Navigating ESG issues: mitigating your class action risk

• ​The recent progress and focus on ESG issues means there is greater pressure on boards than ever. An important step for boards is understanding why ESG risks and their disclosure are now mainstream next to traditional financial disclosures.
• With the increased pressure around voluntary disclosures driven by stakeholder expectation (and soon to be mandatory disclosure regimes), companies are focusing on their processes to support the language used and commitments made regarding ESG. In particular, companies are engaging in data collection and analysis to support increased interest by company boards on climate targets and ESG risk-mitigation strategies.
• There is a need for companies to integrate climate and ESG-related targets as business targets in the recognition that the need to balance the interests of stakeholders with the duty to shareholders when it comes to these targets is in the best interests of the company.
• Companies are expected to be transparent when it comes to successes and even when it comes to any errors. Where errors are made, the way a company responds to and corrects these is important when it comes to effectively managing the expectations of stakeholders, investors and the broader community.
• In order to substantiate ESG commitments, regulators (including ASIC) will be looking at accountability within a company’s business for taking responsibility for those commitments. A clear understanding of the structures which support implementation of those commitments is key when disclosing climate and ESG-related targets and ambitions.

• In Australia, one of the key non-judicial methods of enforcement is the Australian National Contact Point for Responsible Business Conduct (AusNCP). The AusNCP provides conciliation services to resolve complaints against multinational enterprises operating in or from an OECD nation, and applies the Internationally Agreed Responsible Business Conduct Standards (OECD Guidelines). Outcomes can involve public statements from the AusNCP conciliator, recommendations made to businesses by the conciliator and public review by the conciliator on how a business is implementing the recommendations.
• Companies often establish project-specific complaint resolution points of contact through which employees or other stakeholders can make complaints. This approach is particularly common in the extraction industry. Other companies will organise a broader complaints resolution mechanism, sitting at the parent-level, which administers complaints and whistleblower processes.
• Employment issues have traditionally been resolved on an individual-basis or union-basis. This approach reflected a “reactive approach” by employers which involved resolution of individual disputes as they arose. However, employers have been and are necessarily adopting a proactive approach which involves taking steps to prevent harms to employees before they occur. This shift in focus has been driven by the newer powers that the Fair Work Commission and Fair Work Ombudsman have acquired, as well as new obligations imposed on companies (for example, the obligation to proactively to prevent sexual harassment).
• Shareholders have, in the past decade, become more active in pressing companies to ensure that they facilitate suitable work conditions, including through the supply chain. Employees also have greater avenues to advocate for themselves publicly (media, parliamentary enquiries, questions raised during question times, and more local avenues such as town halls).
• Employers and companies will often have (and in some cases are required to have) formal and informal whistleblowing policies encouraging employees to ‘speak up’.
• Organisations are focusing on underreporting. Some organisations have phone applications to allow the remote reporting of issues. Others are introducing more training for their employees and are analysing exit interviews with employees to identify potential issues.
• When forming and carrying out remediation plans in respect of known human rights grievances, companies should be aware of the UN Guiding Principles for remediation, including ensuring that the remediation process must be:
  • legitimate, by being capable of supporting the trust of stakeholders;
  • accessible, by being available to stakeholders;
  • predictable, by being sufficiently clear;
  • equitable, by being fair;
  • transparent, by being transparent with stakeholders about its progress; and
  • rights-compatible, by being based upon engagement and dialogue with stakeholders.

Key points for companies to be aware of in the litigation context

• Issues arising recently include forced labour, online harms and digital rights, climate-related human rights impacts, and disputes with indigenous communities.
• Complaints around these issues tend to be based upon tortious claims; usually negligence. However, complainants recently have adopted novel legal theories which attempt to stretch traditional tortious causes of action to new circumstances. For example, some cases have involved allegations that a party has committed the tort of conversion by facilitating forced labour, and other cases have involved product liability torts for online harms.
• Allegations are also increasingly being made to the effect that a corporate defendant has failed to carry out adequate human rights due diligence.
• More recently, courts have taken account of “soft law” principles (including international organisation policies) to assess whether a company owes a particular duty of care to certain stakeholders or to determine the appropriate standard of care.
• There have also recently been complaints that a corporate defendant has failed to comply with its own policies on human rights (especially in the context of greenwashing).

• Class Actions in the US: The US is one of the most active jurisdictions in the world. ESG litigation in the US can arise through a variety of avenues including: environmental marketing claims, investor claims, climate claims, Diversity, Equality and Integrity issues and ESG backlash litigation. An increasing example and trend in the US is for local governments or states (e.g. Connecticut) to sue corporate energy sector businesses for public nuisance (climate change) created from their conduct.
• Class Actions in Thailand:  The Thai Civil Procedure Code allows for ESG issues to be litigated through claims based in torts, breach of contract and other various legal rights. Although the class action landscape in Thailand is limited, the first class action was ESG-related. A trend has been for Thai Courts to provide a broad class definition, meaning most citizens in Thailand can be included within a class.
• Class Actions in Australia: ESG class actions are on the rise. Although recent ESG litigation has introduced new subject matter (e.g. greenwashing), most litigation is still in familiar territory with claims framed around common causes of action such as allegations of misleading and deceptive conduct, breach of directors’ duties, and breach of disclosure obligations.
• ESG Backlash: This may be a novel development unique to the US, however some organisations are becoming increasingly concerned about what they say about ESG issues due to concern around ESG backlash. For example, some state attorneys-general have sued investment funds alleging that they have a fiduciary duty to maximise return for investors and, to the extent they incorporate ESG considerations into investment criteria, that may be a breach of fiduciary duty. The debate is over whether that is a breach or an appropriate matter to look at when maximising shareholder return over the long term given the importance of these issues.
• Future trends: The scope of ESG class actions will likely expand as things develop. In APAC, ESG issues can be exacerbated with businesses conducting themselves in multiple jurisdictions, leaving them exposed to the risk of ESG litigation in different jurisdictions, especially if they have supply chain issues and human rights issues across different countries. A unique aspect of ESG litigation is that for many claimants, it is not just about the money. Rather, it can be motivated by other purposes like an attempt to raise political awareness of issues through litigation.