Across Europe, one of the key developments in the disputes landscape over the past few years has been a growth of ESG related disputes, with a number of important judgments holding governments, public bodies and corporates accountable for their ESG policies and actions.
In the United States we have also seen a distinct rise in ESG fraud cases and investigations which involve the deliberate misrepresentation or manipulation of a corporate's environmental, social and governance practices or performance. Whether that trend continues under the new administration and the increasing anti-ESG sentiment remains to be seen, but it is likely that there are more cases yet to come given the time it often takes for misrepresentations and concealed facts to come to light.
We explore in this article the ESG fraud environment in England and Germany and whether we think developments are likely to mirror what we have seen from the other side of the Atlantic.
The English perspective
The short point is that we have yet to see ESG fraud cases in England on anything like the scale of the US.
In the English High Court, possibly the most significant example of an ESG fraud case is the Volkswagen NOx emissions scandal, often referred to as "Dieselgate". The scandal first broke in 2015 in the US when the US Environmental Protection Agency found that Volkswagen was selling diesel fuel cars which had "defeat devices" installed which could "cheat" when being tested for nitrogen oxide emissions so the cars would appear to comply with vehicle emissions standards, but when running normally impermissible NOx levels were produced. In the UK a major class action representing more than 90,000 UK Volkswagen owners was brought alleging various causes of action including fraudulent misrepresentation. The case was settled for £193 million in 2022.
This has been followed by another major class action on behalf of approximately 1.5 million users brought against various car manufacturers in what has been dubbed "Dieselgate Part 2", and which includes similar allegations of dishonesty on an industry wide scale.
We are, however, yet to see many other examples of consumers bringing ESG fraud cases in the UK. It is unclear whether this reflects the challenges of identifying a legal basis for ESG fraud cases in all but the clearest of circumstances, lack of funder support for individuals with limited resources to bring complex litigation against businesses or other factors.
One area of significant activity in the US has been litigation by investors and enforcement action by regulatory bodies like the Securities & Exchange Commission (SEC) against companies for inaccurately representing their ESG credentials. The latter has in recent years imposed heavy fines on a number of public companies for making misleading claims about their ESG credentials although that may now slow with President Trump's appointee at the helm.
In the UK, there has so far been no corresponding increase in activity, and it is unclear whether this will come. UK public companies are required to publish information relating to certain ESG matters and there has certainly been increased interest by investors in the ESG credentials of publicly listed issuers when making investments. However, examples of allegations of ESG fraud by public companies in their reporting documents are scarce. A possible explanation for this is the strict verification process which English public companies go through before publications to market, which involves carefully checking the accuracy of each statement and confirming that no material information has been omitted.
The FCA is due to introduce new stricter ESG reporting requirements for prospectuses during the first half of this year following a consultation paper published in July 2024, which will increase the regulatory burden on public companies, perhaps open the door to closer scrutiny by regulators, investors and other stakeholders of ESG credential reporting, and which may in turn lead to more cases.
Other examples in England of action in respect of ESG fraud appear to be few and far between. However, one regulator which has been busy is the Advertising Standards Authority (ASA), which has vigorously clamped down on businesses making misleading or deceptive claims about the environmental credentials of their products, services or practices, known as "greenwashing". In 2023, the regulator updated its guidance on greenwashing and a number of high-profile investigations have since resulted in the ASA finding breaches of the "CAP Code".
Whilst on the face of it this may represent evidence of tough action against deceptive ESG practices, the reality is perhaps less interesting. Whilst the ASA can ban advertisements, its powers are limited and do not extend to imposing real monetary penalties. It also seems unlikely that an ASA decision to ban a misleading advertisement could lead to meaningful consumer legal action.
The German perspective
In Germany, Europe's largest economy, there has been growing interest in ESG issues, though the scale of ESG fraud cases, like in the UK, remains smaller than in the US. Germany’s regulatory landscape, key cases, and evolving regulations highlight the challenges and differences from the US.
Aside from the Dieselgate litigation in Germany, another notable ESG fraud case involved DWS, a subsidiary of Deutsche Bank. The firm was accused of overstating the sustainability of some investment funds. A whistleblower in 2021 alleged that DWS had falsely marketed funds as sustainable without appropriate environmental impact disclosures. This case prompted an investigation by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) as well as the SEC in the US and raised questions about the integrity of ESG-related financial products. While the BaFin investigation is still ongoing, the SEC is a step ahead: DWS has already been fined $25 million in 2023.
Despite these incidents, Germany has not yet seen the same volume of ESG fraud litigation as in the US, which may be due to differences in legal culture and the more measured approach by regulators. Regulatory bodies and legal frameworks in Germany differ significantly from those in the US. BaFin, Germany’s main financial market regulator, oversees corporate governance and financial market integrity, including ESG matters in accordance with their “sustainable-finance strategy”. While its role resembles that of the SEC, its actions have been more cautious, prioritising financial regulation compliance rather than actively investigating ESG-related misrepresentation.
Nevertheless, Germany and the European Union have introduced significant regulatory reforms aimed at increasing transparency in ESG practices. The EU Taxonomy Regulation, in effect since 2021, establishes criteria for sustainable activities, requiring companies to disclose alignment with environmental goals. This is complemented by the Corporate Sustainability Reporting Directive (CSRD), which requires companies to provide more detailed ESG disclosures, especially regarding governance and environmental impacts. In addition, the proposed EU Green Claims Directive (GCD) aims to stop greenwashing by setting standards for environmental claims. Companies in Germany must also consider developments in emissions trading, anti-corruption and supply chain laws.
While BaFin has stepped up its scrutiny of ESG-related disclosures in line with these regulations, its approach remains relatively conservative. However, there is an emerging trend in German jurisprudence towards a stronger stance against greenwashing. For instance, in the “Katjes ruling” of June 2024, the German Federal Court of Justice (BGH) banned businesses from claiming "climate neutrality" in advertising materials without specific and directly visible information supporting such claims. This decision highlights a growing intent to prevent deceptive and potentially fraudulent ESG claims and aligns with broader European efforts to standardise sustainability disclosures.
However, regulatory requirements are not always clear, and the lack of standardised guidelines for disclosing sustainability-related key statistics further complicates the detection of fraudulent actions, adding to the challenge of enforcement.
There are several factors that may explain why Germany’s ESG fraud landscape differs from the US. First, there is a lower level of private litigation in Germany, where class actions are not as prevalent. Additionally, Germany's regulatory approach is more risk-averse and the legal system requires a higher burden of proof for fraudulent intent, which makes it more difficult to pursue ESG fraud cases unless the misrepresentation is clear-cut.
Conclusion
It is clear that in both England and Germany, lawmakers, regulators, and other stakeholders have begun to turn their attention to identifying and challenging fraud in the ESG sphere. Nonetheless, to date neither country has seen the same level of activism as in the US. This difference may be for a number of reasons, including, for example, the more cautious approach taken by regulators in England and Germany, who have prioritised consumer safety issues rather than ESG fraud more broadly. On the other side of the coin, the robust preventative procedures in place make it more difficult to give false information about ESG credentials.
The implementation of new regulations in both England and Germany targeting ESG fraud may mean that there is increasing momentum to hold businesses to account. It is therefore crucial for businesses to stay up to date with the developments in the field and to have appropriate policies in place to mitigate the risks of fraud arising in their ESG practices.
However, it remains uncertain whether England and Germany will experience an increase in ESG fraud litigation and other activism which matches the level seen in the US. Indeed, enthusiasm for tackling ESG fraud might even start to wane, mirroring the anti-ESG sentiment expressed in the US.
