Take care over ESG claims

ESG (Environmental, Social and Governance) has become a corporate buzzword, with ESG strategies embraced by organisations wishing to communicate across- the-board excellence in social and environmental responsibility.

Impressing stakeholders, and those managing tender processes, with examples of ESG practice has become an attractive proposition – to the extent that some have over-egged the pudding, making false and unsubstantiated claims about their activities, products and services.

To date, this sort of deceit has not been punished to any great extent. However, lawsuits are now emerging in the USA, and it is only a matter of time before the same sort of legal action appears here in the UK.[1]

The sectors so far impacted by the lawsuits have been energy, plastics, chemical, food and agriculture, mining, finance, travel, FMCG, transport and aviation, fashion and textiles, and professional services.

Regulation is also increasing, and there has already been some action taken against ‘greenwashing’. The Competition and Markets Authority (CMA) has investigated the eco-claims of leading fashion brands and retailers and, in a relatively quick period of time, secured undertakings from these brands with regard to future marketing, having found that their claims could not be substantiated.

These retailers now have to be unswervingly honest about their assertions and not use misleading ‘natural’ imagery that implies environmental friendliness. A reputational hit has been taken by these brands, even though the CMA has no financial penalties to levy. That could change if the Digital Markets, Competition and Consumer Bill is passed, with significant penalties of up to 10% of turnover, and could be imposed on future offenders.[2]

Now there is other legislation monitoring statements relating to ESG, such as the Companies (Strategic report) (Climate- related Financial Disclosure) Regulations 2022.[3]

In addition, the Financial Conduct Authority has instituted a package of measures (AGR) to reduce greenwashing with regard to some investment products.[4]

Company directors need to get on top of this situation now to be absolutely certain that ESG claims can be substantiated. The whole area of litigation against directors who run organisations that engage in ‘greenwashing’ is now one to beware, as part of corporate risk management. Shareholder class actions could easily emerge and due diligence is essential.

The drive to rapidly launch green tech products into the market might also have been too rapid, making product liability claims more likely in this space. There is also the potential for more environmental liability cases to emerge, if products marketed as being ‘environmentally friendly’ prove to actually cause environmental damage.

Companies must embed responsible principles into their strategies and honestly communicate ESG-related actions, ensuring transparency and truthfulness underpins all. Directors should take their duty of care with regard to this aspect of business extremely seriously, and show a deep interest in the initiatives being cited as shining examples of ESG policy.

If challenged and needing to mount a defence, they will also need a Directors & Officers insurance policy that can help pull accurate and mitigating evidence together, and fund the cost of legal defence services. Talk to us about this cover – and others surrounding the ESG agenda — today.

Sources:

[1] 2024 06 07 – ESG Litigation & Regulation presentation to WTW — FINAL.pdf

[2] https://www.kingsleynapley.co.uk/insights/blogs/criminal-law-blog/greenwashing-enforcement-is-not-going-away

[3] https://www.legislation.gov.uk/uksi/2022/31/contents/made

[4] https://www.fca.org.uk/publications/finalised-guidance/fg24-3-finalised-non-handbook-guidance-anti-greenwashing-rule