Greenwashing - CMA guidance and risks for financial institutions
Draft CMA guidance
To what extent is it permissible to use terms such as "recyclable", "organic" or "sustainably produced" in product marketing?
The Competition and Markets Authority has been looking at potentially misleading claims about the green credentials of consumer products and has published draft guidance setting out a series of key principles which will be helpful in assessing what is permissible. Those principles are:
- claims must be truthful and accurate
- claims should be clear and unambiguous
- claims should not omit or hide important information
- comparisons should be fair and meaningful
- claims should take into account the full life cycle of the product and
- claims should be substantiated.
Our briefing provides more information on this draft guidance.
Greenwashing in finance has also been in the spotlight recently, thanks to a high-profile claim against an asset manager. Our briefing discusses how organisations can manage the risks around finance greenwashing, while many are getting to grips with the EU Sustainable Finance Disclosure Regulation and the related Taxonomy Regulation.
Mandatory climate reporting for large UK companies
The Task Force on Climate-related Financial Disclosures, or TCFD, is an international framework for companies to disclose the potential impact of climate change on their business and ways in which they manage and mitigate that impact. The framework is growing in prominence, with a recently published survey suggesting that 45% of asset managers are now reporting under it (a 27% increase on the previous year). The Government has proposed that much of the economy would be covered by mandatory TCFD reporting from 2023, and has published a consultation on the first requirements which will apply to publicly quoted companies, large private companies and limited liability partnerships.
Back in March 2021, the Government said that the requirements for PLCs, large companies and LLPs would apply from 1 January 2022; as no draft legislation or even consultation response has been published at the time of writing, this does not give businesses very much time to prepare.
More details on the proposals can be found in our briefing. The FCA has separately proposed TCFD reporting requirements for asset managers, insurers and FCA-regulated pension providers (read more in our briefing). As reported in the last edition of this newsletter, premium-listed companies are already required to disclose in accordance with TCFD on a "comply or explain" basis.
See the Pensions section below regarding the TCFD obligations on occupational pension schemes, which are in force from 1 October 2021 for the largest schemes and for master trusts.
The evolution of ESG-linked financial incentives
As we emerge from the pandemic, the importance of responsible business and sustainability has never been so clear. From the growing efforts worldwide to avert the climate emergency, to public action on racial injustice, society at large is increasingly focused on confronting a broad range of issues. And, of course, there is growing expectation that investors and corporates will play their part.
The evolving regulatory environment also continues to push ESG issues to the top of the agenda, but increasingly there is emphasis not just on the legal liability and reputational damage that may result from poor ESG performance (which has been a focus of due diligence exercises and corporate governance provisions for some time now) but also the opportunities that strong ESG performance may provide for a business to flourish. There is growing recognition that financial rewards can be gained through embracing the challenges of the future – or put another way, that companies will do well by doing good.
Asset managers are particularly well placed to promote sustainable and responsible practices through active management of their portfolio companies.
In this thought-provoking article, we explore potential ways of using ESG KPIs in incentivisation schemes at the asset level to drive behavioural change. In doing so, we also look at market developments in relation to listed company remuneration packages linked to ESG targets, ESG-linked debt facilities and hedging products and impact fund ESG-linked carried interest structures. We also explore some of the difficulties that may arise when adopting ESG-linked financial targets.
The rise of the B Corp
B Corporations or "B Corps" are businesses that 'meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose'. Being a B Corporation demonstrates a company's commitment to its stakeholders and the environment, both now and over the longer term.
Worldwide there are over 4,000 B Corporations, across 153 industries and 77 countries. An increasing number are publicly traded – admittedly on overseas markets so far but the FT recently reported that the London Stock Exchange is about to get its first listed B Corps.
Given the increasing focus on stakeholder governance and sustainability from investors, employees, customers, governments and regulators, it is not surprising that B Corporations are attracting attention. By being a B Corporation, businesses can demonstrate they are trying to create a positive impact for their employees, communities and the environment.
Some large household names and private equity firms already have B Corporation status, including Helios Investment Partners, TowerBrook Capital Partners, Ella's Kitchen, Innocent, Pukka, Bookshop.org and Patagonia (view a full list of all B Corporations).
Our briefing looks at the pros and cons of B Corps status in more detail.
Global growth in climate change litigation
Climate change litigation is amplifying and, gradually, we are starting to see more cases being brought successfully by climate change activists, both in the form of private law duties and through judicial review regimes. In both the Netherlands and Germany we have seen claims founded on international law and human rights standards brought by activists against private companies and in a ground-breaking Australian case a court found the Minister for the Environment had a duty to protect young people from the effects of climate change.
We are also starting to see attempts to utilise existing financial disclosure regimes to try and pressure corporations into publishing additional ESG-related information that give rise to so-called "greenwashing" allegations. Businesses need to be mindful of these developments in the toolkit of claimant lawyers and carefully consider how developing ESG regulations may lead to unintended litigation risk.
Door opened for value chain litigation
A series of cases have recently been brought in which English Courts have declined to dismiss claims alleging novel duties of care against UK companies for alleged harms connected with their overseas business operations. This builds on a policy decision made by the Supreme Court in Vedanta Resources Plc v Lungowe  UKSC 20 to allow novel cases to progress to trial. Claimants have leveraged this to bring even more novel claims, with a new focus on so-called "value chain" liability whereby UK-domiciled businesses are said to be legally liable for the acts of an overseas-based supplier or customer. The collective effect of this growing body of case law is that UK-domiciled defendants face growing litigation risk in respect of alleged harms connected with their global value chains, particularly in relation to business ethics and human rights and environmental practices. For more on this, see our recent articles on Josiya v BAT and Begum v Maran.
Interestingly this is developing at a time where the EU is looking to essentially introduce similar "value chain" liability regimes via regulation and, taking a different approach, where the US Supreme Court has declined to recognise a similar duty in the US. These developments, and the fundamental divergences between the EU, UK and US, is something for businesses to take heed of as the ESG agenda matures globally. For more on these global developments, see our recent summary of the Nestlé decision and EU mHRDD (mandatory Human Rights Due Diligence) regimes.
Please visit our COP26 Hub for news and views and key announcements from the UN Climate Change Conference 2021 which will be held in Glasgow from 31 October to 12 November 2021.