There is currently a trend in the ESG world of increasing regulation and investigations by regulatory bodies – these regulations and investigations will result in more widespread and detailed publicly available information on any failure by a company to comply with their ESG credentials.
One consequence of this information becoming more readily available, is that it may also provide fertile ground for litigation.
Who are the Potential Claimants?
There are two possible sets of claimants.
- The first is shareholders, and particularly shareholders in listed companies. Shareholders may claim that they were misled into relying on ESG information that later turned out to be false, with a claim being brought under either s90 or s90A of the Financial Services and Markets Act 2000 (FSMA).Section 90 applies in relation to information published in listing particulars or the prospectus, while section 90A applies to a wider scope of published information, such as annual reports and accounts and interim reports, including but not limited to directors’ reports, strategic reports and corporate governance statements.Shareholders in private companies cannot bring claims under the FSMA, but they may instead seek to rely on section 2(1) of the Misrepresentation Act 1967 (1967 Act) (section 2(1)), negligent misstatement, the tort of deceit for fraudulent misrepresentation, or breach of directors’ duties under the 2006 Act.
- The second set of claimants is those who have suffered a loss at the hands of a subsidiary – even outside the UK and where the subsidiary was not a UK registered company – where a parent company holds itself out as exercising a degree of supervision and control of its subsidiaries, but when it does not in fact do so. The failure to exercise an appropriate degree of supervision and control may constitute the abdication of a responsibility that it has publicly undertaken through its ESG disclosures, and thus leave it liable to claims.This strikes at the heart of ESG reporting and the need to report honestly and accurately.
What are the steps to mitigate ESG litigation risks?
ESG reporting is currently fraught with problems, not least because there is no single set of standards that companies must comply with.
There are several ways in which a company can reduce potential exposure to shareholder class actions. For instance, it might include assumptions, qualifications and limitations in its ESG disclosures, avoid unrealistic statements (such as ‘zero tolerance’), and educate and train directors on their duties in scrutinising and approving ESG disclosures.
Companies may also wish to commission an annual ESG Audit to provide it with an objective view on its progress in matters relating to ESG, and which can be discussed with shareholders, as well as with other investors, the media, employees and indeed the public at large.
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