ESG litigation is being used to drive forward strategic and operational changes in corporate behaviour. Stakeholder demands and mandatory reporting obligations mean companies must evidence their implementation of ESG strategies and stand ready to justify their ESG credentials.
With this growing risk of ESG litigation comes the need for greater corporate oversight from the highest echelons, and for large organisations, this is likely to tighten the nexus within the corporate structure between a parent company and its subsidiaries. And this tightening of the corporate belt may expose the parent to another litigation risk, that of parent company liability.
Recent cases suggest the English courts are increasingly willing to impose a common law duty of care on parent companies for the wrongful acts of their subsidiaries in the ESG arena. This is not a new duty of care; however before the decision in Vedanta, the requisite degree of proximity between the parent and the party harmed, and the factors and circumstances supporting the existence of a duty of care, were unclear.
In Vedanta Resources PLC and another v Lungowe and others  UKC 20, Zambian claimants brought claims in England against the UK-domiciled parent company, Vedanta, following environmental damage to their farmland caused by discharges from a copper mine owned by its Zambian-based subsidiary, KCM. The Supreme Court had to determine whether the claimants had a real prospect of showing that Vedanta owed them a duty of care in order for the English courts to have jurisdiction over the dispute.
The Supreme Court rejected the suggestion that a specific set of factors must exist to establish parent company liability and held there are no set categories into which a case must fall. It noted that a parent’s “control” of its subsidiary is just one factor (and not necessarily the determining factor) and the following may be relevant:
- the parent’s provision of flawed advice or promulgating group-wide policies and guidelines containing systemic errors (which when implemented by the subsidiary) cause harm to third parties;
- the parent taking active steps “by training, supervision and enforcement” to ensure policies are implemented by its subsidiary;
- the parent holding itself out as exercising supervision and control of its subsidiary (even if it does not in fact do so).
Two years later, similar issues came before the Supreme Court in another jurisdictional challenge. In Okpabi and others v Royal Dutch Shell Plc and another  UKSC 3, Nigerian residents argued that Royal Dutch Shell (the parent company) owed them a duty of care and breached that duty by failing to prevent or remedy pollution damage caused to local communities by its Nigerian-based subsidiary. The Supreme Court reaffirmed that it is necessary to look beyond the bare parent/subsidiary relationship, and endorsed the guiding principles provided in Vedanta.
In Vendanta and Okpabi, the Supreme Court concluded that it was at least arguable that the UK-domiciled parent company owed a duty of care to the claimants harmed by their subsidiaries’ activities, and accordingly the claims could be decided by the English courts.
Município de Mariana v BHP Group (UK) Ltd  EWCA Civ 951 pushes the boundaries of parent company liability even further – into the novel realms of parent company liability for harms caused by its subsidiary’s joint venture with another entity. In July, the Court of Appeal overturned a strike out application and allowed this £5bn claim brought by over 200,000 Brazilian claimants against the Anglo-Australian mining giant, BHP, the parent company of BHP Brazil, to proceed in England. BHP’s subsidiary, BHP Brazil, is a 50% shareholder in a joint venture, Samarco Mineração SA, which owned and operated the Fundão dam which collapsed in November 2015, causing loss to life, personal injury and huge damage to property and the environment.
The Court of Appeal did not address BHP’s liability for the activities of Samarco, an “independent” joint venture company established by its subsidiary, and this will be a key issue for the trial court to determine. The Court’s principal focus was whether it was an abuse of process to bring the English proceedings against BHP. Concluding that it was not an abuse of process, the Court was keen to ensure the claimants should achieve effective access to justice; it had genuine concerns regarding the adequacy of remediation in the Brazilian courts and it was not willing to allow the challenges of managing complex, cross-border group litigation (including complications arising from parallel proceedings in Brazil and the risk of irreconcilable conflicting judgments) deny the claimants the opportunity to bring their claim against BHP in England.
ESG group litigation is on the rise and these cases are part of a growing trend to promote access to justice and make UK-domiciled parent companies accountable for environmental damage and human rights abuses caused by their overseas subsidiaries.
The English courts are not alone in this trend. Courts in EU nations are also facing a growing number of group claims which seek to hold parent companies liable. In September 2022, the Dutch courts gave the green light to a group of Brazilians impacted by earth tremors and land cracking (allegedly) due to salt mining operations in Brazil, to pursue their claim against petrol chemical giant, Braskem, and its parent company, Braskem NL, in the Netherlands where its European headquarters are based. With the EU’s proposal to legislate for mandatory due diligence on human rights, the environment and good governance throughout the supply/value chain, it is inevitable that more claims against EU-domiciled parents will follow.
Parent companies must respond with active corporate governance; they cannot hide behind their corporate structure and try to kick their ESG responsibilities down the proverbial road elsewhere. Companies, particularly those with activities in higher-risk countries where allegations of environmental damage and human rights abuses are more likely to arise, should review their group-wide approach to risk management and get a real handle on their governance of subsidiaries, joint ventures and supply chain affiliates. Ignorance will not assist those at the top of the corporate chain.