that time to reflect that we were all afforded and the focus on what the future of society and economies looks like and the relationship between the world of business and the wider world. And when we talk about ESG disputes, essentially we're talking about nothing more sophisticated than disputes that are arising from these ESG factors.

Tim:

And do you want to just explain as well, relatedly, why it is that an ESG inspired dispute would be particularly relevant to a large corporate?

Tom:

Yeah. I think as part of this environment that I've just described, we see an increased focus on sustainability and asking questions about companies when it comes to sustainability. And one end of the spectrum is actually challenging companies in relation to sustainability issues through litigation. And when it comes to ESG themed disputes, we've seen different motivations for those claims. So quite a lot of the litigation in this space is intended to drive changes in behaviour, so so-called strategic litigation against governments and against companies, trying to bring about social change through court actions.

We've also seen quite a lot of litigation against companies, trying to encourage more disclosure, more transparency about what a company is doing and the effect that it has on the wider world from a sustainability perspective. And then finally, and probably most relevantly for what we're talking about today, you've got ESG-inspired litigation that is seeking compensation, seeking damages payments from companies.

Tim:

Yeah. And I think that's really important in terms of framing the specific topic of conversation today. And I'll just briefly explain what we mean by this. So class actions are obviously where multiple claimants with claims share common characteristics and they seek a remedy against the same defendant or multiple defendants. The English courts have got various types of procedures for collective litigation. We covered some of that in our first episode in this series. And ESG disputes are particularly well-suited to class actions because they often relate to conduct where the alleged harmful impact causes damage to a very large class of claimants.

And in those cases, proof of breach, causation and loss is all likely to involve difficult and expensive forensic work, both in the assembly of evidence and the analysis of its economic effect. And the reality is that the cost of that work compared to the level of loss suffered on an individual basis means that it's just rarely, if ever, going to be wise or proportionate for an affected claimant to litigate alone. There is a pithy quote from a US judge, Judge Posner, that often gets cited in English judgments when discussing the rationale for having a class action regime, which is that, "The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30."

So there's that real strong access to justice case for jurisdictions to have the right procedural devices available to handle these sorts of disputes. And what we've seen in recent years is a trend of many jurisdictions implementing reforms to bring in these sorts of procedures. And one such place is Europe, which I think is a good time to bring you in, Martin. Do you want to briefly outline what the position is in Europe?

Martin:

Yes. Thanks, Tim. As you rightly say, the introduction of collective redress or class action proceedings on a broader scale in Europe has been on the agenda of the EU Commission over the last 10 years, and it has resulted in the so-called Representative Actions Directive. And that directive essentially aims at giving access to justice to consumers in certain fields of EU consumer laws, facilitating the bringing of claims in collective redress proceedings. And it introduces a minimum standard and a tool that all member states must implement by the middle of this year. Efforts to implement such law, such procedural rules in their respective codes are ongoing. Not all member states have so far introduced relevant legislation. But this is very much in the making, and we can expect that we will have a whole range of collective redress mechanisms available in the very near future.

Then the interesting thing, if I may add, is that although the requirements in that directive are to implement collective redress mechanisms for consumer claims, but member states are free to deviate as long as they meet the minimum standards. And many member states use the opportunity and actually go beyond the requirements of the directive and allow for collective redress proceedings in business to business relationships also.

Tim:

Thanks, Martin. I think we will likely see, by the sounds of it, as we'll come to in this podcast how those procedures will get tested through ESG collective actions. And we thought we'd look at that issue through the prism of a public company and three dimensions in which it may be subject to ESG-related class or group actions. The first, from its investors, through securities litigation, litigation, the second from those affected by supply chain activities, and then the third from its customers and the world of consumer litigation. So let's start with the first of those, securities litigation. Now that's driven a lot of class actions activity in jurisdictions like the US. So Tom, what do you think the prospects for groups of effective claimants to bring ESG-related securities litigation in the UK is?

Tom:

Well, I think probably the starting point, Tim, is to ask what would be the legal basis for the claim? What's the cause of action? And when we look at this question, we tend to start with our statutory regime for securities claims, which is set out in the Financial Services and Markets Act, referred to as FSMA. And under Section 90 of FSMA, there is liability for any person who's responsible for listing particulars or prospectuses if an investor acquired securities and suffered loss as a result of an untrue or a misleading statement in those particulars, or an omission of certain information which FSMA requires issuers to include. And a claim of this nature won't succeed if the defendant is able to demonstrate that he or she had a reasonable belief that the statement that was included in these particulars was true or not misleading or that the omitted matter was properly omitted.

As things currently stand, it's a negligent standard of liability that a defendant faces. Alongside Section 90, we also have Section 90A of FSMA, which provides for liability for any issuer of securities if an investor suffered loss as a result of an untrue or misleading statement or dishonest omission of a required matter in relation to certain published information under FSMA. And again, similar to Section 90, there are circumstances in which a claim will not succeed, and that includes if the investor is unable to demonstrate that he or she acquired or held or disposed of securities in reasonable reliance on a misleading statement or omissions. There's a built-in reliance test in this part of the legislation. And the issuer can also avoid liability if no senior manager, the technical term in the legislation, PDMR person discharging managerial responsibility, if nobody in that category knew the relevant statement was untrue or misleading or was reckless as to whether that was the case.

So you can see that from more akin to a fraud standard from an English common law perspective. Now you said, or you asked me rather, what the relevance of these particular provisions might be to ESG claims. Well, to date, we haven't seen that many Section 90, Section 90A claims, and I think that's because of the evidential challenges associated with proving loss, and in the case of Section 90A claims, proving reliance by the claimant investor. But that does beg the question as to whether we will see more of these in the future.

Tim:

Yeah, I think that's right. I mean, there are certainly a number of claims making their way through the courts, but this is an area of the law where there's not a huge number of judgments. And the judgments that we've had and the cases that have settled, have tended to relate to issues arising out of the GFC or corporates' false accounting issues and things like that. But do you want to explain exactly how it is that these sorts of issues would be relevant to ESG-related claims?

Tom:

Yeah, sure. It's a good question, I think. And I would say the reason why people are looking very closely at 90 and 90A claims in this context is because there is generally more interest on sustainability and what companies are saying about sustainability and the financial effect of ESG issues on the values of securities. And I think all of that means that it may be easier for an investor in the future to show that it has suffered a loss if an ESG-related issue affects a company that it's invested in, or easier for it to show that it relied on a particular ESG-related disclosure by that company.

And already we're seeing claims of this nature, so under Section 90 or Section 90A, against companies which have got into trouble with financial crime-type ESG issues, so for instance, claims against companies which have been subject to fines from authorities in relation to bribery or sanctions violations. There is then a stock drop or drop in the price of the relevant securities and investors bring claims off the back of that. So that is one context in which we're already seeing one aspect of ESG giving rise to securities litigation.

Tim:

And when you say greater focus on sustainability in financial disclosure, what specific regimes do you have in mind?

Tom:

One of the real themes, I think, in this area when it comes to ESG is that companies are being asked to disclose more and more information about climate change-related issues and broader sustainability-related issues. And in the UK we have things like the TCFD recommendations, the recommendations of the Task Force on Climate-Related Financial Disclosures. And those have been adopted by the UK government for larger UK companies and for listed companies. And what TCFD requires is that companies disclose on a comply or explain why they haven't complied basis, certain information in relation to climate change issues. So for instance, companies that seek to comply with TCFD, they have to set out what their governance regimes are in relation to climate change. So in other words, how are they providing for governance of climate-related risks and opportunities?

They have to set out their strategy when it comes to the impact of climate change on business and financial planning. They have to set out what their risk management frameworks are, so what process does the organisation use to identify, assess and manage the climate-related risks it may face? And finally, they have to set out what their metrics and their targets are in relation to climate-related risk and opportunity. So quite a lot of information has to be put out there into the public domain if you are a company seeking to comply with the TCFD recommendations. And you can see how more and more information of this nature is published, it could lead to securities claims in the future.

Tim:

Yeah, absolutely. Particularly when you consider the growth of the litigation funding industry over the last decade or so, together with the emergence of what might be referred to as a claimant bar of law firms who are all looking at these sorts of issues. And I think it's fair to say that companies are now much more alive to these risks. It's a risk that is considered at risk committee and board level. So we obviously see a trend of getting questions from issuers about what practical steps they might take to mitigate ESG litigation risks. Do you want to just give a quick summary on that issue, Tom?

Tom:

Yeah, I think there's a few things to think about. The first really emerges, I think, from the G element of ESG, the governance piece, having in place an adequate process to assess, document, and disclose and mitigate the risks associated with misleading disclosure in public documents. Having a verification process in place to ensure that information you are putting out into the public domain is accurate. I think there's a role for third party advisors as well, particularly when it comes to technical issues around climate and other environmental issues. So having the right expertise to inform the board, to inform the management when they're producing this public disclosure. And for instance, we were talking about the different causes of action on the FSMA. Section 90 provides a defence for a company if it is putting express statements into the public domain in reliance on expert input, and the company had a reasonable belief that that expert input was accurate. So I think that there's a real basis there for relying on third party advisors and building that into your risk management frameworks.

I think also something that companies are very alive to is putting in place appropriate assumptions when they're making disclosure in relation to sustainability issues. So for instance, companies might say, look, here's our plan to move towards net zero, but we are making assumptions about the necessary state support and legislative framework that we will need in order to achieve those objectives. And similarly, I think there's a point there around disclaimers if you're setting out what your plan is in relation to the risks and opportunities arising from climate change. Being very clear about what the risks are, where you are subject to factors beyond your control, where you are making best estimates of those particular matters. You obviously have to be a bit careful about disclaimers because courts tend to look at them quite restrictively when assessing whether a particular company has created a duty of care or breached a duty of care. But I think there is a role there for ensuring that adequate disclaimers are built into documentation.

And then finally, I think, certainly when it comes to climate change issues, there's a lot to be said for being transparent, to explaining your workings and your methodology in your public documents, how did you actually get to the outcome that you're putting into a public document, alongside as much clarity as possible. One of the real issues, I think, in relation to climate change and greenwashing issues when it comes to public disclosure is companies have a tendency to use quite a lot of jargon and not everybody understands that jargon in the same way. So being crystal clear as to what it is you mean when you are putting out this information is a good way of mitigating risk.

Tim:

Martin, presumably a lot of what Tom has just outlined, given its jurisdiction-neutral principles that would apply no matter where a company is based, would be applicable to clients that you're talking to and advising in Germany. But are there any specific aspects that you would want to draw out that might be different from a European perspective?

Martin:

Yes, maybe not different, but if I may add one interesting point that goes to what Tom just said about the difficulties of proving, providing evidence in court in security litigation where you want to demonstrate a misleading claim about sustainability, human rights compliance, and the like. We had a recent investigation here in Germany into DWS, Deutsche Bank's fund, regarding allegedly wrongful or incorrect allegations regarding their ESG compliance. And that has been going on for a couple of years and ultimately led to the stepping down of DWS's CEO. Made a lot of noise in the market and gives a good taste of what to expect in the market going forward. And on the back of this investigation, there was a recent article by a judge at the Federal Court of Justice in Germany who emphasised the importance of criminal law on investor fraud.

And whereas, in the past, investor fraud cases were primarily assessed against monetary aspects and prospects, wrongful or misleading information on the prospects of making profits, he's very certain that any kind of allegations regarding ESG sustainability of the investment will have to be considered in the context of investor fraud also. Now, where does that lead? That leads to the public prosecutors being required to investigate ex officio, allegations where there are indications that allegations around ESG compliance might be wrong. And that can and is being used in different scenarios in the courts already, having the public prosecutor investigate the corporates, and on the back of that bring litigation using the results of such investigations.

Tim:

Very interesting. Sounds like a trend for us all to keep an eye on. Okay, so I think we'll move on to the next dimension of ESG litigation, and the risk that corporates might face claims in relation to their supply chain. I think probably makes sense to come to you first on this one, Martin, because there's been an awful lot going on in Germany, and Europe more generally, on this topic.

Martin:

Yes, there has been a lot going on, in particular in Germany. Germany has been very quick to introduce the so-called Supply Chain Act, which came into effect in January this year. And in a nutshell, it creates due diligence obligations for corporates regarding the human rights and environmental impact of their entire supply chain. So corporates of a certain size have obligations to take precautionary or preventive measures to prevent human rights or environmental breaches. They have to have action plans for remediation if within their supply chain those issues arise, and they have to regularly report on their compliance with those due diligence obligations. And according to this Supply Chain Act, authorities are allowed to investigate suspicious circumstances and issue fines on the corporates if they don't comply with those due diligence obligations regarding human rights and environmental impact.

Now, that's Germany. Very similar regulation along the same lines is currently in the making at EU level also. The EU proposal is out with a similar aim, to introduce for corporates due diligence obligations. That's currently being deliberated, but in the, let's say, rather late stages, so we can expect similar regulation to be introduced more broadly on European level in the near future. But obviously, those regulations and breaches thereof are likely to give rise to litigation in the future.

Tim:

And Tom, how about the position as it's been developed in the English courts in recent years?

Tom:

Yeah. And I think we do have to look at the English courts rather than any legislation of the sort that Martin has been describing. There's nothing on the stocks at the moment in the UK. Had we remained part of the European Union, of course, we would also have signed up to the Europe-wide legislation that Martin's been outlining. But since Brexit, government has not indicated that it's proposing to legislate in a similar way.

We have had a number of developments from the English courts in relation to cross-border multinational tort liability in the past few years. I'll give you a couple of examples. Many people listening to this will probably be aware of these, but we've had a number of cases from our UK Supreme Court, which has considered the circumstances in which a parent company can be held liable, held responsible for tortious acts committed by its subsidiaries overseas under English law. And the key question that comes out of those cases is can you say that the parent has assumed a duty of care to those individual claimants who were affected by the alleged wrongful acts?

So you have cases like the Lungowe and Vedanta case, which related to alleged copper mine discharges in Zambia. And that was a case where the Supreme Court said the liability of the parent company depended on the extent to which and the way in which that parent company involved itself in the control, supervision or in advising the management of the relevant operations of the subsidiary. Or alternatively, whether the parent held itself out publicly in doing so, regardless of whether it in fact did so. And a very similar line of reasonings developed by the Supreme Court in the Royal Dutch Shell case of Harvey against Shell, litigation which related to alleged pollution in Nigeria. So the English courts at the most senior level showing a real receptiveness to investigate alleged corporate wrongdoing in jurisdictions outside of the UK.

Tim:

Yeah, and I think that reflects a trend, actually, of the judiciary in this jurisdiction more generally to look very seriously at claims that are brought before it. And there's another case, I think it's probably worth also highlighting, Tom, relevant to class actions in this space, relating to the collapse of the Brazilian dam. Do you want to just give us a couple of minutes on the relevance of that?

Tom:

Yeah, and I think the case you're referring to is often referred to as the Mariana case, and it is probably the most high profile case of this nature working its way through the English courts. It arose from what I think is Brazil's worst ever environmental disaster, which basically a dam collapsed and many cubic metres of tailings from iron ore mining operations were discharged into a river basin. And a claim was brought on behalf of over 200,000 claimants in the English courts against the English and Australian parent companies of one of the shareholders in the joint venture company that owned the dam. And the high court initially, when it received this claim, struck it out. It said, this is just not workable. We're going to strike it out on the basis of what it referred to as irredeemable unmanageability. And I think in that decision, the court was quite influenced by the fact that there was already litigation ongoing in Brazil. And it looked at this case before and thought it's just going to become too hard to deal with if we have parallel proceedings in different jurisdictions.

But interestingly, when this question of strikeout was referred to our Court of Appeal, it overturned the high court's decision, and it said there's no proper basis for the high court's findings that the proceedings were abusive on the basis of irredeemable unmanageability. We just don't think that's the right test and it applies in this way on the facts. And again, I think that illustrates this trend of the English courts being willing to permit multi-jurisdictional tort litigation to proceed against English companies or English domiciled companies in our courts.

Tim:

Yeah. And that is a good example of what you tend to see in class action cases, the courts grappling with what is essentially a question of procedure or case management. But what about questions of substance, for instance, around when a duty of care can be said to arise between a company and an alleged victim [inaudible 00:29:19]?

Tom:

Yeah, and I think there are a number of cases that are being brought right now which are trying to explore the limits of duty of care and the limits of corporate responsibility for harmful events. One case which is often referred to in this context is the Begum against Maran case, which was a claim brought by the widow of a man who had fallen to his death while working in a Bangladeshi shipyard. And the claim was brought in England against the English agent for the owner of the vessel in question, in relation to the end of life sale of that vessel. And the claimant argued that the defendant, so this ship owner agent, had a duty of care to take all reasonable steps to ensure that its end of life sale was negotiated in a way, and the consequent disposal of the tanker was handled in a way which would not endanger human health, wouldn't damage the environment, wouldn't breach international regulations, and she alleged that duty had been breached.

And again, this question went to the Court of Appeal. They were invited to strike out the claim on the basis that it hadn't pleaded a recognised cause of action under English law. And they declined to do so, they refused to strike out this claim. And I think the legal theory that really underpins the allegations that were being made is that a company can be liable for creating a dangerous environment, creating dangerous circumstances, even if another third party, in the Begum case it would've been the shipyard, is closer to the harm suffered. And we're seeing that creation of danger argument being run in a number of claims before the English courts. And in the Begum litigation, the Court of Appeal described this area of English law as one of the most fast developing areas of the law of negligence.

Tim:

Presumably one of the areas where that is developing most quickly is in relation to supply chain claims, where this seems to have particular relevance.

Tom:

I think that's right. And that is why we had supply chain claims as one of these three dimensions that we're talking about on the podcast today. And of course, supply chain claims are claims where it's likely that you do have that lack of a direct relationship between the ultimate defendant and the claimant. So cases that are running creation of danger-type legal arguments are likely to be particularly prevalent in supply chain claims. And I think we will see more and more of those in the years ahead.

Tim:

Okay. So let's now move on to our third dimension, consumer claims. And in the ESG space, what I think about here immediately, Tom, is greenwashing-type litigation.

Tom:

I think you're right to do so. And we're seeing greenwashing-type allegations forming the basis for consumer class actions in a number of jurisdictions. A case that comes to mind is one that's been brought in the United States in the Californian courts, where a customer has filed a class action claim against her airline, Delta Air Lines, on the basis that the company falsely marketed itself as a carbon-neutral airline. And in order to make out her case and to prove loss and ultimately be awarded damages under Californian law, the class representative in that case is arguing that she wouldn't have decided to fly with that particular airline if she'd known that the company's claims about carbon neutrality were false.

Tim:

Very interesting. Martin, how is this playing out in Europe?

Martin:

Very similarly. There is a growing focus on what we call greenwashing, i.e., allegations about the environmental sustainability of corporates' products or services. And just picking up on the example that Tom just referred to, there's a similar case in the Netherlands where an environmental group is pursuing KLM, the Dutch air carrier-operator, for allegedly misleading environmental credentials that it is holding out for its business. The question that was brought up in the Amsterdam courts is rather a procedural one, and that is about the admissibility of the claims and whether the group of claimants here, the environmental group, is sufficiently determined and has a sufficient interest in pursuing a claim against KLM.

And interestingly, and that shows the tendency we are generally talking about, the Amsterdam court found that this is a subject matter of general interest, the misleading environmental credentials, the allegedly misleading environmental credentials. So the court said, we are not required to apply too strict rules on the determination of the groups and confirm the standing of the interest group, the environmental interest group, to bring the claims and therefore to proceed to the next stage in the proceedings.

Tim:

Tom, to what extent is the fact that regulators and authorities are being more active in relation to greenwashing a factor in these types of claims?

Tom:

I think that's a really good point, and it's definitely a feature of the ESG litigation world that you get regulatory action in whatever form inspiring private litigation against companies. And I think in many ways that's true of each of the dimensions of claims we've already spoken about, securities litigation and supply chain and now consumer litigation. Specifically when it comes to greenwashing, what you're seeing in the UK is more and more authorities from the Advertising Standards Authority and the Financial Conduct Authority picking up on greenwashing and seeking to enforce misleading behaviour against companies.

Tim:

Yeah. I mean, I think one of the challenges in this space is, say I'm a consumer and I care about sustainability and I buy a product, but it subsequently turned out to be less green than I thought it was. Obviously, I'm aggrieved, but from a legal perspective, what loss is it that I've suffered? My toothpaste or T-shirt or perhaps my flight may perform exactly the same function as it did before, no?

Tom:

I think that's right. And it's one of the reasons why we haven't seen a spate of greenwashing class actions to date, I think. The question is how do you evidence loss in the scenario that you've just outlined? But I think there are potential roots to say, "Look, I've actually suffered a financial loss." So you might, for instance, have a class of claimants who say, "I could have bought a cheaper T-shirt if I'd wanted to, but I bought this particular T-shirt because it was marketed as being sustainable and that mattered to me. And that's my loss, the difference between the cheaper T-shirt and the premium sustainable product that I in the end went for." I do think we will see claims of that nature tested in the courts in the years ahead.

Tim:

Yeah, I think that's right. And I think the recent claim against Jaguar Land Rover in respect of allegedly defective diesel particulate filters is a good example of that. I think one of the reasons that Jaguar Land Rover has been targeted for that claim is to do with the fact that the cars involved had what you refer to as a sustainability premium involved. But I suppose things are a lot more straightforward if you can show that because of a misrepresentation, a product or good is worth less than it otherwise would be.

Tom:

Yes, I think that's right. And it's interesting you mentioned the Dieselgate issue that has led to proceedings across jurisdictions. And in those cases, you've seen claims against manufacturers who were alleged to have installed technology in vehicles which affected the measurement of harmful emissions when the vehicles were tested. The result of that being that when the vehicles were actually sold, they were sold on the basis they were capable of emitting a certain volume of emissions, but when they were operated in the real world, those volumes were much higher. And that has been the basis for these claims. And in England, we've seen the high court granting a group litigation order for the management of claimants' claims in relation to allegations of deceit and breach of statutory duty and breach of contract against Volkswagen.

And then depending on how and when the claimants bought their vehicles, some claimants have also brought claims on the basis of consumer protection legislation. And the claims against Volkswagen were settled, but there are other claims against manufacturers that are still on foot. And you talked earlier about a claimant bar and the activity of funders in this area. A number of claimant law firms are very actively involved in building books of claimants who can bring class actions of this nature against manufacturers arising out of emissions-related issues.

Tim:

Yeah, I think that's going to be a feature of the litigation landscape here for some time. And Martin, that is obviously not an issue that is specific to the UK and is an issue you've seen in Europe as well, isn't it?

Martin:

Yes, absolutely, Tim. And in particular, Dieselgate has been the one matter that primarily occupied the courts here in Germany in recent years and ultimately led to the introduction of the so-called Declaratory Model Action because the flooding of the courts with Dieselgate cases was just so enormous that the legislator felt pressed into providing that legislation, the collective redress action, which was then also used for Dieselgate cases here in Germany. And maybe on the proving of loss aspect of it, it's been very clear from the judgments of the federal court here in Germany that the very fact that I have placed my trust or reliance on the marketing of cars as being environmental friendly, or more environmentally friendly, at least, compared to other types of vehicles, in itself creates a loss in the sense that consumers have entered into a contract that was not beneficial for them based on their understanding. And that's led the Federal Court of Justice repeatedly decide that relevant contracts could be rescinded. And that was the court's ultimate answer to the evidence of loss question.

Tim:

There was just one other point I wanted to mention in relation to consumer claims, which is the class action that has recently been filed against Severn Trent Water and is proposed to be filed against five other UK water companies in the coming months. All six water companies are accused of underreporting the number of times they caused pollution incidents by spilling or discharging sewage into waterways in breach of environmental rules. And what's really interesting about this class action is that it is an environmental claim badged as an infringement of competition law. The way that the claim is framed is as an abuse of dominant position in breach of Chapter II and Article 102, the water companies being regulated monopolies in their respective regions, and the prices that they can charge being capped by Ofwats, the water regulator, to prevent them exploiting their dominant positions and setting abnormally high prices.

But there are also quality regulations and those are designed to guarantee that they deliver basic level of quality for those cap prices. And what the proposed class representative in that case is pointing to are preliminary conclusions from the Environment Agency about what was said to be widespread and serious non-compliance with the quality regulations, including a criminal investigation into more than 2,000 water plants across the country. And the claim is based on the principle that... Or they say this all constitutes exploitative abuses of the company's dominant positions. Not in terms of excessive pricing, but in relation to excessively low quality of service for the price that was charged. Normally, these cases are centred around pricing and non-price exploitative abuse isn't actually explicitly envisaged within Article 102, but we tend to see such cases relating to pricing practises so this is slightly different.

And it is also interesting because it's a good example of claimants using competition law as a sword rather than a shield when it comes to protecting the environment. So it's a really interesting example of a class action being used to hold companies account to certain standards, so definitely one for us to keep an eye on. Okay, so let's end with what quiz show hosts refer to as quickfire round, a few quick thoughts on the following questions. Tom, will we see class actions against fossil fuel companies and other major polluters based on their contributions to climate change?

Tom:

Interesting question. I think the answer in part is that you're already seeing claims along those lines in some US states. So for instance, in Puerto Rico, not a state but a territory, you have various municipalities arguing that fossil fuel companies have practised deception in relation to the harm caused by climate change over a number of decades and that there should be relief granted by the court as a result of that. I think under English law, it's a difficult line of argument. The English courts generally are pretty reluctant about finding tortious duties of care owed by corporates to a large population of claimants. And there are always going to be evidential difficulties attributing particular harm caused to the actions of defendants. So I'd never say never, but those claims look hard, given the current state of English law.

Tim:

Martin, same question to you.

Martin:

Yeah, thanks. We have a very prominent case ongoing in the court of Essen in the middle of Germany, where Peruvian farmers have brought an action against RWE, the German utility, for its contribution to climate change, resulting in the melting of glaciers in the area where those farmers live and the need to build a dam, requesting the court to order damages or payment of a contribution to build that dam from RWE. And as Tom said, when taking a first look also on the German law, it would seem very difficult to prove causation to be successful with this kind of claim.
And accordingly, the first instance court dismissed the claim. But at the appeal stage level, the appeal court interestingly found that it wanted to look into causation more closely and has opened evidentiary stage of the proceedings, saying that without a doubt, RWE, as a utility with huge emissions, must have contributed to climate change to some degree, although one may not be able to determine very precisely the extent to which. But the causation as such may well be established in those court proceedings. It's a case that is being closely watched across jurisdictions, actually.

Tim:

And Tom, what about claims against directors of companies?

Tom:

Another interesting one. I think it's an area where we're seeing activity in a number of jurisdictions. Not necessarily class actions as such, but claims being brought against directors alleging that they have breached their duties by failing adequately to consider the risks of climate change for the companies that they ar-re managing, that they have responsibility for. And an example of this type of derivative action was the claim against the directors of Shell that was recently brought in England by the environmental law charity ClientEarth. And our high court refused permission for that claim to proceed, but I think we will see claims against directors as the deliberative body of companies, the ones that are ultimately responsible for what companies do. And I think that will be a particularly acute risk if you have companies that are not taking climate change and other ESG-related issues as seriously as they might.

Tim:

Martin, what about the position in Germany?

Martin:

No concrete case comes to mind, but with the growth of regulation in that space, and we briefly talked about the Supply Chain Act, for example, and there is also the Green Claims Directive on the horizon, essentially creating a framework around how companies, corporates must label their products and services in terms of environment and human rights. The question of liability of directors is one that most certainly will be very relevant in the near future.

Tim:

Thanks, Martin. And thanks to you both for your time today. That's all we've got time for. Thank you for listening and be sure to check out our other episodes in this series on class actions. We welcome any feedback or questions, so please do get in touch with any of us. Our details are on our website. To ensure you don't miss out on any future episodes, do subscribe now on Apple Podcast, Spotify or your favourite podcast platform. While you're there, please feel free to keep the conversation going and leave us a rating or review. Until then, many thanks for listening.