A growing number of regulatory and prudential authorities have been pressing the case for mandatory climate-related disclosure regimes.
Leading bodies have started the process of aligning reporting frameworks with the Task Force for Climate-related Financial Disclosure (TCFD) recommendations. And listed companies are increasingly experiencing pressure from institutional and activist investors to mitigate their emissions.
But building a competitive business strategy around ESG is not straightforward. Nor is concurrent compliance with TCFD reporting, still only an emerging discipline. The margin for innocent misstatement is wide.
The Covid-19 environment has added to the multiplicity of challenges. The case for ESG has to be made alongside many other competing business priorities. The risk of “over-promising” will be material. And all of this will be happening when corporate behaviours are under scrutiny like they have never been before.
As they prepare to comply with the mounting reporting requirements brought on by new regulations on supply chain, companies, their directors and risk managers will also need to keep in mind that scrutiny of their green statements – not just in regard to supply chain but indeed any aspect of their operations – is intensifying.
Internal and external stakeholders are concerned about perceived greenwashing – the practice of making an unsubstantiated or misleading claim about the environmental status of a business or the environmental benefits of a product, service, technology or company practice. Regulators in Europe and the US have cracked down harder on greenwashing in 2021 as so-called ESG stocks – those perceived to perform better against environmental, social and governance metrics – demonstrate superior market performance and attract ongoing high levels of investor interest.
As businesses (particularly issuers and those in regulated sectors) move towards more consistent and accurate disclosures, the sustainability and ESG promises that they make will be monitored by increasingly sophisticated investors, and the same self-activist and pressure groups that were mounting successful legal campaigns before the Covid-19 lockdown hit.
Meanwhile, we are seeing more climate change-related activity in the courts. A recent report from the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science found that, as of May this year, there were 1,841 ongoing or concluded cases of climate change litigation globally; 1,387 of which were filed in US courts, and the remainder across 39 other countries and 13 international or regional courts and tribunals.
Climate-related litigation has more than doubled in the past six years, from 834 cases filed between 1986 and 2014, to over 1,000 from 2015 to the present.
Around three quarters of cases to date have been brought against governments, but cases against private sector organisations are increasing across a range of industries. At the same time, the number of cases brought by non-governmental organisations (NGOs) and individuals has also increased.
In one example, in January 2020, ENI, a state-backed energy company, was fined €5m by the Italian Competition and Market Authority for claiming its palm oil-based diesel was "green" when the production of palm oil is driving deforestation. And in February, the UK Court of Appeal ruled in favour of green campaigners’ case against the Heathrow Terminal 5 runway decision, citing a failure to consider its commitments under the Paris Accord.
One of the most acute areas of legal exposure for any listed entity derives from its public disclosures, either in its annual reports or at the time of capital raising. And at a time of mounting consumer expectation (and protection), ESG misstatements will constitute a real legal and reputational vulnerability.
In a world of increasingly accessible litigation funding and an ever more sophisticated claimant bar with access to collective consumer redress remedies and class actions, consistent and accurate reporting around climate, sustainability and ESG promises will be essential.
Businesses that get it right will be much more attractive to insurers both from a liability and an investment perspective. Carriers will need to exercise caution to identify those that stray into greenwashing as the cost of association with those businesses could be high.
It is a salutary lesson to companies that ‘greenwashing’ will increasingly be called out. Ultimately, the cocktail of ‘soft’ pressure from consumers, investors and other stakeholders to assess the environmental impact of companies could increasingly leave them open to litigation.