The landscape of ESG litigation is evolving quickly, with increasing cases tied to environmental and human rights concerns. Omar Shaikh, GEFI, moderated the discussion with Criminal lawyer Sophie Scemla who shared insights on this trend, highlighting how regulations like the Corporate Sustainability Reporting Directive (CSRD) and the upcoming Corporate Sustainability Due Diligence Directive (CS3D) are set to amplify the volume and scope of ESG-related litigation.
The Rise of ESG-Related Legal Actions
Sophie noted a steady rise in environmental litigation and human rights disputes, with Europe experiencing a particular surge due to its legal structure that empowers NGOs to initiate criminal actions against corporations. Under CS3D, companies face broader compliance requirements, including supply chain due diligence with potentially significant sanctions—up to 5% of annual global turnover—if they fail to meet these standards. This shift underscores the pressing need for companies to enhance compliance measures, especially as consumer activism and social media boycotts increase reputational risks, a trend that has already impacted several fast fashion brands.
Greenwashing, Greenhushing, and Communication Challenges
Navigating the complex terrain of ESG regulations often brings companies into the “greenwashing” and “greenhushing” discussion. Greenwashing refers to misleading sustainability claims, while greenhushing involves concealing ESG activities to avoid scrutiny. Sophie emphasized that effective communication is essential for mitigating ESG litigation risks, especially with funds and activist shareholders increasingly holding corporate management accountable for their ESG performance.
“Companies should improve negotiation with stakeholders, especially NGOs, to anticipate risks and maintain constant dialogue. Due diligence must be robust to anticipate and manage potential risks, especially as whistleblowing alerts tied to ESG violations rise.”
Preparing for Regulatory Challenges and Due Diligence
In addition to communication strategies, Sophie recommended that companies invest in stronger due diligence systems to identify and address risks across supply chains. Multinationals face particular challenges in gathering detailed information from suppliers in developing countries, where local ESG regulations may not align with European standards. Contract negotiations with these suppliers can also be complex, as they may not fully understand European ESG requirements. Sophie noted that companies are seeking clearer guidance from the European Commission to standardize due diligence expectations across borders.
Conclusion
The ESG litigation landscape is at a pivotal juncture. With new directives like CSRD and CS3D poised to enforce stricter accountability across supply chains, companies must prioritize transparent communication, engage in proactive stakeholder negotiations, and strengthen due diligence processes. As Sophie observed, “It’s not a question of if litigation will increase, but when.” In the coming years, companies that invest in robust compliance and reputational risk management will be best positioned to navigate the challenges of this new era in ESG accountability.