Christoph von Burgsdorff
Luther Rechtsanwaltsgesellschaft, Hamburg
christoph.von.burgsdorff@luther-lawfirm.com

Christina Goebel
Luther Rechtsanwaltsgesellschaft, Hamburg
christina.goebel@luther-lawfirm.com

The legal landscape for companies regarding environmental, social and governance (ESG) obligations is tightening rapidly on a global scale. Public and investor expectations for sustainable business practices are rising, prompting legislators and courts to intensify regulatory scrutiny. This has led to a significant increase in ESG-related litigation worldwide. Companies now face lawsuits concerning violations of environmental regulations, human rights within supply chains, or misleading sustainability communications. The spectrum of claims ranges from class actions in the United States to collective actions in Europe and individual claims for damages.

In Germany, the focus is particularly on the Supply Chain Due Diligence Act (LkSG)^[1], which will be further tightened in coming years. Simultaneously, marketing-driven activities that exaggerate or falsely portray environmental friendliness – commonly referred to as ‘greenwashing’ – are increasingly subject to judicial review. In Germany, for example, this is being addressed through the application of the German Act Against Unfair Competition (UWG)^[2], as there is currently no specific legislation governing sustainability advertising. New EU directives regulating such corporate practices have already come into force and will soon be transposed into national law by member states. The result is a marked increase in ESG-related lawsuits and criminal investigations scrutinising not only regulatory compliance but also advertising statements and voluntary corporate commitments.

Today’s litigation practice demonstrates that non-compliance with ESG requirements or unclear statements can lead to costly legal proceedings. The large number of cases already pending shows that a veritable plaintiff’s market has formed. Plaintiffs (eg, consumer or environmental protection organisations, but also private individuals) attempt to pursue claims based on ESG regulations. Of particular significance are cases where courts establish binding standards for interpreting and applying ESG requirements, since specific duties to act and their limits often do not result directly from applicable laws.

German courts are increasingly clarifying through case law what duties companies have regarding ESG compliance. The following sections illustrate this development with recent examples.

Basis for recent regional court decisions: case law of the German Federal Court of Justice^[3]

In June 2024, the German Federal Court of Justice (BGH) decided a case against an international confectionery and liquorice manufacturer. The confectionery manufacturer had used an advertising slogan which claimed its products were ‘climate neutral.’ What could not necessarily be inferred from the term ‘climate neutral’ was that this climate neutrality was not achieved through actual emission avoidance, but through compensation measures.

The court based its decision primarily on provisions of the UWG that the confectionery manufacturer had violated. According to section 5 (1), sentence 1 of UWG, anyone who engages in a misleading commercial practice that is likely to cause consumers or other market participants to make a commercial decision that they would not otherwise have made is acting unfairly.

In its judgment, the German Federal Court of Justice clarified that the term ‘climate neutral’ is ambiguous, as it encompasses both the avoidance of CO₂ emissions and CO₂ compensation – measures to achieve climate neutrality that cannot be considered equivalent and therefore need to be explained in more detail. A mere QR code with further information on a website is not sufficient to eliminate the potential for misleading consumers. Instead, more detailed explanations are required in the advertising itself.^[4]

Application and implementation by German regional courts

On 9 August 2024, the Hamburg Regional Court issued two highly publicised judgments on misleading advertising using sustainability terms, based on the abovementioned case law of the German Federal Court of Justice.

A cruise company had advertised with the slogan ‘2050 decarbonised cruise operations (net zero)’ and referred to various measures to reduce emissions. However, the court ruled that the general claim of environmental friendliness without more specific information on scope and effect of the measures taken was misleading. Although the defendant had explicitly referred to specific measures to reduce emissions, it had given a misleading impression and had also misleadingly concealed the fact that compensation measures would still be necessary after 2050. The court emphasised the requirement to provide justification when using ESG terms. Anyone advertising sustainability must be able to transparently explain the basis for this statement – otherwise there is a risk of violating section 5 of UWG.^[5]

Furthermore, the Hamburg Regional Court decided a case against an oil company regarding advertising claims about allegedly ‘CO₂-neutral’ fuel. In the court’s opinion, it is generally not sufficient for consumers to know whether the claimed CO₂ neutrality is achieved through avoidance or through offsetting measures. The average consumer would be aware that it is not enough to be told that offsetting measures are being taken, but also wants to know the extent and nature of the measures being implemented.^[6]

Further decisions will follow

Requirements for transparency and traceability in ESG-related advertising are constantly increasing. Several courts in Germany are currently dealing with cases involving this legal issue.

For example, the Frankfurt am Main Regional Court is hearing a case against a US electronics company that advertises its wearables as ‘CO₂-neutral products’ and uses a logo that describes the products as ‘carbon neutral’.^[7] In view of the aforementioned decisions of the Federal Court of Justice and other regional courts, it can be assumed that the ruling will be in line with this existing case law.

Perspective: further tightening of corporate obligations after implementation of European directives

The European Union Directive on Empowering Consumers for the Green Transition (ECGT),^[8] which came into force on 26 March 2024, further tightens the requirements for environmental advertising and sustainability labels in order to curb greenwashing and promote reliable environmental information. General environmental claims such as ‘eco’ or ‘climate neutral’, for example, will only be permitted within narrow limits in the future, and the use of sustainability labels will be strictly regulated. The EU Directive on Environmental Claims (publicly known as the ‘Green Claims Directive’), which is still in the advanced legislative process and which EU Member States must then transpose into national law, is intended to supplement the ECGT in the foreseeable future with specific requirements regarding the justifiability, verifiability and communication of environmental ESG terms.

While regulation and case law with regard to ESG-related advertising is becoming more precise, the judicial interpretation of other, no-less-important ESG core content and regulations in Germany remains to be awaited.

Since January 2023, the LkSG has required larger companies to comply with human rights and environmental due diligence obligations along their supply chains (sections 3 et seq, LkSG). Violations can not only result in fines (sections 23 et seq, LkSG), but also give rise to civil liability risks.

With the entry into force of the EU Corporate Sustainability Due Diligence Directive (CSDDD) on 25 July 2024, which EU Member States still have to transpose into national law, due diligence obligations will be further tightened; in particular, more companies will be included, responsibilities will be extended to indirect business partners in the supply chain, and rights to take legal action will be strengthened.

Germany is expected to implement the CSDDD by revising the existing LkSG accordingly. However, since the CSDDD leaves the specific details and interpretation of the individual obligations of affected companies to the EU Member States and their implementation, further floods of ESG case law in Europe are to be expected.

Conclusion

Recent developments in case law, new legislation, and the increasingly strict interpretation of existing regulations by domestic courts show that legal requirements for sustainable business practices are continuously increasing, both nationally and internationally. Making reckless greenwashing statements poses a considerable risk.

Companies should therefore urgently review their internal processes and also place greater emphasis on their external image. Among other elements, this means advertising claims about sustainability must always be verifiable and justified; general statements, especially the use of terms that cannot be uniformly verified, such as ‘environmentally friendly,’ without substance are risky.

If a product or service actually has significantly more disadvantages for the environment, minor environmental activities should not be emphasised as a precaution. It is advisable to keep an eye on the entire life cycle of the product along the supply chain, right through to disposal.

Compliance with and, where applicable, monitoring of due diligence obligations along the supply chain, as well as internal procedures and processes for compliance with ESG regulations, should be fully documented and the (scientific) methods used should be conclusively demonstrable. Companies should already be preparing for an obligation to make information relating to their ESG statements, in particular environmental statements, available to consumers.

Employees from marketing, compliance and legal departments should receive regular training on these topics. Finally, companies should continuously monitor developments in national and international case law.

This will minimise liability risks because one thing is certain: the increase in ESG lawsuits affects companies worldwide.