Investors are becoming more emboldened to file legal challenges against companies for their net zero claims, approaches to governance and other hot-button ESG issues, using a pair of underutilized provisions of a UK law.

Standard Chartered Plc, BT Group Plc and mining giant Glencore Plc were all sued last year for alleged governance or social-related shortcomings. Sections 90 and 90A of the Financial Services and Markets Act 2000 state that a company can be liable to pay compensation if it makes a misleading statement or an omission in public filings that leads to a loss for shareholders.

“It isn’t now considered distasteful for the UK’s largest financial institutions to enter into litigation” against a company and its directors, said Ravi Nayer, partner and litigation expert at law firm Bryan Cave Leighton Paisner. “For the right case, they will intervene.”

Large companies listed on the London Stock Exchange, including FTSE 100 members, are most likely to be targeted, with directors also vulnerable, Nayer said.

Use of the FSMA provisions is being spurred by investors armed with more disclosure data about corporate emissions, diversity and other environmental, social and governance indicators. Many are demanding faster and more comprehensive action on sustainability from companies in which they own shares.

The possibility of such litigation in the UK is part of a broader trend. Globally, the number of climate change-related cases more than doubled to over 2,000 between 2015 and 2022, with about 25% of them filed in the past two years, according to data compiled by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. While most of the cases were brought against governments, a growing number involve companies. Most were brought in the US, UK and Australia.

Under the UK’s FSMA provisions, 13 cases were lodged in the past decade. Four were brought last year, including governance or social-related cases against Standard Chartered, BT Group and Glencore.

So far, there’s been a limited number of substantive judgments in this area. Four of the 13 cases were settled out of court, seven are ongoing, one claim failed, and one succeeded, according to BCLP. They’ve all been on governance or social issues, but lawyers say it’s a matter of time before an environmental case is brought.

For example, a group of institutional investors alleged last year that Glencore published misstatements and omissions relating to its compliance with ESG standards and rules. They challenged Glencore’s stated commitments about complying with the laws, regulations and best practices in countries where it has operations, and also about reducing its bribery and corruption risks. The case is ongoing.

ESG lawsuits based on the UK Financial Services and Markets Act

Year (first issue)
Litigation
Status
ESG basis
2013
RBS Rights Issue
Settled
G
2014
Cattles
Settled
G

Lloyds/HBOS
Claim failed
G
2015
Autonomy
Claim succeeded
G
2016
Tesco
Settled
G
2019
Serco
Ongoing
G

G4S
Ongoing
G

RSA
Settled
G
2022
Indivior
Ongoing
S

Standard Chartered
Ongoing
G

Glencore
Ongoing
G, S

BT Group
Ongoing
G
2023
Petrofac
Ongoing
G, S

Source: Bryan Cave Leighton Paisner, August 2023

These types of claims are “definitely becoming more of a threat,” said James Hennah, partner at Linklaters. “Institutional investors are more focused now than they’ve ever been on ESG credentials.”

At the same time, “these claims are notoriously hard to bring, particularly for ESG issues,” Hennah said. “You have to show that the specific impugned statement induced you to buy the security.”

And while it may still be a developing area of legislation, more court cases means more precedents get set, leading to a maturing of this field of law. It’s a type of “benevolent circle,” Nayer said.

Third-party backers also are seeking to profit from FSMA claims. Litigation funder Woodsford of London said its ESG team identified two British multinational companies that had made false and fraudulent statements. Those findings prompted investors to sue the companies under FSMA, with a view to seeking compensation. If the investors prevail in their lawsuit, they and Woodsford stand to benefit.

“If a claim succeeds, there’ll be a recovery — that’s of interest to litigation funders,” said Emily Blower, managing associate at Simmons & Simmons.

–With assistance from Jeremy Hodges.

Copyright 2023 Bloomberg.

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