An emerging frontier

Peter Drucker had famously observed that “what gets measured gets managed”. The global crisis of climate change has led us towards an increasing trend of climate-related litigation and regulatory action across almost every industry. This includes corporate regulators taking enforcement action, shareholders suing in relation to corporate disclosures, commercial competitors seeking to protect their market position by suing to restrain greenwashing conduct.

The three pillars of ESG — environmental, social and governance — define the framework within which these disputes arise. Today, claims are being made not only before regional and international courts and commissions, but also before domestic courts. This rise of litigation, in turn, has led towards a growing recognition that climate change is a global problem, and international cooperation is required to address the same. The Paris Agreement, to which India is also a party, is one such manifestation of this cooperation.

Global trends in ESG change litigation

Analysing the ESG litigation trends globally, it has been found that the number of climate change-related cases around the world has more than doubled since 2015. As recorded in a report by the Grantham Research Institute, by May 2022, more than 2000 cases of climate change litigation had been filed before 15 international or regional courts and tribunals. Courts are increasingly becoming a new frontier for battling the effects of climate change. The trends in litigation have changed from tortious and public nuisance claims against states and state agencies in the 2000s and early 2010s, to claims alleging failure to meet national and regional targets for emissions reduction.

Need for climate risk reporting

This rise in the global trend has led to the creation of a robust climate risk reporting mechanism. ESG reporting typically focuses on non-financial aspects of a company’s business system, and supports the notion that the firms that are environment-friendly and socially conscious and that have strong corporate governance are better positioned to take advantage of future opportunities and avoid potential risks vis-à-vis non-ESG firms. Adherence to ESG norms has assumed relevance from the point of view of not only companies but also investors and regulatory authorities. Companies have realised that stakeholders are not concerned merely with financial returns and implications, but also environmental, social and governance factors. In light of the shift towards sustainable investment and rising consciousness of firms’ ESG performance, companies are trying to account for the various demands and interests of stakeholders.

ESG integration is also taking place in another form – increased regulatory focus on ESG standards and reporting. Capital market regulators are devising new frameworks so that market participants are sufficiently informed of whether companies are integrating ESG factors in their business strategies, products and services that they offer. Regulatory authorities may impose reporting requirements, however, there is a clear absence of uniform reporting standards for ESG parameters. In the absence of common ESG metrics, investors can have a tough time sourcing the relevant data and deciding how to ‘price the ESG’. Better standardisation for ESG disclosures is the need of the hour.

Climate litigation on ESG issues

Strategies in ESG litigation have kept pace with scientific advancements and developments in the socio-political landscape. ESG disputes can be varied in nature and take one of many forms. Human rights-based cases involving violations of fundamental human rights, such as the right to life, health, food, and water, are becoming more common. Governments can be found in breach of substantive obligations under various international treaties and documents.

Furthermore, foreign investors who are materially harmed by changes in regulatory frameworks in the host countries may seek compensation from states under investment treaties. Many see litigation as the most effective mechanism to challenge authorities when they fail to address climate change adequately. Challenges are mounted against national or local policies or enforcement practices for failure of the government to uphold climate change mitigation and adaptation commitments.

Such trends can be attributed to the fact that court rulings entail ‘institutional legitimacy’, as Professors Jacqueline Peel and Hari M. Osofsky write, and therefore carry the possibility of introducing broad systemic social and policy change.

Role of the judiciary

Through ESG litigation, it has been seen that commercial entities are driven to create integrated, multi-functional and cross-disciplinary frameworks to embed an ESG-led business strategy, supported by effective compliance, and are likely to be more viable, valuable, resilient and competitive over the long-term. There is also considerable momentum towards including climate change obligations in contractual terms. Companies may opt to meet their net-zero emission targets by incorporating climate change clauses in their contracts.

When it comes to cross-border ESG litigation, the role of the judiciary is pivotal in navigating the balance between the financial interests of the businesses and conservation of ecology. Judiciary must appeal to the trust that is needed in societies, which ensures the protection of nature and future generations. Not just the domestic courts, but also transnational courts have an active role to play. To achieve this balance, it is imperative that judges should be ‘climate literates’, that is, that they are as well informed on all issues surrounding climate change as possible.

In addressing these climate issues, the experiments done by the Singapore International Commercial Court should be looked at. It shows how courts can assist in the progressive and principled development of climate change laws and policies. This balance can be achieved not only by the judicially declared legislative remand requiring the legislature or executive to develop climate change laws and policies, but also through judicial decisions creating legal precedents, thereby building a common law for the environment.

To conclude, we are reminded of what eminent legal philosopher HLA Hart says on judicial discretion and judicial role in his classic, ‘The Concept of Law’, that judges are indeed duty-bound to discover and apply the relevant legal rules in every case where they are clearly seeing no legislative remand. Here we must also remember that in Hart’s thesis, Judges, through the rules of precedent, merely discover and declare the law which is not visible. Professor Laurence Tribe takes it further and writes in ‘The Invisible Constitution (Inalienable Rights)’ that, all for participatory evolution of democracy, judges are duty bound to make us know of what is not written or invisible, yet profoundly present in between the lines.

Balram Pandey is an Associate to Hon’ble Justice AK Sikri, International Judge, Singapore International Commercial Court and former Judge of the Supreme Court of India. Vrinda Nargas is a final-year law student at the National Law University, Jodhpur. Views expressed are personal