Companies Re-Assess their Environmental Stance as New Stringent Regulations Loom

The impact of this decision will be unprecedented. 46 countries are part of the European Convention on Human Rights, including all of the European Union countries. More than 600 million people’s human rights are concerned.

Against the back drop of this decision, a fleury of law suits against countries and companies alike will no doubt follow. Countries will implement tough new regulations to meet their international commitments. These regulations and lawsuits will first and foremost target companies.

Companies must proactively look at how they address environmental matters and implement all measures that can be reasonably expected of them. To do so they must identify the gaps between their practices and good practices/regulations, define an environmental action plan and KPIs, implement it and monitor it over the long term.

Human rights and climate change 

The international community increasingly acknowledges the link between climate change and fundamental human rights. This is evident in the preamble of the Paris Agreement[1] and endorsed by the UN Human Rights Council (UNHRC). The UNHRC, informed by The Intergovernmental Panel on Climate Change (IPCC)[2], stated that climate change directly threatens a range of human rights, such as those to life, food, housing, development, water, sanitisation, self-determination, health and culture.[3]

In recent years, a growing number of climate change litigation cases have occurred in jurisdictions around the world. At the beginning of 2023, there were 2180 cases underway in domestic courts globally.[4] Thus far, complainants have primarily based their arguments on violations of the right to life, the dignity of the person, privacy, liberty and security, and family and home life.[5] On April 9, 2024, the European Court of Human Rights (ECHR) grand chamber decided on three such cases. In one of these cases, Verein KimaSeniorinnen Schweiz and Others v. Switzerland, the ECHR ruled that the climate change inaction of the Swiss government had violated the human rights of its citizens.

The ECHR Grand Chamber heard Verein KimaSeniorinnen Schweiz and Others v. Switzerland in March 2023.[6] In this case, Swiss association Verein KimaSeniorinnen Schweiz and four women argued that heat waves induced by the climate crisis negatively affected their health and living conditions. The argument stated that Switzerland’s insufficient climate policies breached the right to life and health under Articles 2 and 8 of the European Convention on Human Rights. The application also suggested that the Swiss Federal Supreme Court rejected the case in violation of their right to a fair trial, as stated in Article 6, and that the Swiss authorities failed to provide an adequate remedy in breach of Article 13. The ECHR concluded that there had been violations of the right to privacy and family life, as well as the right to access the court. In its April 9, 2024 decision, the court ruled that regarding climate change, the Swiss Confederation had failed to comply with is duties under the Convention. This is the first verdict from an international court that has ruled on a government’s legal obligations to meet climate change targets under human rights law.

What next?

This case has garnered significant international attention, especially from European Council states, who share the same obligation as Switzerland to protect the right to private and family life under Article 8 of the UCHR Convention. This case is expected to inspire a wave of climate litigation across Europe.[7] Already, six other adjourned cases will now be heard by the court in light of this decision. Plaintiffs in these cases have brought action against Norway, Austria, Italy and Germany.[8]

In response to this judgement and in preparation for a new wave of climate litigation, countries are expected to increase environmental regulations dramatically. The ruling sets a precedent that governments are legally obligated to protect their citizens’ human rights from climate change’s adverse and pervasive impacts. Governments will have to re-evaluate climate policy and close the gap between their current climate measures and what science shows is required to protect human rights and limit the risk of legal action. Politicians will need to reprioritize the environment and ensure that such reprioritization is and stays a reality over the long term. Faced with increased legal liability (including commitments to the Paris Agreement and Kyoto Protocol) and public pressure, governmental strengthening of climate policies is inevitable. This may include changes in emission reduction targets, renewable energy incentives and adjustments to fossil fuel extraction and consumption regulations.

A ripple effect on companies operating within the jurisdiction of these nations and beyond is a given. Governments will impose higher standards of sustainable practices and corporate accountability. Criminal liability for failure to act may just be around the corner and company boards need to rethink their position and involvement.

Hence, sustainable development will be incentivised to alleviate legal and reputational risks associated with maintaining practices that are not environmentally conscious. Investors will increasingly exert pressure on companies to disclose and mitigate climate-related harm. More extensive national environmental regulations and increased institutional accountability will mean that investors will consider ESG factors and performance more in investment decisions. In 2023, BlackRock, the world’s largest investment firm, found that already over 85% of investors consider ESG factors necessary in investment decisions.[9] Hence, companies that fail to address climate risks or do not have sustainable goals and practices will likely face divestment or reduced access to investors and capital. Investors themselves will need to go beyond the superficial analysis of ESG factors that they currently undertake to put their minds at rest. Indeed, many are happy to rely on their financial advisors’ reassurance or merely invest in anything that is not qualified “brown”. Investors must undertake better due diligence and revise their views on “brown industries”. In fact, “brown industries” such as mining, cement, shipping, power or the aviation sectors are not only essential but are also those that need the most investments to transition towards more sustainability. It is sustainability progress in those industries that can positively impact climate change the most. 

New tougher regulations lead to more greenwashing

As standards for sustainable practices rise, so does the prevalence of greenwashing in the market. Greenwashing occurs when an organisation makes false or misleading statements about the environmental impact of its products or services. Companies utilise greenwashing to capitalise on the growing demand for environmentally sound practices.[10] The correlation between increased environmental regulations and greenwashing was demonstrated in 2015 after China enacted an Environmental Protection Law (EPL) that placed new institutional pressures on high-polluting companies. Studies found that the EPL exacerbated greenwashing as many firms would not sacrifice profit for the elevated compliance costs of new environmental regulations. Instead, firms inflated ESG scores and misrepresented the use of clean energy, low pollutant emissions and other sustainable practices in external marketing to maintain the support of stakeholders and the government.[11]

In light of the recent EHRC judgement, and the onslaught of environmental regulations expected to follow, greenwashing will be omnipresent in the coming years. In 2022, the Harvard Business Review already reported that 42% of green claims by European companies were disingenuous or deceptive.[12] Many “independent” third party “scoring” organizations are either complicit in this by implementing scoring tools that only scrape the surface of a company’s ESG situation or by not offering tools able to identify relevant gaps and effectively evaluating performance.

For investors, greenwashing can and will increasingly lead to penalties, reputational harm and a profound impact on the share price of the company being invested in.[13] Governments worldwide, including in the EU and the US Federal Trade Commission, have enacted stricter regulations (such as the European Green Deal) to mitigate greenwashing. Companies charged with greenwashing face serious legal repercussions, including lawsuits and fines. In France, violating the Climate and Resilience Law[14] and falsely advertising environmental achievements can result in heavy fines and prison sentences.[15] Further, greenwashing poses significant reputational risks. Companies accused or charged with greenwashing damage the trust of their clientele, investors and employees. Greenwashing can also lead to costly product recalls and strained relationships with partners and suppliers – impairing the operations and prospects of the company.[16] With the EHRC decision, more regulations will undoubtedly see light and companies may well risk closure if they fail to meet them.

Due Diligence as a tool for governments, investors and companies alike

Regulations multiply. Greenwashing is becoming increasingly harder to detect as emissions science limitations and questionable “ratings” tools facilitate the use of smokescreens and funhouse mirrors.

Investors and companies should and can no longer rely on their knowledge of buzzwords to identify disingenuous environmental claims.

On the one hand, it is essential that companies present a truthful picture of their ESG situation, goals, action plans, KPIs and achievements or areas of needed improvements. On the other hand, Investors must look at companies for their potential rather than for what they are. Brown industries for example are essential to society and can transition towards sustainability whilst continuing to provide value.

Continuous, due diligence tools help both companies and investors in ensuring that they are pro-active in their assessments over time. ESG is not a one-off effort. It has to be continuous and involves short, medium and long-term goals and milestones setting, ongoing monitoring and evaluations against predefined KPIs, and honest acknowledgments and reviews of failures and successes to implement lessons learned. 

Vaultinum, a trusted independent and impartial third party, has developed such due diligence tools to help companies meet accountability expectations and investors make informed decisions.

References: 

[1] Mayer, B. (2016). Human rights in the Paris Agreement. Climate Law. https://www.benoitmayer.com/files/Human%20rights%20in%20the%20Paris%20Agreement.pdf [2] Data — IPCC. (n.d.). IPCC. https://www.ipcc.ch/data/

[3] OHCHR. (n.d.). OHCHR and climate change. https://www.ohchr.org/en/climate-change/

[4] Climate lawsuits are on the rise. This is what they’re based on. (2023, August 9). State of the Planet. https://news.climate.columbia.edu/2023/08/09/climate-lawsuits-are-on-the-rise-this-is-what-theyre-based-on/#:~:text=According%20to%20the%20report%2C%20the,in%20the%20United%20States%20alone.

[5] Warnock, C. A., & Preston, B. (2023). Climate change, fundamental rights, and statutory interpretation. Journal of Environmental Law, 35(1), 47–64. https://doi.org/10.1093/jel/eqad002 [6] KlimaSeniorinnen v Switzerland (ECtHR) - Climate Change Litigation. (2024, April 9). Climate Change Litigation.https://climatecasechart.com/non-us-case/union-of-swiss-senior-women-for-climate-protection-v-swiss-federal-council-and-others/

[7] Kaminski, I. (2024, April 13). Strasbourg court’s Swiss climate ruling could have global impact, say experts. The Guardian. https://www.theguardian.com/law/2024/apr/13/swiss-climate-ruling-global-impact-european-court-human-rights#:~:text=Experts%20believe%20the%20latest%20ruling,in%20place%20good%20climate%20governance.

[8] Frost, R. (2024, April 10). ‘Historic’ European Court of Human Rights ruling backs Swiss women in climate change case. Euronews. https://www.euronews.com/green/2024/04/09/top-european-human-rights-court-could-rule-that-governments-have-to-protect-people-from-cl

[9] The rise of ESG investing: A game changer for financial markets. (2024, March 6). Acuity Knowledge Partners. https://www.acuitykp.com/blog/the-rise-of-esg-investing/#:~:text=ESG%20investing%20is%20helping%20to,2022%20from%20200%20in%202015.

[10] Hayes, A. (2024, January 22). What is greenwashing? How it works, examples, and statistics. Investopedia. https://www.investopedia.com/terms/g/greenwashing.asp#:~:text=Greenwashing%20is%20an%20attempt%20to,are%20environmentally%20conscious%20or%20friendly.

[11] Zhang, Y., Chen, S., Li, Y., & Ramos, D. L. (2024). Does Environmental Protection Law Bring about Greenwashing? Evidence from Heavy-Polluting Firms in China. Sustainability, 16(5), 1782. https://doi.org/10.3390/su16051782

[12] Ioannou, I. (2022, July 21). How greenwashing affects the bottom line. Harvard Business Review. https://hbr.org/2022/07/how-greenwashing-affects-the-bottom-line

[13] Green is not always clean: Rising tide of greenwash brings risks for investors. (2021, May 19). https://www.avivainvestors.com/en-gb/views/aiq-investment-thinking/2021/05/greenwashing-risk/

[14] Loi n° 2021-1104, Climat et Résilience, August 22, 2021.

[15] FRANCE: Update on “Greenwashing” regulation | World Law Group. (2022, June 5). https://www.theworldlawgroup.com/news/advertising-and-the-environment-update-on-greenwashing-regulation 16 Team, T. (2023, March 10). What is Greenwashing? Why Should Large Enterprises Care? Terrascope. https://www.terrascope.com/blog/what-is-greenwashing-why-should-large-enterprises-care