This article first appeared in The Edge Malaysia Weekly on January 20, 2025 - January 26, 2025

Litigation and enforcement, particularly related to ESG matters, have seen a significant uptrend recently. While corporate sustainability and climate change have long been contemplated in corporate decision-making, the increased global emphasis on ESG has brought litigation in this area to the forefront, both by private individuals and regulatory bodies.

The most recent court cases have highlighted the growing trend of action being mounted against companies and their directors for failing to fulfil their climate pledges.

There has been active litigation in Europe against companies that fail to sufficiently undertake measures to meet their climate pledges. The most notable of which was the Friends of the Earth Netherlands’ (FEN) case against Royal Dutch Shell.

It was argued that the nature of Shell’s business and its role in climate change breached its duty of care under Dutch and international law, particularly related to the protections to the right to life. FEN therefore sought an order requiring Shell to cut its carbon dioxide emissions, in accordance with the Paris Agreement.

FEN was successful in the Hague District Court, which ordered that Shell must reduce its carbon dioxide emissions by 45% by 2030 (relative to 2019 levels).

While Shell successfully appealed this decision in the Court of Appeal (which ruled that the Court cannot impose a specific reduction target upon Shell), the Court of Appeal nevertheless appeared to endorse part of the District Court’s decision that imposed upon Shell a legal duty of care to curb dangerous climate change and reduce its emissions. The Court of Appeal confirmed this obligation must encompass both Shell’s own emissions as well as the emissions caused by its subsidiaries and from the use of its products (that is, its Scope 1, 2 and 3 emissions).

The decision in Royal Dutch Shell has significant impact as it has extended the obligation to cut emissions to not only a single company, but to all its holdings and to the end use of all its products. At the time of writing, it had not been reported if FEN had filed an appeal to the Supreme Court.

The “right to life” forming part of the Court’s decision against Shell is particularly important on Malaysia’s shores, as the right to a clean, healthy and sustainable environment has been recognised as constituting part of the “right to life” under Article 5 of Malaysia’s Federal Constitution by, among others, the Malaysian Court of Appeal in Tan Teck Seng.

There is also increased regulatory enforcement action being taken against companies for misleading advertising and reporting as to their environmental benefits, which is greenwashing.

In March 2024, an Amsterdam District Court ruled that international airline KLM had violated law with misleading advertising related to its “Fly responsibly” ad campaign. The court held that the company painted “an overly rosy picture” as to its sustainability, using vague and generic statements, to make the public think that flying the airline was not harming the planet.

Similarly in the US, the Securities and Exchange Commission (SEC) in September 2024 charged Keurig Dr Pepper Inc over its claims (including those in its annual report) that Keurig coffee pods were recyclable, despite two of the largest recycling companies in the US being unable to recycle the same. The SEC charged Keurig on the basis that it misled customers into purchasing its machines with its environmental claims. Keurig settled the charges for US$1.5 million.

In Australia, the Australian Securities and Investment Commission (ASIC) instituted an action against investment fund Mercer Superannuation (Australia) Ltd over misleading statements about the sustainable nature of some of its superannuation investments options, which included companies involved in the sale of fossil fuels.

The Federal Court ordered Mercer to pay an A$11.3 million penalty and held that it failed to implement adequate systems to ensure the ESG claims of its products were accurate. In delivering its decision, the Court held that “it is vital that consumers in the financial services industry can have confidence in ESG claims made by providers of financial products and services.As is the case in many other industries, consumers may place great importance on ESG considerations when making investment decisions.”

The foregoing cases are of importance, particularly due to the mandatory sustainability reporting and disclosure requirements imposed by Bursa Malaysia on companies listed on its Main Market and ACE Market in December 2023.

Recently, the Securities Commission Malaysia announced that under the National Sustainability Reporting Framework, listed companies on Bursa Malaysia’s Main Market and ACE Market and large non-listed companies with an annual revenue of RM2 billion and above will be required to comply with sustainability disclosures in accordance with the IFRS Sustainability Disclosure Standards starting from next year in stages.

These company sustainability disclosures are important not only for regulatory compliance purposes, but also in investment decision-making by shareholders. Additionally, financial institutions guided by Bank Negara Malaysia’s Climate Change and Principle-based Taxonomy would increasingly consider climate change risks in assessing their financing and investments.

With courts now imposing positive obligations on companies, the next question is how the duties and obligations of company directors will be affected.

Directors globally have a duty to act in the best interests of their companies. In Malaysia, this is enshrined in Section 213 of the Companies Act 2016. Such duty must be exercised with the skill and knowledge that is expected of a director, and failure to do so is an offence under the law.

Recently, there have been a number of cases instituted against company directors, where it has been argued that by failing to implement sustainable or climate change mitigation measures, the directors had failed in their duties.

The most notable of these cases is the UK case of ClientEarth vs Shell Board of Directors. In this case, Shell had implemented an “energy transition strategy” (ETS) to meet its net zero targets. However, a derivative action by minority shareholders was brought against Shell on the basis that the ETS was inadequate to meet Shell’s net zero target by 2050 and therefore Shell’s directors had breached their duties.

The UK High Court dismissed the action stating that it would be difficult to hold directors liable when there is no “universally accepted methodology” for achieving the ETS reductions, and as courts were reluctant to interfere in company management decisions. The appeal of ClientEarth to the Court of Appeal was also dismissed.

While the action in ClientEarth was unsuccessful and dismissed preliminarily by the UK High Court, a former Supreme Court judge of the UK extrajudicially criticised the decision of the High Court, describing it as “unpersuasive on all points” and stated that the absence of a universally accepted methodology for climate goals did not necessarily preclude the Court from evaluating the credibility of Shell’s approach.

While this case was unsuccessful in the UK, how the courts will approach these issues in other countries will very much depend upon specific local laws. For example, in Poland, the management of Polish energy giant Enea is currently suing the company’s former directors for voting to invest in a coal power plant project that lost the company more than US$160 million due to rising carbon prices, competition from cheaper renewables and increased difficulty in securing funding for such climate-averse projects.

In Malaysia, the Securities Commission has issued the Guidelines on the Conduct of Directors of Listed Corporations and their Subsidiaries, in which public-listed companies and their directors have a positive duty to ensure there is an “adequate group-wide framework for co-operation and communication between the listed corporation and its subsidiaries to enable it to discharge its responsibilities including …  sustainability risks, and corporate governance policies and practices”.

The above shows a growing trend that judges are increasingly requiring companies to implement sustainability and climate change measures.

Lord Sales, a current UK Supreme Court judge, emphasised this poignantly when he extrajudicially stated that: “There is much force in the view that directors may and, increasingly, must take into account and accord significant weight to climate change in their decision-making. This is not least because a failure to act sustainably is more and more likely to have adverse financial impacts on companies who are, or are perceived to be, behind the curve on environmental issues … their companies’ interests may be so implicated by climate change effects that their general fiduciary and due care obligations actually require them to cause their companies to take action to reduce their contribution to climate changing activity.”

Abhilaash Subramaniam and Kwong Chiew Ee are part of the Malaysian Bar’s joint committee on ESG. The views expressed herein are their own and do not constitute legal advice.

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