Protection of Climate and Environment: Increasing Relevance for Corporate Compliance | Hogan Lovells

Climate and environmental protection are becoming increasingly important both in social discourse as well as for the legal and compliance practice. Environmental, Social and Governance (ESG) issues are at the top of the political agenda and have become substantially more relevant for companies of all sizes. In recent weeks and months, court decisions in Germany and the Netherlands have once more put the focus specifically on the “E” in “ESG” and the importance of environmental compliance for companies around the globe. Furthermore, steps towards a law demanding due diligence of the supply chain have been made in both the European Union and Germany, demonstrating again the political interest in ESG topics. The same applies to the U.S., where the U.S. Securities and Exchange Commission (SEC) announced on June 11 that proposed SEC rulemaking areas include disclosure relating to climate risk.

Current developments

Recent decisions by German courts illustrate the increasing importance of climate and environmental protection issues. A recent example is the decision of the Federal Constitutional Court (Bundesverfassungsgericht) dated March 24, 2021, in which the Bundesverfassungsgericht declared the German Federal Climate Change Act partly unconstitutional. Since the Act only provided for emission reduction measures until 2030, the dangers of climate change would be postponed to periods after that data and thus at the expense of the younger generation.

Companies are also increasingly facing the threat of legal disputes over the impact of their actions. This is, for example, demonstrated by the Higher Regional Court (Oberlandesgericht) Hamm in a lawsuit filed by a Peruvian farmer against a German energy company claiming the company shares a responsibility for climate change. The Court is currently gathering evidence. In the Netherlands, a court’s ruling against an international company recently also received a lot of attention. Further “climate lawsuits” have already been announced.

Environmental and climate protection is a cross-industry issue that will continue to gain momentum as a result of the “European Green Deal” and the European Climate Law. This poses new risks and challenges for companies, which they should address through a targeted review of their compliance and reporting processes.

Identifying company risks

Companies should ensure that all activities and products comply with the various international and national environmental requirements as well as the expectations of ecological responsibility generated among their customers. Otherwise, companies would not only face the risk of fines, but also of claims for damages, potential waves of lawsuits and possibly even an obligation to take back and refund certain products.

Furthermore, the affected companies face the threat of serious reputational damage. The increasing media focus created by the public proceedings and social media can scare off investors and customers and cause lasting damage to the company’s brand. This way, serious damages can occur even if the legal disputes are ultimately won.

Sharpening compliance in response to increasing risks

Companies should therefore focus clearly on avoiding public proceedings, negative press and social media publicity in advance. However, this can only be successful by developing and implementing effective systems and processes to analyze risks, identify possible violations, and prevent any infringements in the future. With this knowledge most companies already established general compliance management systems (CMS) to prevent any violation of law. In addition, some companies already have environmental management systems in accordance with the EMAS regulation or the ISO 14001 standard in place, thereby aiming at a continued improvement of their own environmental performance.

The developments of the last weeks in particular should be taken as impulse to specifically align an already existing CMS with environmental and climate goals and the adherence to environmentally relevant regulations in order to effectively prevent any violations.

In addition to adopting concrete roadmaps for achieving environmental goals, training employees and setting up internal processes and control measures while carefully documenting these steps are particularly important. Each companies’ aim should be to establish a general corporate culture that embraces actions friendly to the environment and the climate. This is the only way to achieve set goals, effectively avoid violations, and reduce risks for the company.

Should a company nevertheless receive indications that environmental violations might have occurred, the company should investigate these indications as quickly as possible and cease the respective behavior. Especially in the case of complex issues, companies should conduct an internal investigation to ensure comprehensive understanding of the circumstances regarding the violation as well as effective remediation, while also fulfilling any reporting obligations. If a fine is still imposed as a result of these violations, the company should argue for a reduction of the fine due to the functioning compliance management system in order to prevent additional financial damages to the Company.

Outlook

The protection of climate and environment has become an important parameter of public policy and economic decisions. The recent court decisions have provided further legal emphasis.

For companies across the globe, violations of national or international regulations on climate or environment therefore entail not only the risk of reputational damages, but in an ever increasing amount legal or litigation risks as well. Companies should face these risks by reviewing their compliance management system and adjusting it to the latest challenges or by establishing a functioning compliance management system with up to date elements of environmental compliance.