In a recent DWF-commissioned survey of 480 senior executives in 13 countries, only 35% of respondents said they have fully considered the ethical and legal implications relating to ESG disclosure and commitments.
47% said they will limit their disclosures to those that they believe will not create any legal issues, while almost the same number (48%) were “still thinking about how to best handle ESG disclosures from a legal perspective”.
What are ESG claims and why are they an issue?
When a brand or business does something well, proving to be a differentiator against its competitors, it naturally wants to tell the world and maximise its commercial opportunity.
Environmental ("E"), sometimes known as "Green", claims suggest that a product, service or brand minimises harm to, or has a positive effect on, the environment. For example, terms like ‘green’, ‘sustainable’, ‘eco-friendly', 'carbon neutral', 'net zero', 'recyclable', or 'biodegradable' are common 'Green Claims'. Used incorrectly, they can easily create a more favourable impression of environmental credentials than can be justified, which risks misleading the consumer and is technically unlawful.
To put the issue of these Green Claims into context, it is useful to look at some statistics (taken from European Commission data collated for the EU Circular Economy Action Plan):
- 54% of consumers wanted to make more sustainable choices at the beginning of the COVID pandemic;
- 60% of consumers would pay more for products with better environmental performance.
Showing the potential for increased revenue is certainly an incentive for businesses to shout about their Green credentials.
However, stats also showed that:
- 61% of consumers find it difficult to understand which products are environmentally friendly and;
- 44% of consumers do not trust environmental information.
While doing the right thing remains vital and will only become more important, regulatory uncertainty and the rise in class actions makes it a very risky time for businesses to make Green Claims. We have seen many big businesses damaged not only by challenges from the regulators, but more significantly by the court of public opinion when the regulatory challenges are published. We can help steer clients through this uncertainty to unlock opportunities for the circular and green economy.
Amongst a raft of other legislation, the EU has recognised the need for harmonisation and the proposed Green Claims Directive is intended to tackle this by requiring companies to substantiate green claims against a standard methodology on environmental impact.
Under the digital markets, competition and consumer bill to be unveiled soon, companies will face the threat of civil penalties of up to 10% of global turnover for breaches of consumer law (likely to cover unsubstantiated or misleading Green Claims). Individuals who breach these laws will face fines of up to £300,000.
Social "S" claims such as large-scale employment claims focused on issues such as labour practices, discrimination and redundancy are also on the rise.
The Class Action
ESG and its associated compliance requirements is driving a number of class action cases as investors, consumers, and employees are increasingly looking beyond bottom-lines and assessing what businesses are actually doing to address climate change, tackle human rights abuse and improve diversity.
We can see that happening in real time.
Shell had announced, ahead of a May 2021 Annual General Meeting, that its Energy Transition Strategy was "to become a net-zero emissions energy business by 2050".
In October 2021, it announced a new target which was to "halve [our] absolute emissions by 50% by 2030.
In what is claimed by ClientEarth to be a first-of-its-kind case, there's a class action being brought by the environmental law organisation on behalf of activist shareholders, who claim that Shell’s 13 directors are personally liable under the Companies Act for failing to devise a strategy in line with the Paris agreement around emissions targets.
We wait to see how that action progresses, but it is likely to encourage other similar shareholder actions.
Mitigate the risk
Scrutiny of ESG claims and regulation is more prominent than ever, with many businesses being forced to disclose their environmental and human rights credentials. Businesses must ensure they have reviewed internal processes and have the strategies in place to cope with changes in legislation and increased scrutiny.
Businesses need to consider:
- if there is a real need to make a public ESG claim;
- in making a public ESG claim, that it can be properly substantiated;
- prioritising areas within the organisation which are at greater risk of ESG claims and undertake a comprehensive risk assessment;
- reviewing public statements related to ESG factors;
- reviewing ESG policies;
- ensuring there is sufficient legal oversight;
- collating and monitoring any ongoing risks;
- creating a comprehensive crisis/incident response plan;
- how the business would respond to a group litigation ESG claim and;
- tracking complaints received from customers and monitoring any arising trends.
If you or your business wants advice on preparing or responding to a group action, get in touch with one of our Class Action experts in your jurisdiction today.
DWF has advised on some of the biggest class action cases, in multiple jurisdictions and across multiple sectors.
To find out more about our Class Actions experience visit our Class Actions webpage.