ESG disclosures and litigation risk

There are a number of clear benefits to making ESG disclosures, including providing companies with a competitive edge, allowing businesses to uncover opportunities and providing the Board with better oversight of progress with ESG objectives.  Well formulated, accurate and precise ESG disclosures can also help to remove or mitigate litigation risk relating to ESG and sustainability issues which businesses may otherwise face, by building transparency, increasing board oversight over ESG issues and assisting businesses to identify and remedy emerging ESG risks facing their business.

In fact, there have been a number of cases brought in recent years relating to businesses' failure to make disclosures and public statements regarding ESG-related risks.  For instance, last year cases were brought in the US against Nestle, Mars and Hershey's alleging a failure to provide disclosure of child labour and modern slavery in their supply chain. 

Another notable recent case is the Australian case of McVeigh v. Retail Employees Superannuation Trust, in which a pension fund member filed a claim against an Australian pension fund, alleging that they had failed to provide adequate information in relation to the risks that climate change, and the resulting physical impacts, posed on the financial position of many of the pension fund's investments. This case has recently settled; you can view our client briefing on the settlement here.

Careful ESG disclosures detailing ESG-related risks facing a business can help businesses to reduce litigation risk and provide a defence in the face of litigation which might arise in ESG-related areas.

However, as with any disclosures, filings or public statements, businesses can be held liable for misrepresentations, misstatements or omissions in ESG disclosures. 

Given the challenges faced by businesses when making ESG disclosures, filings and public statements, it is not surprising that there has been an increase in litigation arising out of ESG disclosures and statements globally, including some very high profile cases. 

One high profile example arose from the Deepwater Horizon disaster.  Following that disaster, BP was faced with claims from investors who had purchased shares after the disaster happened but before the full extent of the disaster became clear, and who alleged that BP's public statements at the time had not accurately stated the full scale of the disaster; as well as separate claims that material statements made before the disaster in BP's sustainability statements about safety reform efforts were false.  

There have been other recent cases arising from disclosures made in relation to workplace safety requirements in the supply chain, the treatment of workers and animals by companies, health, safety and security, as well as the risk posed to companies' investments by underlying vulnerabilities to climate change.

Whilst many of these cases have been brought in the US courts, litigation risk looms large over businesses operating in the EU as a result of continuing regulatory developments, and published guidance, which will directly affect businesses in the UK. In 2017, the Task Force on Climate-related Financial Disclosures ("TFCD") issued some ambitious recommendations for financial disclosures, which were designed to be implemented in the near-term future. The UK Government has since set out its expectation that all listed companies and large asset owners should disclose in line with the TFCD requirements by 2022. 

This was followed in 2019  by the release of the Bank of England's Prudential Regulation Authority supervisory statement for banks and insurance institutions, which set out the PRA's expectations concerning the strategic approach that those institutions should take to climate change risk, which included developing disclosure on financial risks from climate change.

In July 2019, the Government published its Green Finance Strategy, in which it stated that it would support quality disclosures through data and guidance, as well as "establishing a joint taskforce with UK regulators, chaired by Government, which will examine the most effective way to approach disclosure, including exploring the appropriateness of mandatory reporting". 

The recent COVID 19 pandemic will inevitably have an impact on this area.  Despite warnings that the resulting global downturn may divert attention from ESG priorities,  the pandemic has in fact brought  ESG issues into sharper focus, with leading global institutions calling for governments to ensure that they use the pandemic as an opportunity to ensure environmentally and socially sustainable economic recoveries.  ESG disclosures are likely to be a key tool relied on by governments and industry, and recent developments have reflected this:

• The Climate Financial Risk Forum published their 2020 Guide in June 2020, which includes detailed guidance on the disclosure of climate-related financial risks.
  
  
• The Committee on Climate Change (CCC) presented its annual report to the UK Parliament in which it recommended the continued use of the TCFD framework.
  
  
• In November 2020, the UK Government set out its roadmap for the transition to full alignment with the TCFD framework across all sectors.

These developments and increased focus highlight the need for businesses to invest time and energy in developing their ESG disclosures, filings and public statements, whilst taking care to mitigate potential litigation risks.

Businesses should strive to strike a balance between making statements to articulate their sustainability agenda and achievements, whilst also ensuring that disclosures and public statements are made in such a way that they help to mitigate limitation risks and avoid giving rise to unnecessary risk from the making of the statements themselves. The following steps should be taken to minimise the risk that ESG disclosures and public statements may lead to liability in the future:

• Treat ESG disclosures and public statements with the same diligence you would any other financial disclosure or public statement. ESG disclosures should be audited and verified to a high standard.  Businesses must ensure that the Board has full oversight over all ESG disclosures and public statements.
  
  
• The introduction of comprehensive ESG disclosures may require changes to businesses' governance, risk assessment and/or auditing processes. These changes can be time consuming, and businesses should look ahead and prepare properly if changes are required before businesses can provide detailed ESG disclosures.
  
  
• Businesses must be careful to guard against including imprecise, or aspirational language in ESG disclosures or statements where possible. Appropriate caveats to ensure that it is clear that those statements are simply aspirational, rather than definitive commitments, should be included where necessary.
  
  
• Multinational businesses must be careful to guard against liabilities which may arise overseas across all of the jurisdictions in which they operate.

There is much still to do in this field, and pressure on businesses to ensure that economic growth is focused around sustainable practices continues to grow.  Although the immediate impact of the COVID 19 pandemic and subsequent economic fall-out may deflect from the sustainability agenda, ESG remains a priority for many businesses, and we are already seeing businesses and institutions start to think innovatively around how they can build back better. If businesses adopt a proactive but prudent approach to the provision of ESG disclosures and statements, whilst also carefully and strategically deploying disclosures to help mitigate litigation risk where necessary, then the opportunities presented by these developments can rightly be viewed as an opportunity rather than a risk.