A focus on ESG litigation

Osborne Clarke on how seriously companies should take greenwashing accusations

How do you see ESG litigation developing?

The concept of ESG is not a new one – but the attention it has gained is fresh and here to stay. Put simply: no-one has solved the climate crisis, globalisation has made supply chains harder to monitor, and levels of public scrutiny over companies’ actions (and omissions) has never been higher. The result is that governments and regulators will continue to produce rules and guidelines which demand responsible action by businesses. The trend we’re seeing more of is individual stakeholders using any means available – including litigation – to hold businesses to account where they perhaps don’t feel governments and regulators are acting quickly enough.

Which parts of the acronym do you think will generate the most litigation?

It’s perhaps artificial to carve up ESG when it comes to litigation – if a company is acting in a way which is not sustainable, that activity will arguably involve environmental sins, antisocial conduct and questionable governance at once. The directors’ statutory duty to promote the success of the company explicitly includes reference to the long-term impact of the company’s operations on the community, environment, suppliers, employees. Recent high-profile litigation has focused on governance (ie, derivative actions) in order to try to force a change in company activities. Businesses in the private sector need also to be prepared for more class actions focusing on supply chain practices and seeking compensation related to environmental issues such as carbon emissions and pollution.

What constitutes greenwashing under UK law?

Under English law, there is no single legal definition of ‘greenwashing’. However, the term is commonly used to describe an entity making misleading or unsubstantiated claims about the environmental benefits of its products, services, or practices. The focus has developed swiftly from laws aimed at protecting consumers from false advertising to preventing the anti-competitive nature of greenwashing in a B2B context. It’s not just about what label you put on a product, but how you promote your business more generally. Companies don’t realise that every single statement (whether on their websites, in their sustainability reports, in their recruitment campaigns) that talks about their sustainability credentials is a potential hostage to fortune.

What has been the most significant greenwashing claim to date in the UK and what does it demonstrate?

So far in the UK, there haven’t been many legal cases that could definitively be categorised as greenwashing. There are some examples of derivative actions aimed at forcing a change of approach by companies, but the most high-profile examples of greenwashing have resulted in fines and investigations by the Advertising Standards Agency, rather than legal claims in the courts. Additionally, the Competition and Markets Authority has initiated investigations into green claims made by several prominent companies. The UK’s Financial Conduct Authority has also indicated its intention to crack down on greenwashing within the financial services sector by implementing an anti-greenwashing rule effective from 31 May 2024. This demonstrates that regulatory enforcement is currently the primary battleground for tackling greenwashing in the UK

How are most consumer/competitor legal claims against misleading environmental claims being made and funded in the UK?

As above, most greenwashing claims are pursued by regulators rather than consumers or competitors. However, this situation could change significantly in the coming years as large companies become subject to mandatory sustainability disclosure obligations. This could potentially lead to a surge in litigation based on misleading disclosures in published materials, such as under s90 and 90A (now schedule 10A) of FSMA 2000. The UK is increasingly becoming a favourable legal market for class actions, with a mature litigation funding market and a growing number of claimant law firms operating on a conditional fee agreement basis. Consequently, there may be an increase in class actions against companies engaging in greenwashing practices in the future.

How seriously should companies take the threat of greenwashing accusations?

Companies in the UK should take the threat of greenwashing accusations very seriously. With increasing public awareness and concern about environmental issues, consumers are becoming more discerning and demanding when it comes to sustainability claims. Regulatory bodies, activist groups and shareholders are also actively monitoring and challenging companies’ sustainability claims and practices.

What are the potential legal liabilities for those accused of greenwashing in the UK?

Where a regulator investigates a business for false or misleading green claims it has wide ranging investigatory powers and a range of penalties that can be imposed. At its most serious, both a business and senior personnel within the business can be criminally prosecuted and face a fine or, for individuals, possible imprisonment. However, more typically, businesses may be required to commit to undertakings to prevent greenwashing, which will be enforced by the courts if necessary. In addition, businesses may have to offer compensation or some other form of redress if the greenwashing has influenced consumer transactions and may need to commit to removing any misleading advertising. Outside of regulatory investigations, businesses and individuals are at risk of the usual array of common law legal action to recover damages in contract and tort (including claims for breach of contract, misrepresentation or even fraud), as well as the applicable statutory remedies (for example, individual directors can be disqualified for the most egregious conduct or otherwise fined for reckless or dishonest reporting under the Companies Act 2006).

How can companies best prepare themselves (inc what steps can they take to ensure their environmental claims do not open them up to the risk of legal action)?

The potential developments in ESG litigation are driven by a combination of factors, including societal expectations, regulatory changes, investor demands, and the increasing recognition of the financial and reputational risks associated with poor ESG performance. It is important for companies to proactively assess and manage how their business impacts the environment and human rights at every stage of the value chain. This includes engaging with stakeholders, taking the time to really understand their environmental impact and their supply chains, ensuring accurate reporting, and proactively tracking evolving legal requirements to mitigate the risk of litigation. To meet the raft of new regulatory obligations, businesses also need to collect and store significant volumes of sustainability data and implement new ESG compliance and governance systems.

What legal defences are available to those facing claims?

Defences to claims by regulators include demonstrating adequate due diligence processes, being able to substantiate the claims in question and evidencing compliance with the relevant regulations. Failing that, if the greenwashing allegation is essentially well founded, a company should focus on demonstrating that it took reasonable steps to ensure that the green claim in question was accurate and it had appropriate systems and controls in place regarding making green claims. It should also take immediate corrective action.

How much experience does Osborne Clarke have working on ESG claims generally and greenwashing specifically? Do you have a highlight case and if so why?

Osborne Clarke is currently advising clients who are subject to regulatory investigation for misleading green claims. Our ongoing work means that we have first-hand knowledge of the standards regulators expect businesses to meet to achieve compliance, particularly around the Green Claims Code. This contentious experience has proven invaluable when helping clients assess their current claims, review substantiation, devise playbooks and train marketing and business teams.

What are Osborne Clarke’s plans to build this part of its disputes practice and why? Are there one or two partners with a particular focus on this area?

Around our international network, our lawyers advise across the extensive range of legal services that are touched by ESG and disputes lawyers are just part of the multi-disciplinary team. As the web of public and regulatory interest and legislation grows, so do the contentious risks for our clients and so the team is expanding rapidly.

Katie Vickery and her team regularly advise clients in relation to misleading environmental claims enforced by the CMA and Trading Standards as well as wider ESG compliance, circular economy, deforestation-free products and supply chain risk management. With regard to governance, both Jane Park-Weir and Charlie Crowne are recognised experts in the field of directors’ and officers’ duties, ethics, corporate reporting obligations. Jane has a particular focus on handling complex corporate disputes, including derivate actions against directors and unfair prejudice claims. Charlie has a wealth of experience advising clients in relation to ESG and greenwashing risks in the financial services sector, including pension and investment funds.

Osborne Clarke’s disputes and risk practice group also holds itself accountable in supporting the firm’s broader ESG strategy. Osborne Clarke For Good is the firm’s way of ensuing it’s a good corporate citizen, a good employer and a good business.