In the absence of a robust regulatory framework, the number of companies being taken to court for alleged selective or misleading statements in ESG reporting has in recent years increased significantly. This blog surveys the rapidly evolving regulatory landscape in respect of ESG disclosures and recommends some practical steps businesses can take to guard against charges of Greenwashing.
In the 18-months following Client Earth’s landmark OECD complaint against BP, one that was determined both “material and substantive” in an important, precedent-setting assessment by the UK National Contact Point, there has been a significant increase in the number of prosecutions related to Greenwashing internationally. According to the most recent figures published by the UN, there are more than 1,550 climate-related cases presently making their way through the courts across 39 jurisdictions, and a growing proportion of such prosecutions allege that “corporate advertising contains false or misleading information about environmental impacts.” This finding was substantiated in a July 2021 report published by the London School of Economics.
But although charges of Greenwashing have focused traditionally on commercial law, specifically accusations of false advertising, recent research indicates that activist NGOs, stakeholders and consumers are increasingly litigating on the basis of alleged selective or misleading statements in environmental, social and governance (“ESG”) reporting and regulatory disclosure materials. Indeed, the most recent ESG Litigation Roadmap, published by the World Business Council for Sustainable Development, includes an appendix dedicated to cases of “Corporate Disclosure ESG Litigation”, and urges that companies “treat public disclosures in relation to ESG matters as seriously as those deployed in respect of financial disclosures” precisely because they are now such “a fruitful source of litigation.”
At a time when businesses across regions and industries are coming under unprecedented pressure from investors and other stakeholders to disclose their ESG risks, practices and impacts, leaders can ill afford to overlook this new trend in climate litigation. So, what is the current state of play in terms of the regulation of ESG reporting? And what steps can businesses take to guard against the risk of being taken to court on the basis of information relayed in ESG reporting materials?
“More and more people want to live a green life, and I applaud companies that strive to produce eco-friendly products or services. However, there are also unscrupulous traders out there, who pull the wool over consumers' eyes with vague, false or exaggerated claims. The Commission is fully committed to empowering consumers in the green transition and fighting greenwashing. ”
European Commissioner for Justice
An Evolving Regulatory Landscape
A major factor contributing to the rise in Greenwashing cases prosecuted on the basis of alleged false or misleading information incorporated into ESG disclosures derives from the conspicuous absence of robust regulatory frameworks governing the contents of such literature. While there has recently emerged a proliferation of voluntary, standardized ESG reporting frameworks, the lack of clear regulation regarding, for instance, evidentiary requirements for claims, or standardized mechanisms to distinguish longer-term plans, targets and procedural aspirations from contemporary practice and impacts, has created a legal ambiguity that is rife for litigation.
Against this backdrop, legislators on both sides of the Atlantic are increasingly moving to tighten the regulation of ESG disclosures, particularly as they pertain to environmental matters. In January 2021, for instance, a European Commission study found that 42% of sustainability claims published by EU businesses in a variety of online contexts are potentially in breach of EU law. The Commission has since issued plans to expand the disclosure requirements imposed by the Non-Financial Reporting Directive (NFRD) via the introduction of a more far-reaching Corporate Sustainability Reporting Directive (CSRD).
Similarly, in the UK, the Competition and Markets Authority (CMA) has conducted detailed research into misleading environmental claims. In September, the CMA further published a "Green Claims Code", setting out 6 key points to help consumers evaluate the trustworthiness of environmental claims disseminated on packaging or in advertising.
A comparable direction of regulatory travel can be discerned in the United States. In April, for instance, the Securities and Exchange Commission (SEC) launched a public consultation on ESG reporting “with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change.” Chair, Gary Gensler has since committed publicly that the SEC will propose a standardized reporting framework in early 2022.
Equally significantly, in March, the International Financial Reporting Standards Foundation (IFRS) committed to establish a new body, the International Sustainability Standards Board (ISSB), to accelerate the move toward consistent and comparable ESG and sustainability reporting standards. Launched formally at November’s critical COP-26 summit in Glasgow, the ISSB will consolidate with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) to produce standards that “will help investors understand how companies are responding to ESG issues, like climate, to inform capital allocation decisions.”
Labels like “green” or “sustainable” say a lot to investors. Which data and criteria are asset managers using to ensure they’re meeting investors’ targets — the people to whom they’ve marketed themselves as “green” or “sustainable”? I think investors should be able to drill down to see what’s under the hood of these funds.
Chair of the U.S. Securities and Exchange Commission
Measures Businesses Can Take Now to Build Capacity
But while the introduction of more robust regulatory frameworks will provide business with greater clarity in respect of the structure and content of ESG disclosures, firms will still need to strike a balance between fulfilling the disclosure requirements of legislators on the one hand, and ensuring that the policies and commitments outlined in ESG reporting do not render them liable to court action on the other. Furthermore, owing to the sheer variety of products and services liable to become subject to mandatory disclosure in the coming years, regulators will likely only ever be in a position to provide a very general framework for ESG reporting and the extent of standardization will vary greatly across industries.
Ultimately, the best defense for any company to guard against the charge of Greenwashing is to avoid doing it in the first place. In this regard, it is imperative that ESG reporting processes are integrated into a coherent, company-wide system of sustainability governance, one that is supported actively at senior management-level and complemented by the introduction of concrete policies and metrics for measuring and assessing progress. Adverse impacts must never be obscured or minimized, but accounted for fully and supplemented by the introduction of concrete, measurable remedial policies. Likewise, any assertion of positive impact must be substantiated with reliable data and contextualized in a transparent fashion that reflects, for instance, the influence of basic regulatory requirements and statutory obligations.
Nevertheless, there are certain straightforward, practical measures that all companies should consider adopting in the short-term to build ESG reporting capacity and thereby minimize liability to accusations of Greenwashing going forward.
1. Have a Say in Setting Standards
As outlined above, there is a growing appetite among legislators across diverse jurisdictions to regulate the contents and structure of ESG disclosures. However, the emergence of such standards and procedures will not be instantaneous and, as recent consultations conducted by the SEC and European Commission indicate, there will be ample opportunity for those businesses who recognize the long-term value of ESG practices to shape an evolving policy landscape.
It is precisely those companies that engage with government consultations, participate in meetings with regulators and adopt measures to enhance their institutional reporting capacity who will be positioned strongest to thrive in a more tightly regulated reporting ecosystem going forward. Furthermore, organizations that are proactive in disclosing sustainability metrics ahead of the introduction of binding obligations are also those most likely to be heard in standard-setting discussions because they will be seen to possess the credibility and institutional capacity required to set the agenda.
2. Draw on Existing Reporting Capacity
While the IFRS has made clear that its proposed standardized ESG reporting criteria will prioritize environmental factors, it is imperative organizations do not lose sight of “S” and “G” considerations in developing disclosure capacities. Indeed, the intrinsically interconnected nature of the relation between companies’ environmental, social and governance impacts is such that they can never be addressed effectively in isolation and this corelationality must be accounted for in terms of developing an ESG reporting strategy.
Put simply, the capacious scope of ESG reporting obliges companies to draw upon the skills and input of the entire organization in order to create meaningful value for stakeholders. The expertise of Finance departments may be particularly valuable in this regard. Chief Finance Officers and financial controllers can draw upon their extensive reporting experience to shape non-financial disclosure processes and controls. Input from financial experts can also assist in the development of effective governance for sustainability reporting mechanisms, and potentially aid in the solicitation of independent assurance over non-financial processes.
3. Root Your Reporting in Robust Data
As we have seen, the more information organizations report and disclose regarding ESG performance, the more scrutiny their published materials are liable to attract. Such examination is likely to focus on the depth and reliability of disclosures, risk exposure and resilience, as well as concerns regarding Greenwashing.
The European Commission’s proposed Corporate Sustainability Reporting Directive will, for example, require large companies to seek “limited assurance” around their reported sustainability information from either their statutory auditor, or an independent assurance services provider.
Therefore, it is imperative that any information businesses do provide to stakeholders and regulators regarding social and environmental impact, actions and policies is rooted in robust and objectively verifiable data that can withstand the most scrupulous analysis.
At a time when ESG disclosures are coming under unprecedented public, regulatory and media scrutiny, it is more advisable than ever to solicit the services of an internationally renowned sustainability ratings provider, such as EcoVadis; one possessed of the resources and expertise required to track, trace and verify all the information uncovered during an assessment and to outline a meticulous, objective research methodology underpinning published data.
Ultimately, any ESG disclosure is only ever as robust as the data reported on, and the unique, holistic character of EcoVadis’ industry-leading ratings methodology can provide your business with a deep reservoir of objectively-compiled, standardized data that can be compared accurately against the performance of industry peers and relayed with confidence to stakeholders.
Get in touch or find out more about how EcoVadis can help your company to keep ahead of the regulators and proactively build sustainability and resilience throughout your organization and supply chain.
About the AuthorMore Content by Sean Donnelly