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Financial services: greenwashing claims and regulatory risk

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The combination of a developing regulatory framework and heightened market expectations on both ESG disclosure and practices is creating a fertile ground for growth in litigation and regulatory sustainability-related risks for financial services firms. This is particularly the case against the backdrop of a significant uptick in claims brought by shareholders against companies and directors and the rise of climate activist litigators. Litigation funders are increasingly targeting ESG issues, enabling claimant groups to finance litigation against corporates, likely resulting in an increase in class actions; the first round of funding for one ‘ESG litigation fund’ raised almost £40 million.

In addition to the substantial and evolving regulatory disclosure requirements for financial services, greenwashing is in sharper focus for regulators and supervisors. This is seen in the UK’s anti-greenwashing rule for all FCA-regulated firms coming into force this summer and ESMA’s “Call for evidence on greenwashing”. The PRA and ECB have also heightened their expectations of how banks and insurers manage and report on their approach to climate-related risks.  

Unpacking how this relates to regulatory enforcement and litigation claims such as:

  • misrepresentation and mis-selling claims 
  • section 90/90A claims under the Financial Services and Markets Act 2000
  • breach of fiduciary duties
  • breach of directors’ duties 
  • class actions
  • regulatory investigations and fines 

CMS have been supporting financial services firms with mapping these sustainability-related legal and regulatory risks, which are primarily connected to the publication of detailed information on sustainability matters – both at entity level and in financial product documentation.  

The priority questions we address are: 

  • How is the sustainability-related regulatory backdrop impacting the level of litigation and regulatory enforcement risk? 
  • What are the likely claims/enforcement that could arise? 
  • Who is likely to make a claim? 
  • If a claim/enforcement did occur, what is the likelihood of it succeeding and how does this relate to financial impact and reputational damage for our business? 
  • For FCA regulated insurers, how might their policy holders be affected and which insurance policies might be exposed

We have various solutions to support with tackling this issue including: 

  • training sessions - typically attendees come from all areas of the business with an interest in sustainability, most commonly legal, compliance and sustainability teams, to understand more of what the risks are and potential mitigation against them; 
  • sustainability-related litigation and regulatory risk matrix – mapping the risk of claims and enforcement that could arise, bespoke to your business. The matrix increases the understanding across personnel of the nature of the claims and enforcement that could arise and how to effectively mitigate against them; 
  • board packs – directors are increasingly in the greenwashing spotlight, with the requirements on them to take responsibility for sustainability strategies. Our board packs help unpack the legal and regulatory greenwashing risks in an appropriate format for directors. 

For an initial conversation on how we can support you on greenwashing risk, please reach out to the partners listed on this page or to your usual CMS contact.

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