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Viewpoints

| 1 minute read

The rise (& risk) of false greenwashing claims

A report by the New Climate Institute has recently found that many large companies are routinely exaggerating or misreporting progress on tackling climate change. The report encourages greater regulation, instead of relying on consumer and shareholder pressure to drive corporate action.

Whilst regulatory changes take time, consumer and shareholder pressure can be brought to bear now. The increased public scrutiny of all things ESG (especially by ethical investors), means that PLC’s (and their directors/senior managers) need to be very careful to ensure that their published ESG statements and policies do not fall foul of the provisions of the Financial Services and Markets Act 2000 (FSMA).

A company will be liable to pay compensation to those who have suffered loss as a result of a misleading statement in its published information relating to those securities, or an omission of something required to be so published, or a dishonest delay in publishing such information (section 90A (and Schedule 10A) of FSMA). Separately claims can be brought in relation to false statements published by the company in prospectuses (section 90 of FSMA).

Whilst claims under FSMA are relatively novel there is a marked increase in their use and FSMA is seen as another tool in the shareholder armoury (alongside derivative actions - note the recent announcement by environmental charity ClientEarth to bring a claim against the board of Shell). Claims under FSMA are likely to be pursued by investment firms committed to ethical investment, rather than by activist environmental organisations.

It is worth noting that not only is the company itself at risk of a claim but so too are the person(s) discharging managerial responsibilities (i.e. any director or senior manager of the issuer) if they knew about the wrongful statements and omissions. This is because the issuing company could seek to lay off its liability so that personal liability can arise in appropriate situations.

Companies will be the innovators that find the solutions to the climate crisis, but they must be subject to scrutiny and regulation Mitigation of climate change depends on innovation; companies have, and will continue, to play a central role in finding and scaling up solutions for deep decarbonisation. These efforts need urgent acceleration. The findings of this report indicate that regulators should not rely on consumer and shareholder pressure to drive corporate action. Companies must be subject to intense scrutiny to confirm whether their pledges and claims are credible, and should be made accountable in the case that they are not.

Tags

corporate, dispute resolution, sustainability and esg, esg reporting, directors duties