ESG disputes bulletin – November 2024

November 12, 2024

In this edition of the Dentons UK ESG disputes bulletin, we look at two UK cases focusing on accountability for ESG risk in supply chains: one by investors against a fast-fashion house and the other a judicial review of the National Crime Agency, so coming from diverse perspectives. We then turn to some international news on greenwashing, illustrating a continued focus on green claims, whether in finance or manufacturing. The bulletin ends with a trip to Hawaii, reporting on the further success of a local community relying on human rights challenges to bring about improved environmental goals.

Overall, these cases evidence continued focus on corporate ESG accountability with demands becoming more stringent, driven by investor and activist litigation and enhanced regulatory scrutiny.

Supply chain scrutiny

Boohoo faces investor lawsuit

Institutional investors in Boohoo Group Plc recently filed a claim against the company alleging its failure to disclose alleged labour rights violations in its supply chain caused financial loss to investors. The legal action follows Boohoo's share price dropping by more than £1.5 billion following a report by The Sunday Times detailing these allegations.

The claim, brought on behalf of 49 institutional investors, is under sections 90 and 90A of the Financial Services and Markets Act 2000 (FSMA). These provisions allow investors to seek compensation for losses stemming from untrue or misleading statements, or disclosure failures, in listing particulars, prospectuses or other information published to the market. The investor claimants are reportedly pursuing more than £100 million in damages.

There are an increasing number of high-profile investor claims in the English courts under sections 90 and 90A FSMA, but this claim against Boohoo is the first we have seen focusing on ESG failings in the supply chain. Whilst becoming more common, section 90/90A claims are known to be challenging, including due to difficulties in establishing a causal link between a misleading statement and a drop in share value. This case will be closely watched, not just for its own outcome but also to see if it sets a path for other similar actions. The risk of investor challenges of this type underscores the importance of companies undertaking and documenting robust supply chain due diligence.

UK Court of Appeal rules on NCA's duty to investigate Xinjiang cotton imports - R (World Uyghur Congress) v. National Crime Agency (NCA)

The second case highlights the potential exposure to money laundering offences if a company handles goods linked to criminal activities, such as forced labour, in their supply chain. The Court of Appeal decision examines the application of provisions of the Proceeds of Crime Act 2002 (POCA) and brings into sharp focus the need for businesses to consider carefully their supply chains and ensure suspicions of criminal activity are dealt with properly and in compliance with the POCA regime.

In this case, the Court of Appeal overturned a 2023 High Court decision and ruled that the NCA's decision not to investigate businesses in the UK using cotton imports from China's Xinjiang Uyghur Autonomous Region was based on a misapplication of the law. In reaching the decision, the court made it clear that specific criminal property did not need to be identified for proceeds of crime obligations to arise - in this case, the likelihood of forced labour being used was sufficient. The approach of the court therefore demands businesses to take a wide contextual risk approach, rather than necessarily focus on a particular transaction.

The court also examined the application of the exemption under section 329(2)(c) where goods are acquired for "adequate consideration". Section 329 of POCA concerns the offence of acquiring, using or possessing criminal property and the court held that the section 329 exemption does not cleanse the goods, such that they cease to be criminal property once they are acquired for adequate consideration, and the exemption only applies to an offence under that section. The goods remain criminal property and an offence can subsequently be committed by the purchaser (or other party in the supply chain) under section 327 or 328 where they, for example, process or transfer the criminal property, assuming the elements of the specific offence are satisfied.

The Court of Appeal decision provides additional justification, if any was needed, for businesses to conduct thorough due diligence on their supply chains and highlights the potential for significant repercussions if appropriate steps are not taken. The decision also emphasises the need to submit Defence Against Money Laundering Suspicious Activity Reports (SARs) and obtain necessary consents. As firms reassess their compliance frameworks, the ruling is anticipated to increase the volume of SARs, with consequent delays to underlying transactions.

Greenwashing

Lawsuit against ExxonMobil over plastic recycling claims

In California, ExxonMobil is facing a civil lawsuit brought by the Attorney General alleging greenwashing in relation to its plastics recycling processes. The lawsuit accuses the company of a "decades-long campaign of deception" about its recycling operations - in particular, claims about the percentage of recycled content in plastics produced in its "advanced recycling" process. The lawsuit alleges ExxonMobil misled the public into believing that recycling could effectively address the significant plastic waste crisis caused by production of single-use plastics.

The Attorney General asserts that the company's promotion of its advanced recycling programme was misleading, emphasising that nearly 92% of the plastic waste processed by ExxonMobil is converted into fuel for incineration rather than being recycled. The lawsuit alleges violations of multiple state laws, including those related to false advertising and unfair competition. California is seeking civil penalties and an unspecified compensation for the harm caused by plastic pollution. In response, ExxonMobil defended its recycling methods, claiming to have kept more than 60 million pounds of plastic waste out of landfill and, in turn, pointing to failures in the state's recycling approach.

The case is a legal milestone as it is the first time US officials have attempted to hold an energy company accountable for claims about recycling activities and also because it challenges "mass balance" accounting which allows companies to reallocate the volume of recycled content from one product to another, thereby increasing that second product's claimed percentage recycled content.

Rulings in Australia regarding investment greenwashing

Following enforcement action by the Australian Securities and Investments Commission, the Federal Court of Australia has ordered Mercer Superannuation (Australia) Limited to pay an A$11.3 million penalty after admitting to making misleading statements about the sustainability of certain investment options in its pensions.

The court found that Mercer had misrepresented "Sustainable Plus" investment options by claiming they excluded investments in carbon-intensive fossil fuels, alcohol and gambling, when that was not the case. The court found that Mercer's contraventions stemmed from a failure to implement adequate systems to ensure the accuracy of ESG claims and to monitor sustainability exclusions effectively.

The ruling illustrates continued regulatory focus on marketing of financial products around sustainability credentials and, with the UK Financial Conduct Authority recently introducing an Anti-Greenwashing Rule requiring green claims by FCA-regulated entities to be fair, clear and not misleading, there is increased potential for similar enforcement activity in the UK.

Challenges to environmental policy

Youth activists push Hawaii towards zero-emission transportation by 2045 - Navahine F v. Hawaii Department of Transportation

Finally, to Hawaii, where the state's Department of Transportation reached an historic legal settlement with 13 young climate activists by agreeing to accelerate transition plans for a zero-emission transportation system.

The 2022 lawsuit accused the state of implementing policies that harmed guaranteed constitutional rights to a clean and healthy environment. When the case was filed, the plaintiffs were between nine and 18 years old.

The settlement agreement provides a roadmap to fully decarbonise the state's transport systems by 2045 and goes beyond Hawaii's previous climate commitments. The court will oversee implementation of the settlement and has powers to enforce against the state in the event of non-compliance.

This settlement is another notable example of successful environment-focused litigation brought by groups with specific characteristics or interests and comes only months after the European Court of Human Rights' landmark decision in the KlimaSeniorinnen case which challenged Switzerland's environmental policies on the basis they violated rights to life and health under the ECHR, as discussed in our previous bulletin.