We all know the “carrots” applicable to good ESG performance: cheaper funding, greater customer engagement and custom from the associated improved market image. There is a proven positive correlation of good ESG performance with increased profits or improved share performance. 

As with the colloquial expression, there are also “sticks” to encourage companies to have a better ESG profile. One big “stick” is the possible litigation that can arise when a company does not do enough or gets its ESG positioning wrong, even for well-meaning companies with ESG strategies.

A number of banks and an oil major have both recently been hit with the proverbial “stick.” Increased regulation, including for example the U.S. Securities and Exchange Commission’s proposed rules on climate-related disclosure,will no doubt result in increased litigation.

In March 2022, a UK-based environmental charity issued proceedings against the directors of an oil major (of which the charity was a shareholder) for failing to prepare adequately for net zero.   The activist charity claims that the directors breached their duties, namely that they failed to act in a way that promotes the company’s success in that a director must have regard to the impact of the company’s operations on the community and the environment. This is the first example of company law being used to bring a claim for ESG compliance.  If successful, it could certainly lead to more such claims. In May 2022, a major national carrier was taken to court by environmental groups for alleged “greenwashing”. The argument was that the airline’s advertising campaigns were misleading and represented to customers that they can neutralize the carbon emissions relating to their flight. 

In October 2021, the U.S. Department of Justice and the SEC were reported to have initiated investigations into an asset manager owned by a global investment bank, after its former Sustainability Chief alleged that the company did not have a clear ESG strategy and lacked certain policies. The German financial services regulator in May 2022 raided the aforementioned investment bank’s offices on suspicion of fraudulent advertising relating to ESG investments being sold under false claims. 

Separately, the UK Advertising Standards Authority recently warned a major bank over its use of adverts to greenwash its reputation.

Whether you are a bank or a large corporate, you could be the target of regulators, industry bodies or activist shareholders using ESG as a policing mechanism. So how do you go about gathering “carrots” without being hit by the “sticks?”

All recommendations come back to the fundamentals of working on and improving a company’s ESG strategy, both in terms of setting such strategy and the methodology for implementing it.

There is nothing like some healthy competition to drive effective ESG strategy, and, as we know, this only pays dividends in funding provision, customer engagement and market image. Thus, in the first instance, strive to do better than your peers. Companies should not wait or delay implementing their ESG strategies. “First-mover” advantage is no bad thing when it comes to ESG.

Secondly, consistency is key. A key downfall for many companies is when their internal policies do not align with their external dictums. Consistency and clarity are essential to avoid a mismatch that might give rise to greenwashing claims or misleading disclosures. Beyond consistency, companies must be mindful of the broader picture. ESG is a holistic term and engages all stakeholders, from shareholders, directors and employees to the wider community with which a company may engage. 

Furthermore, ensure that your data can back up the claims you make. You must be able to back up any public statements you make with quantifiable and auditable metrics. On the topic of detail, take care of oversimplifying “green efforts”. The catchy advertising slogan or short form description of ESG efforts are very tempting, because the more complicated detail of counting carbon emissions or the methodology behind a fund’s investment, for example, are not nearly as eye catching for new customers. However, such slogans tend to be an invitation to claims of greenwashing.  Perhaps more information and disclosure remains the solution.

And finally, be flexible, always. As the market and regulation continue to evolve in this area, and the demands of an informed customer base increase, ESG strategies will need to continue to evolve with a permanent effort to improve performance and a close eye kept.

Just like the risk to our climate, the risk of ESG-related litigation is real and immediate.  Accordingly, especially given all the great “carrots” available to those who implement good ESG strategies, it is important to be spending time on assessing and de-risking your company’s exposure. To quote Greta Thunberg: “My message is that we'll be watching you.”

1 See https://www.pillsburylaw.com/en/news-and-insights/sec-issues-landmark-esg-proposal.html