The same is true for corporates, who also face greenwashing risk from incorrect or omitted information in financial reports, non-financial statements and prospectuses, as well as a lack of transparency around the limitations of the methodologies that underpin disclosures. Where those errors or omissions relate to equity or debt securities, the financial institutions that acted as managers and/or underwriters are also potentially exposed under securities laws in some jurisdictions.
According to the United Nations Principles for Responsible Investment (UNPRI), the 2022 proxy season had one of the highest records for majority-supported ESG shareholder proposals in recent years, and the 2023 season is off to a similar start.
Investors and good governance groups are also focused on whether a company has “congruence” between its stated public positions on matters such as the environment, social issues (abortion, LGBTQ+ support, systemic racism and criminal justice, to name a few), and their indirect lobbying, political, and electoral engagement.
Additionally, the legal and regulatory framework around climate-related disclosures is developing rapidly across the world, driven by the recommendations of the Task Force on Climate-Related Disclosures (TCFD).
A number of jurisdictions and authorities, including the U.S. Securities and Exchange Commission, have either proposed or introduced frameworks requiring TCFD-aligned reporting, while EU member states will need to introduce legislation in line with the EU’s Corporate Sustainability Reporting Directive (CSRD) by 2024.
In order to settle regulatory investigations into their sustainability disclosures we have seen a number of corporates agreeing to take on additional, ongoing reporting obligations.
How are climate disclosures driving risk for business?
Greenwashing litigation comes in a variety of forms, with the main threat coming from securities and shareholder lawsuits in the United States.
One of the best-known examples involves a major U.S. oil producer, one of whose stockholders filed a securities fraud class action against it and three of its directors in a Texas district court in 2016.
The complaint alleged the company’s public statements were materially false and misleading because they failed to adequately disclose the impact of climate change on the business, and that as a result, its stock price was artificially inflated.
When the company subsequently announced it might need to write down the value of some of its fossil fuel assets, its share price dropped. While a similar case brought by the New York Attorney General was dismissed, the Texas suit is still live, seven years later.
In Europe we have seen cases brought against energy majors over whether their pledges to be carbon neutral by 2050 are misleading given their fossil fuel investments today, and lawsuits targeting airlines in relation to “responsible flying” campaigns that NGOs claim give consumers “the false impression that … flights won’t worsen the climate emergency.”
These threats may seem remote to many businesses. But there are activities common to a much broader range of companies that also present litigation risks.
It is possible we may see NGOs taking a closer look at corporate offsetting, and in particular whether emissions reduction credits deliver their stated decarbonization benefits. If they don’t, it could spark complex contractual claims between corporates, offsetting providers, and the bodies that certify them.
While not litigation, we are also seeing NGOs bring complaints against companies through the Organization for Economic Cooperation and Development’s (OECD) network of National Contact Points (which were established to promote adherence to the OECD’s Guidelines for Multinational Businesses).
In 2017, a group of NGOs filed a complaint in the Netherlands against an international bank alleging it had failed to disclose the quantity of greenhouse gas emissions emitted as a result of its financing activities.
The complaint resulted in the bank making a number of commitments to reduce its climate impact, including by steering its lending portfolio in a direction more compatible with the aims of the Paris Agreement.
Where else is risk coming from?
The principal source of greenwashing liability for businesses stems from prospectuses, where U.S. securities laws and instruments such as the EU Prospectus Regulation and other national instruments present a relatively low bar for claims.
Here we are seeing private parties engage with authorities to put pressure on companies; as an example, in 2017 an NGO asked a Canadian securities regulator to stop an infrastructure company’s initial public offering based on allegations that the prospectus had deficient disclosures around climate-related risks. After the regulator agreed to review the request, the company amended the prospectus.
Where greenwashing claims relate to particular financial products marketed as “green”, claims have been brought on the grounds of mis-selling, misleading advertising and unfair business practices.
It can be challenging for investors to win these cases however, as doing so requires them to demonstrate they have suffered a loss.
The fact a product isn’t as green as it says may not have any impact on its price, and even if there has been a drop, the impact on individual investors may be so small as to make it uneconomic to bring a claim.
As a result, any uptick in mis-selling claims in relation to green financial products is likely to arise in jurisdictions with claimant-friendly class action regimes, such as the U.S. and Australia.
Within the EU, greenwashing investor claims could become class actions under the Representative Actions Directive if the EU were to expressly bring ESG-related regulations within scope, or if member states go beyond the directive’s minimum framework in their national implementations.
What actions can companies and their boards take to reduce the risks they face?
These ESG disclosure-related risks exist now, based on existing legislation, regulation and legal doctrine, and we can expect them to intensify as companies are faced with additional climate-specific legal and regulatory disclosure obligations.
In response, corporates and financial institutions should avoid overstating their ESG-related commitments, and keep abreast of legal and regulatory developments that may impact the need for – and nature of – those disclosures, including applicable legal grounds, regulators’ recommendations and industry standards and guidance.
These standards and guidance will also evolve as more greenwashing cases are dealt with. At the same time, initially non-binding international standards such as the TCFD framework can be incorporated into national law.
