Litigation and Arbitration

What do companies need to consider during the course of society’s transformation to sustainability?

ESG and climate change-related issues dominate the legal, political and business agenda. Alongside governments, companies are playing an increasingly important role in the transformation of society as a whole towards greater sustainability. This can be seen, among other things, in the increased legislative regulation of the sustainability sector, for example through the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG), the German Corporate Sustainability Due Diligence Directive (CSDDD) and the EU Taxonomy Regulation. In the area of climate protection in particular, the German legislator has committed itself to complying with the 1.5 degree target by signing the Paris Agreement, which is why we can also expect the obligations to be passed on to companies in this area in the near future. 

Private actors, i.e. individuals, associations and NGOs, are already demanding that companies be obliged to be more sustainable. In order to achieve more sustainable business practices and more climate-positive behaviour of companies, private actors are engaging in strategic litigation against specifically selected companies, either alone or together with associations. The lack of case law means that the companies being sued face great uncertainty regarding the outcome of the case. In addition, there is public pressure due to the media attention.

What types of legal disputes could companies face?

Previous procedures show potential for legal disputes in various areas. They can pose major liability risks for companies.

• Climate change litigation: Climate lawsuits are intended to oblige companies to adopt climate-positive behaviour or to pay compensation or costs for eliminating the damage caused by climate change. Several proceedings of this kind are currently pending in Germany and other EU member states. However, there is a lack of supreme court rulings to date. For this reason, it is important to carefully examine whether and to what extent liability exists. Among other things, the German supreme courts have not yet ruled on the question of whether companies are only liable for their own behaviour or also for emissions resulting from the use of the manufactured products by consumers and emissions from the supply chain.
• Greenwashing litigation: If companies publicly classify and advertise their products or processes as environmentally friendly or sustainable even though they do not meet the advertised standards, they risk legal action. Due to the Taxonomy Regulation, lawsuits of this kind can primarily affect financial service providers, but ultimately also any other company if the advertising constitutes a misleading commercial act under the German Unfair Competition Act [Gesetz gegen den unlauteren Wettbewerb, UWG].
• Shareholder activism: By becoming shareholders in companies, activists can, under certain conditions, take legal action against the management board if the latter does not take sufficient measures to improve climate protection and sustainability. Even though under German law it is the supervisory board that is generally responsible for asserting claims against the management board, shareholders can bring a derivative liability action on behalf of the company.
• CSDDD litigation: The EU Directive has created civil liability for companies vis-à-vis private individuals if the European companies concerned are responsible for abuses along their value chain. The CSDDD imposes more far-reaching due diligence obligations on the obligated companies with regard to compliance with human rights and environmental regulations in their supply chains than currently provided for in the German Supply Chain Due Diligence Act. In particular, it also addresses the 1.5-degree target set out in the Paris Agreement. It remains to be seen how the litigation behaviour of people who have suffered damage under the CSDDD regulations will develop.

What do we advise companies to do?

The number and variety of lawsuits relating to sustainability and climate change have increased significantly in recent years. While initially the defendants were states and their institutions, there has been a trend towards private actors bringing claims against companies for some time now. Corporate liability for climate change and other ESG-related issues has legal, financial and reputational dimensions for companies.

The plaintiffs use the media attention in connection with the proceedings to influence the behaviour of (not just) the companies being sued. It is therefore important for companies to act at an early stage and not to wait until a legal dispute before involving a lawyer, but to already obtain compliance advice beforehand in order to minimise litigation risks and prepare for upcoming proceedings. The circle of potential plaintiffs is large, as private individuals can file lawsuits alone or jointly with associations, depending on how they are affected. Companies should therefore carefully examine how liability can be avoided.