Managing ESG Litigation Risks

• Greenwashing: Greenwashing is the practice of making misleading claims which suggest that a product, service, brand or business is better for the environment than is in fact the case, and is one of the biggest issues for international advertising regulators today.    
  
  The UK advertising regulator, the Advertising Standards Authority (“ASA”), takes a strict view of misleading environmental claims.  The ASA upholds complaints even in relation to green claims that are specific, true and accurate, if they give a misleading overall view of an advertiser’s environmental impact.  It recently upheld a complaint against ads from a major oil and gas producer that said: “In the UK, 1.4 million households use 100% renewable electricity from [Provider]”.  There was no suggestion that this claim was untrue, but it was judged to give a misleading impression of the company’s overall environmental impact. 
  
  This strict approach has been criticised for its potential chilling effect on discussing environmental improvements (so-called “greenhushing”). The ASA’s view is that advertisers in polluting industries must put green claims in the context of the advertiser’s overall environmental harm, for example with wording such as “We know we have a long way to go, but…”. 
  
  The ASA cannot impose monetary penalties or make legally binding orders.  It is therefore significant that the UK’s statutory consumer regulator, the Competition and Markets Authority (“CMA”), is also investigating greenwashing.  The CMA can take court action seeking fines and other orders, but there is also a legislative proposal to allow the CMA to impose fines up to 10% of an advertiser’s worldwide turnover.  If this becomes law, misleading advertising will be a business-critical issue.
• Shareholder activism: Shareholder activism refers to shareholders exercising their rights in order to force change and impact the governance, performance or strategy of a company.  While minority shareholders do not manage the daily operations of a company, there are methods shareholder activists can employ to influence a company’s board of directors.  For example, they can bring about changes to board structure, commence civil claims against management and publicly call for transformational change by way of company reorganisation or mergers and acquisitions (“M&A”).  Activist campaigns can also adversely impact a company’s reputation.
  
  Shareholders are becoming focused on ESG issues and shareholder activism is increasingly influencing corporate agendas.  Successes of shareholder activists in the oil industry are one of many signs of mounting and effective pressure from investors to enhance companies’ performance and disclosures on ESG criteria, and the focus is shifting to other sectors, including the LSHC sector, and their supply chains. 
  
  Shareholder activism can have a positive impact on the value, performance and decision-making of a company, and aligns with the general duties of directors to promote the success of a company for the benefit of its members.  In the ESG context, it can also help ensure that corporate disclosures on environmental issues are consistently accurate.  For example, companies who implement the recommendations of the Task Force on Climate-related Financial Disclosure (“TCFD”) must report and disclose information on environmental matters (see our article here on the TCFD’s recommendations).  Shareholder activists may seek to increase the environmental commitment of these companies and exploit any differences between the disclosures that are made and separate green claims (for example, if a company claims it will be Net Zero by 2030 but its TCFD report suggests otherwise).  
• ESG due diligence: Companies going through M&A may seek to maximise share price by way of their green credentials – for example, those with lower water usage, cleaner supply chains and stronger environmental commitments may demand a higher premium.  Similarly, a negative environmental record may cause a company to have a lower valuation and/or other financial and reputational risks.  
  
  Understanding a company’s environmental record is therefore important and may increase the due diligence carried out during a corporate transaction.  Companies in the LSHC sector going through M&A should take care in preparing environmental due diligence materials, such as examining environmental data to ensure that any credentials are not exaggerated.  Prospective buyers may wish to consider whether business practices are compliant and whether they will be regarded favourably by stakeholders, particularly in relation to supply chains and carbon emissions.  This may also extend to compliance with any ‘soft laws’ and/or industry standards expected for the LSHC sector.  The giving of ESG warranties and any failure to disclose ESG issues may result in an increased risk of litigation post-completion.  
  
  Many companies in the LSHC sector should also be aware of the Corporate Sustainability Due Diligence Directive (“Directive”).  Whilst the Directive does not specifically target LSHC companies, for those in scope it will significantly change the approach and due diligence that must be undertaken for supply chains.  For more information on the Directive, click here to access the CMS CSDDD Navigator and here for our latest article. 

We have mentioned three litigation risk areas above, but there are others out there, such as the growth of class actions and collective redress.  Although litigation risks cannot be eliminated, they can be managed and incorporated into a company’s risk management strategy.  Companies in the LSHC sector and their legal advisors should look ahead to proactively manage their risk environment and exposure, both in terms of current and emerging risks that arise, as customer and shareholder expectations change and the focus of lawmakers shifts towards ESG issues.  

Key elements to consider:

• Advertisers in the LSHC sector should ensure that their environmental claims are true, accurate and specific, and not unfairly minimise their business’s overall environmental impact.  Claims must either take into account the full lifecycle of a product or service, or must make clear that they only relate to part of that lifecycle.  “Green” imagery, logos and symbols can all contribute to a misleading impression. 
• Any green claims must be properly substantiated, which in a technical area may involve significant effort and cost.  Any forward-looking claims (i.e. “We’re going Net Zero by 2030”) should be substantiated with a clear, costed plan, committed funds, and a record of on-track progress.
• Companies in the LSHC sector should seek to maintain good relationships with major shareholders (including understanding and addressing their concerns).  If a company is able to do this and effectively communicate its strategy and how it is maximising value for its shareholders, it may be less susceptible to challenge and shareholder activism.
• Shareholder activist activity across the LSHC sector should be monitored to understand common avenues of attack and to ensure that companies are not vulnerable in these areas.  This includes conducting regular strategic reviews to identify potential areas of challenge and monitoring accordingly.  
• As part of any corporate transaction, LSHC companies should ensure that ESG due diligence is carried out in relation to environmental claims, with appropriate ESG specific warranties entered into and disclosure given where required.