As the 2020s progressed, discussions on climate change, the environment, and issues related to equality and diversity were at the top of the agenda for many.
The corporate world is no exception, with banks, energy producers and many other major businesses eager to promote their sustainability credentials through advertising, pledges, social media campaigns and a host of other initiatives.
Many of these claims are now viewed through the lens of ESG or environmental, social and governance.
It has become a hot topic in recent years, with many organisations trying to boost their sustainability credentials and public profile by developing business practices they claim to meet ESG-related standards.
But here’s the problem: ESG definitions tend to vary and are hard to pin down. That, in turn, could spell trouble for businesses looking to align with regulators and authorities.
Take the case of the UK, for example. “One of the major complexities in this space is that there is no single overarching regulation or regulation in the UK to govern ESG compliance,” Chris Ross, commercial partner at London-based law firm RPC, told CNBC via email.
“Instead, domestic and international regulation is intricate.”
He said the regulations were “administered by a different set of bodies” including the Corporate Buildings, the Pensions Regulator, the Financial Conduct Authority, the Environment Agency, the Financial Reporting Council and, “as far as European law is concerned, the European Commission”.
Ross expanded his view further, describing ESG as “an umbrella term.”
It covers “a very wide range of considerations, from climate and pollution-related issues to bribery and corruption, anti-money laundering, diversity and inclusion…health and safety, to modern slavery,” he said.
“It is practically impossible to develop a common definition,” Ross added. “In the foreseeable future, companies will need to ensure that they are within the scope of relevant laws and regulations.”
Censorship, Bans and Penalties
Today, companies that label their products or services as ESG, sustainable or similar are looking to their business practices and propositions, and are subject to scrutiny by lawyers, the public, environmental groups and regulators.
For example, in late August, consumer goods giant Unilever was banned from advertising for its Persil-branded laundry products by the UK Advertising Standards Authority.
In a detailed ruling, the ASA concluded that the ad, which described Unilever’s product as “kinder to our planet”, “could be misleading” and “must not appear again in its current form.”
In a statement sent to CNBC, a Unilever spokesman said it was “surprised” by the ASA’s decision and that the ad “has been approved to run multiple times.”
“We acknowledge this decision reflects a recent important evolution in the ASA’s approach to substantiating environmental claims, and welcome the new benchmark set by the ASA for advertisers,” the spokesperson added.
“Persil will continue to lead bold environmental improvements in the laundry space and provide evidence to support future activities in line with changing requirements”.
In the US, statements on sustainability and ESG are also under review.
In March 2021, the Securities and Exchange Commission announced the formation of a climate and ESG task force within law enforcement, saying it would “proactively identify ESG-related misconduct.”
Since its inception, many prominent figures, including BNY Mellon’s investment advisors, have been on the working group’s radar.
In May, the regulator announced that it had charged BNYMIA with “misrepresentations and omissions of environmental, social and governance (ESG) considerations in making investment decisions for certain mutual funds it manages”.
The SEC said its order found that “from July 2018 to September 2021, BNY Mellon investment advisers made or implied in various statements that all investments in funds were reviewed for ESG quality, although this was not the case. always.”
“The order found that certain funds held substantial investments that did not receive ESG quality review scores at the time of their investments,” it added.
The SEC said BNYMIA neither admitted nor denied its findings, but agreed to a reprimand, a cease and desist order and the payment of a total of $1.5 million in fines.
In a statement sent to CNBC, a BNY Mellon spokesman said BNYMIA was “pleased to resolve this matter concerning certain statements it made regarding the ESG review process for six U.S. mutual funds.”
The spokesperson added: “While none of these funds fall within the scope of BNYMIA’s ‘sustainable’ funds, we take our regulatory and compliance responsibilities seriously and have updated our materials as part of our commitment to ensuring accurate and complete communications with investors. part.” .
This photo, taken in January 2019, shows rescue workers resting after a collapse at the Vale mine in Brumadinho, Brazil.
Mauro Pimentel | AFP | Getty Images
It’s not just the financial world that has caught the SEC’s attention.
In April, it accused Brazilian mining giant Vale of “making false and misleading claims about the safety of the Brumadinho dam prior to its collapse in January 2019”.
The SEC said the “collapse killed 270 people” and “caused immeasurable environmental and social harm”.
Among other things, the SEC complaint alleges that Vale “often misled local governments, communities and investors about the safety of the Brumadinho dam through its environmental, social and governance … disclosures. .”
When contacted by CNBC, Vale – which has an “ESG portal” on its website – referred to a statement issued on April 28.
“Vale denies the SEC’s allegations,” the company said, “including allegations that its disclosure violated U.S. law and will vigorously defend the case.”
“The company reaffirmed the commitment it made immediately after the dam ruptured and has since directed it to remediate and compensate the damage caused by the incident.”
More greenwashing lawsuits
In June, the Grantham Institute for Climate Change and the Environment and the Center for Climate Change Economics and Policy released the latest edition of their Climate Change Litigation Trends report. It highlights some key developments.
“Globally, the cumulative number of climate change-related lawsuits has more than doubled since 2015,” the report said.
“Between 1986 and 2014, just over 800 cases were filed, and over 1,200 over the past eight years, bringing the total in the database to 2,002,” it added. “About a quarter of those were filed between 2020 and 2022.”
The report also noted that the greenwashing front is also gaining momentum. “Climate-related green-wash litigation, or ‘climate purge’ litigation, is picking up pace,” it said, “with the aim of holding companies or states accountable for all forms of climate misinformation before domestic courts and other bodies.”
The debate around “greenwashing” is becoming more heated, with the blame often pointing at multinational companies with rich resources and large carbon footprints.
It’s a term for what environmental group Greenpeace UK calls a “PR strategy” used to “make a company or product appear environmentally friendly without significantly reducing its environmental impact”.
Continued trend?
In Europe, Reuters reported in late May that the offices of asset manager DWS and the headquarters of its main owner Deutsche Bank were raided by German prosecutors. Reuters quoted prosecutors as saying the raid was linked to “allegations of misleading investors about ‘green’ investments.”
Deutsche Bank did not respond to CNBC’s request for a statement on the matter. In August, DWS said the allegations reported by the media were “baseless,” adding that it stood by its “annual report disclosures.” We firmly oppose the allegations made by former employees. DWS will continue to firmly support ESG investing as part of its fiduciary role on behalf of its clients. “
This summer, a number of environmental groups also filed a lawsuit against aviation giant KLM.
In a July 6 statement, ClientEarth, a group involved, said the lawsuit was filed “after airlines refused to stop promoting misleading claims that they were making flying sustainable.”
KLM said on its website that it was “committed to creating a more sustainable future for the aviation industry” but did not respond to a request for comment.
For his part, RPC’s Chris Ross said high-profile lawsuits such as the one against KLM showed “the will and resources to bring claims against large companies to test and review their ESG claims.”
Expanding on his views, Ross also referred to a resolution that retail shareholders and institutional investors submitted to HSBC in February. 2022.
“We can expect this trend of scrutiny and direct action to continue,” Ross added. “In this context, it is in an organization’s interest to ensure effective governance and strict adherence to ESG requirements to avoid or at least reduce litigation risk.”