The Rise Of ESG Litigation And The Potential To Deploy FSMA Claims

• Published date: 04 May 2022
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Directors and Officers, Corporate Governance, Shareholders
• Law Firm: Gowling WLG
• Author: Mr Sean Adams, Emma Carr and Catherine Naylor

There are a large and growing number of reasons why company directors, and in particular directors of listed companies, need to take their company's environmental, social and corporate governance (ESG) credentials and statements seriously. The rise of ESG litigation, a trend which is expected to continue to grow over the next few years, is just one of those reasons. However, the potential legal and financial ramifications for directors and companies who don't take steps to assess and address the risks which this presents and which they may face should accelerate the move to put ESG high on the corporate agenda.

ESG litigation takes many forms, and is already hitting the headlines (see, for example, the recent announcement by ClientEarth of its intention to bring a derivative action against the directors of Shell alleging a breach of the duties imposed by the Companies Act 2006 for failing to do enough to take sufficient steps to reduce emissions). Whilst those "failure to act" litigation risks should be considered by all company directors (but especially those in high-profile, listed companies operating in sectors where the ESG agenda is already prominent), the purpose of this note is to briefly highlight the potential for shareholder action pursuant to section 90 and 90A of the Financial Services and Markets Act 2000 (FSMA).

The section 90A regime is available to anyone who acquires, continues to hold or disposes of listed securities. Therefore, whilst there are a number of hurdles to successfully bringing a claim (including a need to demonstrate that loss was suffered "as a result" of the information, or lack of it, and the need to link the relevant issue to "a person discharging managerial responsibilities"), the broad shareholder base of English listed companies (and the corresponding diversity in shareholders' reasons for investment, including a rise in investors with a commitment to ethical investments) and the rise of activist, ESG-focussed shareholders (or shareholder action groups backed by litigation funding) create the potential for this to be another tool in the armoury of those looking to bring ESG-linked claims against listed companies. That risk is magnified by the extension of section 90A beyond published statements (i.e. ESG claims actually made to the market) to omissions and delays in publication.

Since coming into force, the legal market has been waiting for a case to come to trial and deliver a judgment on the practical implementation...