“How many times and in what contexts do the words “green”, “eco” and “sustainable” appear in your company’s financial statements, press releases and marketing materials?”
Although this question has probably not yet featured in a proposal for Directors & Officers liability insurance, it is one which external regulators and other stakeholders are examining with increasing frequency with the spectre of legal liability lurking not far behind. Perhaps therefore it is one on which companies should be reflecting internally and about which boards should also be seeking to gain greater visibility.
The problem
It seems that that the scale of the challenge is already recognised in some quarters. Recent research conducted by Censuswide surveying 150 UK banking executives found that although 100% of UK banking executives say that sustainability is integral to their business strategy, only just over half of UK banks (59%) measure their environmental impact as part of sustainability targets. The executives list the following barriers that need to be overcome in reaching true sustainability:
- the lack of universally recognised regulation and enforcement
- cultural legacies that need to be shifted,
- budget implications
- limited knowledge of the market.
Of all these issues, perhaps the first is the most pressing. The obvious danger is that well-intentioned aspirations and targets published by banks and other companies are interpreted by regulators and stakeholders as “greenwashing” or in other words without any or any adequate justification or grounding in fact or reality.
Clear and present danger
This risk of misinterpretation is not simply theoretical. One recent example of regulatory action is the UK’s Competition and Markets Authority’s (CMA) investigation of Asda, Asos and other retailers over concerns about the way their products are being marketed to customers as eco-friendly. This forms part of a wider investigation launched in January 2022 of the fashion industry as part of the CMA’s efforts to crack down on greenwashing. The CMA has said its investigation may be expanded to the transport, food, drink and beauty sectors in the UK.
The same phenomenon can be seen affecting the financial services sector. In August 2022, the Financial Conduct Authority (FCA) wrote an open letter to fund manager CEOs as it prepares to crack down on greenwashing in the alternative investment space. The FCA has said it will scrutinise hedge fund and private equity firms to assess their claims about ESG as part of a regular review of its supervisory strategy and priorities and has published its own consultation on the topic.
Nor is this regulatory scrutiny confined to the UK. In May 2022, regulators in Germany raided the headquarters of Deutsche Bank and its asset management arm DWS on suspicion that DWS had sold investment products worth $1tn as more environmentally friendly and “sustainable” than they actually were.
A few years earlier in 2019, Eni the Italian state backed energy giant was fined 5,000,000 euros by Italy’s national antitrust regulator for a misleading marketing campaign for green diesel by stressing its renewables component and unlawfully playing up the fuel’s potential in terms of greenhouse gas emissions reduction thereby deceiving consumers.
More recently, in the US, in May 2022, the U.S. Securities and Exchange Commission (SEC) settled charges against a subsidiary of BNY Mellon for misstatements and omissions relating to the use of ESG considerations in making investment decisions for certain mutual funds it managed. As part of the settlement, the investment adviser agreed to a cease-and-desist order, a censure, and payment of a penalty of USD 1.5 million.
Personal liability and the role of boards
Section 172 of the UK Companies Act 2006 requires directors to act in a way most likely to promote the success of the company. It is also the case that directors are required to have regard to the impact of the company’s operations on the community and the environment and in doing so, they must exercise reasonable care, skill and diligence. Perhaps a more relevant starting point though in the context of avoiding or minimising the risk of greenwashing claims, is the director’s non-delegable supervisory function with respect to all the company’s activities.
So, to re-frame the question posed at the start of this article, does the board have a clear understanding of the systems and controls in place to ensure that claims to sustainable credentials however well-intentioned and wherever made are properly thought through and fairly explained? Whilst in the UK there may be significant obstacles in the way of establishing personal liability against individual board members who fail adequately to address this question, this is an issue very much in the regulatory spotlight. That being so, it is one which will not have escaped the attention of potential claimants or their lawyers.
Written by Francis Kean, a Partner at McGill & Partners whose background includes as a litigation lawyer, specialising in Professional Indemnity, Financial Institutions, and Directors and Officers Insurance.
Related posts: The Better Business Act and your ESG director responsibilities; Insights into the joint D&O insurance survey
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