Managing ESG Regulatory and Litigation Risk

88% of attendees said that ESG issues were either “very important” or “important” to their business.

It is not surprising that ESG remains at the top of the boardroom agenda. It is certainly features high on the risk matrix for any business because of the increase in public and consumer awareness of ESG related issues. Shareholders and other stakeholders are also now focusing on ESG principles to promote good business practice and to bring about positive change.

The industry has grown globally from £30 million in 2012 to £1.2 billion by 2022. TLT has seen an increase in sustainability linked loans, the calling card of these loans is that the performance of the borrower is measured against certain Key Performance Indicators (KPIs). Most of the KPIs currently relate to the ‘E’ of the ESG.

The most common KPI is in relation to GHG emission reduction with a requirement to reduce the GHG emissions by a certain percentage each year. If a certain number of KPIs are met, then a margin reduction is available. In practice, there are a few challenges surrounding this including a current lack of a recognised market standard. However, the LMA principles provide useful guidance and the LMA is due to publish market standard drafting in Q2 of this year, which will hopefully provide more certainty

The Regulatory team at TLT have been closely tracking the developments in relation to greenwashing and the increased scrutiny by regulators – especially the Competition and Market Authority’s (CMA) – into environmental claims made by consumer facing businesses to ensure they are not misleading. The CMA launched the Green Claims Code in September 2021; they are currently investigating three well-known fashion brands and in January 2023, they announced that they will also be scrutinising green claims in the sales of household essentials. We can therefore expect to see more investigations in due course. 

On the advertising side, we have seen the Committees of Advertising Practice and Code of Broadcast Advertising publish updated guidance on the use of carbon neutral and net zero claims in advertising, drawing on certain key principles in the guidance on environmental claims on goods and services. We have also seen a number of Advertising Standard Authority rulings on environmental claims.

There has also been a recent development in the competition arena, which could be a real potential driver for innovation.  The CMA are currently consulting on whether there should be changes to the application of the Chapter I prohibition. The Regulatory team’s Green claims outlook 2023 considers these developments in more detail.

A core priority for the FCA is to tackle greenwashing. The FCA launched its consultation on Sustainability Disclosure Requirements and investment labels in October 2022 with the findings and a policy statement due for publication by the end of June 2023. The FCA is proposing that an anti-greenwashing rule will apply to all regulated firms and will require all sustainability related claims to be “clear, fair and not misleading”.

Alongside that, the FCA are also proposing rules specific to asset managers around product labelling and the use of sustainability related terms for naming and marketing products with the expectation that focus will widen in time. The FCA has also recently published a discussion paper on “Finance for positive sustainable change”. It highlights best practice to promote sustainable change and goes beyond the 'E' of ESG, which has been the focus so far. It highlights the need for board level engagement on the “S” and “G” and having board members with specific expertise on relevant issues or at the very least enabling board member access to that expertise.

Globally, we have seen an increase in ESG-related litigation as a growing number of companies set sustainability goals and are subject to certain ESG disclosure obligations. But the litigation we have seen so far is not litigation in the conventional sense.

Instead, we are seeing an asymmetric approach to litigation. The objective is not always about the “winning”. Claimants such as NGOs are looking to drive behavioural change and to raise awareness of ESG related issues through court litigation. This trend is also leading to an increase in institutional investor backing of ESG related disputes – again driven by the desire to bring about positive change through litigation. 

A number of litigation funders are specifically focussed on funding ESG related class actions and we are likely to see an increase in claims being funded in this way in the future.

The more data you have, the more information you have available to assess the possible ESG related risks in your business.

You should think about carrying out a sustainability audit but as sustainability auditors are inundated with requests, there may be a substantial wait for an audit to be carried out and as such, you may wish to think about this sooner rather than later.

Any business should conduct a critical audit of their website, marketing, corporate literature, products, and labelling. Also consider if any environmental claims are being inferred by your marketing messaging and/or campaign themes or initiatives.

There is likely to be a continued wave of regulatory change in the future, so it is going to be important for any business to stay ahead of the curve and acknowledge that anything that you are doing now is just a 'stepping stone' in terms of future progression.

This is a developing and fast-moving area, so seek advice early on.

This may also help you to stay ahead of the curve.