Q&A: Understanding ESG Disclosure Legal Risk


Environmental, social and governance investing is growing in popularity every day, but there are potential pitfalls for the unwary investor.

William Charles, litigation partner at international law firm Milbank LLP, speaks to FTAdviser In Focus about the issues of greenwashing in financial services, the potential for regulatory action to combat it and what investors should do to protect himself.

FTAdviser: How widespread is greenwashing in financial services?

William Charles: It is difficult to say exactly how prevalent greenwashing is in financial services, but it is clear that concerns are widespread and growing, both among regulators and among private investors.

The Financial Conduct Authority has identified tackling greenwashing as a key part of its ESG strategy, and its ESG director recently expressed concerns about the extent of greenwashing in the market.

For private investors, greenwashing is generally among the most frequently cited concerns in available studies.

FTA: How could greenwashing lead to regulatory enforcement against financial services firms?

BATHROOM: ESG issues are high on the regulatory agenda.

The determination of regulators to challenge greenwashing, combined with the expansion of the regulatory framework, means that companies are exposed to increasing risks of enforcement action when their ESG-related statements may be inaccurate or misleading.

New rules requiring climate disclosures (at entity level and at product level) by certain licensed asset managers (among others) were issued by the FCA in December 2021.

Meanwhile, existing rules (for example requiring fund managers to ensure communications with clients are clear, fair and not misleading) could also be applied to combat greenwashing.

Additionally, the requirements are likely to proliferate in the future: in November 2021, the FCA published a discussion paper on expanding the required disclosures to other sustainability factors (supported by a UK green taxonomy), to following HM Treasury’s Greening Finance roadmap proposals.

Greenwashing is also at the center of the concerns of the Competition and Markets Authority, which published in September 2021 a “code of green claims” for companies making environmental claims on goods and services.

Consumer protection rules and advertising standards can also be engaged, for example when companies’ advertisements about their ESG performance are found to be misleading.

FTA: What is the threat of litigation against these companies?

toilet: Disputes in the UK over greenwashing can take different forms.

Investors could sue under the Financial Services and Markets Act 2000 over alleged misleading ESG statements by companies.

In short, these claims provide possible remedies for investors in listed companies who have suffered losses as a result of false or misleading statements in (or omissions from) a prospectus or listing details (section 90), or other company announcements (Section 90A).

Claims for negligent misrepresentation or misrepresentation may also be available. All of these claims are likely to raise (to varying degrees) significant issues of dependency, causation and loss, which plaintiffs will need to overcome.


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