Although the components of ESG are inextricably linked, they all have varying challenges and litigation risks for companies in Scotland, and beyond.

“Environmental” is the first pillar of ESG and refers to the impact of a companies’ activities on the natural world. This includes climate change, pollution, and biodiversity.

The 2015 Paris Agreement is a legally binding international treaty on climate change. Nearly 200 countries have adopted it. Since then, the amount of climate-related litigation has doubled.

Scotland has also enacted the Climate Change (Emissions Reductions Targets) (Scotland) Act 2019, setting a target to achieve net-zero greenhouse gas emissions by 2045. The Scottish Government and non-governmental organisations will seek to enforce the country’s emission targets. Companies that don't take adequate measures to reduce their emissions could face legal action.

ESG litigation may also arise in the context of environmental harm caused by businesses. The Environmental Liability (Scotland) Regulations 2009 imposes a polluter-pays liability on businesses for environmental damage caused by their activities. Liability applies regardless of fault.

Companies may be held liable for the threat of environmental damage, not just actual damage to protected species, natural habitats, water and land. Regulations are enforceable by the Scottish Environmental Protection Agency (SEPA), Scottish Ministers and NatureScot. The costs of reinstating ecosystems can be high, so businesses must take proactive measures to prevent environmental harm.

The UK Government introduced new supply chain due-diligence obligations on deforestation, through the Environment Act 2021. The Act grants authority to the Scottish Ministers to regulate over certain environmental matters. This includes the charging powers of SEPA and producer responsibility obligations. Businesses and organisations must keep pace with the Government’s commitment to tackle the climate crisis.

The industry has seen a rise in ‘greenwashing’ claims where legal action is brought against companies who have made inaccurate claims about the environmental impact of activities. This can include using misleading language, making exaggerated claims, or using unverified environmental certifications or labels.

The Advertising Standards Authority (ASA), the UK’s independent media regulator, has been paying more attention to ESG related marketing, intended to appeal to environmentally conscious consumers. It has introduced specific rules on carbon offsetting, renewable energy and recycling.

Company investors are demanding greater transparency about ESG performance. It is predicted that as a result, shareholder activism will rise. This is where shareholders seek to influence the behaviour and decisions of the company to adopt more responsible and sustainable practices.

Shareholder activism can take many forms, including filing shareholder resolutions, engaging in dialogue with company management, and using shareholder votes to influence corporate decisions. Shareholders are using various methods to hold their companies to account when they fail to meet their ESG commitments, including raising derivative actions against a company’s board of directors.

Environmental charities have successfully brought cases against companies and government bodies. These disputes highlight the role of legal action in promoting environmental protection and holding companies accountable for their commitments to address environmental challenges.

Foods Standards Scotland (FSS) and the UK Foods Standards Agency have introduced new rules on labelling of food products. The aim is to help promote transparency, give consumers more information about food they're buying, and reduce waste. FSS has highlighted the legal significance of "use by" and "best before" dates.

FSS recommendations also seek to address environmental challenges such as climate change and biodiversity loss. The rules promote more sustainable agricultural practices by encouraging the purchase of locally sourced, seasonal produce; assisting consumers to make more informed choices.

A company’s failure to follow the rules could lead to fines, prosecution or even imprisonment for directors. And commercially, lost sales and reputational damage.

In Scotland, pursuers can now raise group proceedings, also known as class actions, under the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018. This new route may give rise to more ESG-related disputes – especially now that access to litigation funding has increased.

Businesses must continue to adopt ESG strategies. Not just to avoid litigation and financial and reputational damage, but because it’s the right thing to do. “Who Cares Wins”?

Naomi Pryde is a Partner, DLA Piper

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Firms must meet responsibilities on the environment or pay price - Naomi Pryde