Corporate regulators across the world now require companies to proactively assess, disclose and manage the key climate risks they face in a world which is rapidly transitioning towards a net zero emissions future.
This regulatory expectation is enhanced through global cooperation and collaboration, with the International Sustainability Standards Board – established following the conclusion of the 26th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP 26) in Glasgow in November 2021 – now working to develop baseline sustainability disclosure standards that will inform local regulatory approaches and the climate risk disclosure and management practices of private entities. Under the ISSB’s current proposals, companies would report on climate and other sustainability-related risks across governance, strategy, risk management and metrics and targets, and would be required, under a consistent disclosure framework, to identify how those risks specifically impact on enterprise value in a given financial year. Following a public consultation process completed in August 2022, these standards may be released as soon as the end of 2022.
Likewise, the Basel Committee on Banking Supervision published a new checklist for banks in June 2022, designed to enable them to identify, monitor and manage all material climate-related financial risks to which they are exposed. This guidance is expected to be imminently applied by the Committee’s 45 member banking regulators, including those from the United States, the United Kingdom and Australia.
Apart from this regulatory expectation, companies are also facing heightened pressure from their customers, suppliers, bankers and insurers to not only inform the market of the climate risks they face, but to also set emissions reductions targets and transition their businesses away from both direct emissions and exposure to high emitting customers and suppliers in the value chain.
The 27th Conference of the Parties to the UN Framework Convention on Climate Change (COP 27), to be held in Egypt from 6 to 18 November 2022, will continue the impetus for action. COP 27 is widely seen as the first ‘COP of implementation’ – moving beyond aspirations and focusing on how to achieve net zero targets through a just and inclusive energy transition and public-private partnerships, as well as the rapid progression of climate resilience and adaptation projects to ensure food, water and infrastructure security. Underpinning both of those objectives will be the additional focus on mobilising and expanding on the US $100 billion in climate finance committed by advanced economies at COP 26 to support climate transition and adaptation in emerging and developing markets.
With this unprecedented momentum in the public and private sectors, there will be significant business and liability risks for companies as they seek to respond to the dynamic and continually-evolving regulatory, market and community expectations in relation to climate change – particularly in setting their own emissions reductions goals and putting in place climate transition plans and targets.
This article explores the risk corporate boards face in this context, particularly in relation to greenwashing liability. This liability can manifest both in the failure to disclose all material climate risks that a company is exposed to (whether intentionally or not) and in committing to emissions reductions targets without putting in place the internal governance and business processes required to achieve those targets.
As the Secretary-General of the International Organisation of Securities Commissions (IOSCO) notes, ‘greenwashing isn’t always intentional’ but it is ‘very widespread’, and has the potential to materially mislead investors and consumers. It can also contribute to economic and financial instability in the long-term due to overstatements in corporate collateral and business value and related distortions in capital market assumptions. These risks have caused IOSCO, and domestic regulators across the world, to make the mitigation of corporate greenwashing a priority for 2022.
This article concentrates on the nature of greenwashing liability for boards – in terms of regulatory breaches and shareholder activism and class actions – in three jurisdictions: the United States, the United Kingdom and Australia.
On 21 March 2022, the United States Securities and Exchange Commission (SEC) issued a proposed mandatory climate disclosure rule for public companies. Following the conclusion of the public comment period in June – which saw nearly 15,000 responses provided – the SEC is now seeking to finalise the rule, which is expected to come into effect by the end of 2022.
The SEC’s proposed rule is based in part on the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) – which have received widespread acceptance for setting globally recognised, consistent and effective climate risk identification and disclosure standards. Under the proposed SEC rule, publicly listed companies will be required to disclose, in their registration statements and periodic reports, the material climate risks to which they are exposed, their governance and management of those risks, and their scope 1 (direct), scope 2 (indirect from purchased electricity) and material scope 3 (indirect from upstream and downstream activities in the corporate value chain) greenhouse gas (GHG) emissions.
Additionally, if a company has adopted a climate transition plan, it will need to give a description of that plan along with the relevant targets and metrics, and if it has publicly disclosed climate-related targets or goals, the company will need to disclose to the market:
- the scope of activities encompassed within the targets or goals, the time horizon envisaged to achieve them and any interim targets that have been established;
- how the company in fact plans to achieve the targets or goals;
- an update each year of progress towards achieving the targets or goals; and
- the extent to which carbon offsets and renewable energy certificates contribute to achieve the targets or goals.
For large companies, the new rule is proposed to commence in fiscal year 2023, so that it would apply to filings in 2024 and subsequently, with smaller companies given an extra year grace period. The reporting of scope 3 emissions will also be deferred for all entities for one year after the scope 1 and scope 2 disclosure requirements commence, designed to enable companies to become familiar with the new regulations and undertake the considerable work required to assess the emissions of customers and suppliers throughout their value chains.
In justifying the proposed rule, SEC Chair Gary Gensler said that it is ‘driven by the needs of investors and issuers’ and reflects the ‘demand for consistent and comparable information that may affect financial performance’. Mr Gensler also said that there is now a need for ‘clear rules of the road’ to hold companies to account for their stated climate goals.
The proposed climate disclosure rule has clear greenwashing liability implications for United States public companies. Indeed, once the rule is finalised, boards that selectively or inaccurately disclose the climate risks their companies face, or that leave their climate-related goals in the form of aspirational targets and commitments, without explaining to the market what those aspirations mean for the company’s operations on a practical level and how the company is progressing in its transition and implementation plans, will be exposed to regulatory action and potentially significant fines and other penalties.
Additionally, on 25 May 2022, the SEC announced proposed rule and form amendments that would require registered investment advisers, registered investment companies and business development companies to disclose the specific ESG factors they purport to take into account when making investment decisions. The proposed amendments are specifically intended to address harm to investors that may be caused from greenwashing and, in the words of the SEC Chair, the ‘huge range of what asset managers might disclose or mean by their claims’ concerning their ESG investment focus.
If adopted as proposed, these rule and form amendments would require specific disclosure regarding ESG strategies in fund registration statements, in the management discussion of fund performance in annual reports, and in adviser brochures. Funds which focus on the consideration of environmental matters in their investment decisions would also need to disclose the GHG emissions relating to specific investments within the fund.
In the United Kingdom, since 6 April 2022, over 1,300 of the largest registered companies and financial institutions have been required to disclose climate-related information as part of their annual financial reporting. Initially, these new disclosure requirements apply to United Kingdom companies which have more than 500 employees and have listed securities, or that are banking companies or insurance companies, as well as to United Kingdom registered companies that have more than 500 employees and a turnover of more than £500 million.
Notably, the new regulations require a regulated company to, among other things, describe:
- the actual and potential impacts of the principal climate-related risks and opportunities it faces on its business model;
- the resilience of the company’s business model and strategy taking into account a range of climate-related scenarios;
- the company’s governance arrangements in relation to assessing and managing climate-related risks and opportunities; and
- a description of the targets used by the company to manage climate-related risks and realise climate-related opportunities ,and of performance against those targets.
In the context of this enhanced climate disclosure framework, the United Kingdom Financial Conduct Authority (FCA) identifies in its Climate Change Adaptation Report that it sees greenwashing as a ‘material risk’ and expects all companies to both ensure ‘clear and accurate ongoing disclosures to consumers [in making] ESG-related claims’ and verify that any net zero commitments are appropriate, achievable and measurable.
The United Kingdom Competition and Markets Authority (CMA) has also published a Green Claims Code (Code), which sets out six core principles intended to help companies avoid greenwashing. The Code will be used by the CMA to actively monitor, investigate and prosecute greenwashing abuses arising from inflated corporate sustainability claims. Indeed, the CMA commenced a ‘full review’ of both online and offline misleading ‘green claims’ at the start of 2022, and has warned that ‘any business that fails to comply with the law risks damaging its reputation with customers and could face action from the CMA’.
Additionally, following the conclusion of COP 26, the United Kingdom Government established a Transition Plan Taskforce (TPT). The TPT has a two-year mandate to develop a ‘gold standard’ for climate transition plan disclosures. The TPT’s work will be drawn on by the Government to require United Kingdom financial institutions and listed companies (some as early as 2023) to develop and publish rigorous and robust transition plans that will detail how they will adapt and decarbonise to correspond with the United Kingdom’s move to a net zero emissions economy by 2050. The TPT’s ‘Call for Evidence’, inviting input from across the economy and civil society to identify the key elements and principles that should inform a ‘Sector-Neutral Framework’ for private sector transition plans, closed on 13 July 2022, and the TPT is due to present a draft Framework to the Government by late 2022 or early 2023.
The work of the TPT is specifically intended to respond to the increasing number of United Kingdom companies that are making commitments to achieve net zero emissions, meaning that it is necessary to ‘enable stakeholders to hold companies to account for their emissions reduction pledges’, and to thereby ‘mobilise the capital needed to accelerate the net zero transition’. In articulating clear standards and requirements for transition plans, the new regulatory framework is also intended to directly ‘support efforts to tackle greenwashing’.
This global greenwashing regulatory framework is also now shaping regulatory developments in Australia.
Australia’s primary corporate regulator, the Australian Securities and Investments Commission (ASIC), has prioritised ‘continu[ing] to undertake targeted surveillance’ to ‘foster continued improvement in the standard of climate change governance practices in our market’ and ‘promote the provision by listed companies of reliable and decision useful climate-related disclosures that will enable investors to make fully informed decisions’. ASIC also has a dedicated workstream which concentrates on the identification of ‘potential greenwashing of financial products’ and possible ‘misleading statements relating to environmental, social and governance claims, particularly across social media’.
Inadequate disclosure of climate risks – whether intentionally or negligently – could result in liability for listed entities under Australia’s continuous disclosure laws, and for all registered companies required to prepare and file annual financial reports, could lead to a breach of the obligation to present a true and fair view of the financial position and performance of the company.
Additionally, the Australian Prudential Regulation Authority (APRA) – which regulates Australian banks, insurers and superannuation funds – released its new Prudential Practice Guide CPG 229: Climate Change Financial Risks (CPG 229) in November 2021. Compliance with the climate risk management and governance principles outlined in CPG 229 is necessary for regulated entities to meet the direct obligations they have to put in place effective risk management and governance frameworks under current APRA Prudential Standards.
Best-practice management of climate change financial risks is identified in CPG 229 to include identifying, measuring, disclosing and reporting the specific risks an entity faces, as well as providing evidence of climate risk management and mitigation plans. In terms of greenwashing liability, the inaccurate identification and reporting of material climate risks, or the commitment to aspirational GHG emissions reduction targets without more, could cause a regulated entity to be in breach of APRA’s enhanced prudential regulatory framework.
Indeed, APRA has warned regulated entities that failure to accurately identify and disclose climate risks an entity faces, and the means for mitigating and managing those risks, is not justified simply because there is ‘a lack of absolute certainty in relation to climate risks’ future impacts’.
Finally, the Australian Competition and Consumer Commission (ACCC) has specifically identified greenwashing as a 2022-2023 enforcement priority. This is intended to respond to the fact that ‘many consumers are increasingly considering the environmental impact of the products and services they buy’ and the ACCC’s concern that ‘some businesses are falsely promoting environmental or green credentials to capitalise on these consumer preferences’.
Apart from the risk of regulatory enforcement action relating to deficient climate risk disclosure or setting emissions reduction targets without taking meaningful steps to achieve those targets, boards must also now be prepared to deal with shareholder agitation in those circumstances.
Indeed, the global trend towards shareholder activist strategies seeking to compel companies to provide more complete and effective climate risk disclosure and/or to take positive measures to achieve future emissions reductions targets (whether committed to or not) is expected to continue in coming years.
In the United States, there was a significant increase in the number of climate-related shareholder resolutions filed in the 2022 proxy season, with 236 resolutions filed that had an average support vote of 31.6% and 15 resolutions achieving majority support.
These resolutions sought to – among other things – compel boards to enhance the quality of their climate disclosures, commit to mandatory emissions reductions targets, and implement specific measures to achieve those targets.
The intense public relations and stakeholder management pressure faced by companies subject to a resolution is reflected by the fact that, of the 236 climate-related resolutions filed in the 2022 proxy season, 110 were withdrawn in exchange for companies agreeing to various climate action, such as setting science-based targets to reduce emissions.
In the United Kingdom, the 2021 proxy season saw a marked trend towards boards supporting the ‘Say Yes on Climate’ initiative. This is a campaign intended to make it standard practice for boards in the United Kingdom, Europe and the United States to voluntarily (without the need for shareholders to agitate the matter) place their climate transition plans before shareholders at their annual meetings for an advisory vote.
For example, in April 2021, Glencore put its climate transition plans to shareholders at its annual meeting, resulting in a 94% vote from shareholders in favour of the plans, and a commitment from management to reach net zero emissions by 2050, and to also cut emissions by 40% by 2030.
This proactive engagement between boards and shareholders is a positive development, and can assist boards to take shareholders ‘on the climate journey’ in a collaborative, transparency and consultative process, and in doing so to achieve a smooth transition plan for the company and avoid potential action by shareholders to intervene in the company’s management or to initiate class actions (examined in further detail below).
In Australia, climate-related shareholder activism has also increased in the last few years. In a recent empirical analysis, it was found that, between 2002 and 2019, there were 83 ESG-related shareholder resolutions proposed for Australian listed companies, with 80% of those put forward between 2017and 2019. Out of these resolutions, 48 were related to climate change.
Unlike in the United States, shareholders in Australia do not have the general power to propose non-binding ‘advisory resolutions’ absent an express corporate constitutional provision authorising such resolutions. However, in agitating for companies to take action on climate change, shareholders typically put forward both a special resolution seeking to amend a company’s constitution to give shareholders specific power to issue advisory resolutions, as well as a substantive ordinary resolution calling for a company to take steps to mitigate climate risks (for example, through lower GHG emissions, eliminating exposure to thermal coal, and/or transitioning away from high emitting projects or investments).
While resolutions proposing constitutional amendments to allow advisory resolutions – requiring 75% shareholder support – have not been successful in this context, support for substantive resolutions calling for companies to take action on climate change has increased over time. In April 2020, for the first time in Australian corporate history, more than 50% of shareholders of a listed company voted in support of a climate change resolution advanced by minority shareholders of Woodside Petroleum Limited, calling for the company to establish GHG emissions reduction targets aligning with the commitments under the Paris Agreement. While not binding, resolutions of this kind receive considerable publicity and media scrutiny, often causing companies to adopt what is proposed by shareholders to avoid reputational damage.
Shareholder class actions
Apart from shareholder activism targeting corporate decision-making on climate change at a board and management level, shareholder class actions relating to a company’s climate risk disclosure and management practices are also becoming more widespread. In its 2021 Global Trends in Climate Change Litigation report, the Grantham Research Institute on Climate Change and the Environment identifies that, worldwide, just over 800 climate-related proceedings were filed between 1986 and 2014, while more than 1,000 cases have been filed in the last six years alone.
The United States has been a particular hotbed for climate litigation. Indeed, of the total 1,841 climate-related proceedings filed since 1986 (whether concluded or ongoing), more than 75% have been commenced before courts in the United States.
The majority of climate-related proceedings have, to date, been commenced against governments, typically on the basis that inadequate action has been taken to meet emissions reduction targets under international frameworks such as the Paris Agreement, or that authorisations for proposed new project developments or other third party actions fail to take into account known climate risks (often framed as an alleged human rights or constitutional contravention, or more recently adopting a negligence/duty of care case theory).
Likewise, against private companies, climate actions have tended to be based on allegations that fossil fuel entities, and more recently other ‘high emitters’ such as those in the agricultural sector, are directly contributing to global warming in a manner that contravenes international law obligations.
An emerging case theory has also been that, in failing to take climate risk mitigation measures, private entities may breach their duty of care to investors insofar as they expose the company to foreseeable loss in a net zero economy. These latter claims are now being seen against individual directors in addition to the company itself. For example, on 15 March 2022, ClientEarth notified Shell of its intention to bring a derivative action shareholder claim against the Shell board of directors, made pursuant to sections 172 and 174 of the Companies Act 2006 (UK). ClientEarth requires the permission of the High Court to proceed with the claim.
In a greenwashing-specific context, however, shareholder class actions remain very much in a state of development. Globally, the Grantham Research Institute and the Climate Social Science Network estimate that:
- since 2016, at least 20 judicial climate-focused greenwashing cases have been filed in courts in the United States, Australia, France and the Netherlands; and
- since 2008, at least 27 climate-focused greenwashing claims have been filed before non-judicial administrative oversight bodies in the United Kingdom, Australia, Italy, New Zealand, Denmark, the United States and South Korea.
Again, most shareholder greenwashing proceedings have been seen to date in the United States. There are ongoing proceedings against ExxonMobil and other fossil fuel companies, which include allegations that the companies have made false misrepresentations concerning the climate risks they face, and have conveyed a false impression that they are more environmentally responsible than they really are in order to induce consumers to purchase their products.
While the Supreme Court of the State of New York dismissed a claim against ExxonMobil in December 2019,a separate claim against the company filed on behalf of investors and consumers by the Massachusetts Attorney-General is proceeding in that State. In its defence, ExxonMobil claims that no reasonable investor or consumer would be misled by the relevant statements (including on the basis that previous climate risk disclosures are readily available to investors and consumers in making investment and purchase decisions).
Further, various group proceedings against multiple fossil fuel companieshave been filed in a number of States, such as Vermont, Minnesota, and Rhode Island. Those actions, each filed by the respective Attorney-General in each State, remain on foot.
Additionally, in July 2021, securities class actions were filed against oat milk company Oatly Group and its officers, alleging greenwashing on the basis of misleading statements related to GHG emissions and energy consumption associated with Oatly’s products in registration statements filed with the SEC and in investor presentations.
The SEC’s new climate disclosure rule, once implemented, could enhance the scope for greenwashing liability from shareholder actions on the basis of material misstatements or omissions under sections 11, 12(a)(2) and 15 of the Securities Act of 1933, and sections 10(b) and 20(a) of the Securities Exchange Act of 1934. That is particularly the case in relation to the requirements to disclose the nature and impact of climate risks on a company’s business, as well as metrics concerning physical and transition impacts – which pose challenges to accurate identification, assessment and reporting. Nevertheless, many climate disclosures could be seen to consist of forward-looking statements, which may invoke the safe harbour defence under the Private Securities Litigation Reform Act of 1995 for eligible issuers. The SEC’s intended safe harbour concerning scope 3 emission disclosures made reasonably and in good faith may also mitigate the liability risk for companies.
Shareholder greenwashing claims are still in an emerging phase in the United Kingdom. Climate-related litigation has, to date, focused on the broader climate actions identified above, such as the failure to reduce emissions, or the approval of new projects by government departments, alleged to be inconsistent with the United Kingdom’s commitment to transition to a net zero economy by 2050 and to meet its obligations under the Paris Agreement.
To date, greenwashing-specific claims have arisen in a regulatory (rather than a shareholder) context. Notably, there have been findings by the United Kingdom Advertising Standards Authority that Irish-headquartered airline Ryanair’s claims in its advertising material in September 2019 that it was the ‘lowest emissions airline’, and Shell UK’s claim in a radio advertising campaign in January 2020 concerning the ability of customers to ‘drive carbon-neutral’ under a Shell Go+ loyalty scheme, were misleading to consumers.
A claim by ClientEarth in 2019, originally filed with the United Kingdom National Contact Point, alleging that BP misrepresented the nature and extent of its low-carbon investments in contravention of the OECD’s Guidelines for Multinational Enterprises, did not proceed after BP withdrew the advertisements which were the subject of the complaint.
In Australia, climate litigation has so far principally been commenced in the context of challenges to government approvals of high emitting projects. However, a disclosure-based greenwashing claim was filed in 2018 by a member of a $50 billion superannuation fund alleging, among other things, that the trustee had misled investors by inadequately considering and disclosing the material climate risks the fund faced from investments held in entities and sectors likely to be significantly impacted by physical and transitional climate risks. While the matter was settled out of court, it achieved the end result of the trustee committing to more effective disclosure and management of climate risks for the benefit of investors.
In a significant development, on 25 August 2021, shareholder advocacy organisation the Australian Centre for Corporate Responsibility (ACCR) filed proceedings in the Federal Court of Australia against oil and gas company Santos, alleging that Santos’ claims in its 2020 Annual Report that it would achieve net zero emissions by 2040 were false and misleading. ACCR asserts that the target depends on undisclosed assumptions about the effectiveness of carbon capture and storage processes that have not been scientifically proven in the market, and is also inconsistent with Santos’s plans to expand its natural gas operations. This is the first greenwashing claim in Australia which challenges the accuracy and underlying basis for publicly stated net zero emission targets, and is a case theory which is expected to be replicated in other shareholder class actions in future.
Indeed, the Grantham Institute specifically identifies ‘increased volumes of litigation’ likely to be encountered by entities that ‘act inconsistently with commitments and targets, or that mislead the public and interested parties about their products and actions’ in coming years, reflecting ‘the increasing urgency with which the climate crisis is viewed by the general public’. Defendants in such proceedings are also expected to diversify from the fossil fuel industry and other high direct emitters into financial market actors and other sectors, reflecting recognition in society of ‘the role that multiple actors will need to play in the transition to a net zero global economy’.
Significantly, in addition to liability at the level of the company, personal director liability can be expected also. This could rely on the case theory that the board has, in failing to disclose key climate risks or in committing to emissions reductions targets without adopting business practices capable of aching those targets, breached regulatory standards and/or exposed the company to reputational harm, resulting in material loss to the company that is inconsistent with the standard of care and diligence expected of a reasonable director.
With enhanced monitoring and climate risk assessment, disclosure and management protocols from regulators, and continued investor scrutiny and climate-based activism, greenwashing liability is a significant issue that all corporate boards now face.
To minimise the risk of liability from both regulatory and shareholder enforcement action, boards must design and embed strong internal governance, oversight, reporting, auditing and verification processes so that climate risks can be accurately identified, disclosed and managed as part of an integrated business operational model. In doing so, boards should consider forming a specific climate risk board committee, as well as management-level climate and disclosure committees comprised of senior management officers such as the CEO, general counsel and climate and sustainability officers.
There is also a need for boards to ensure a company has in place adequate resources and training for its internal risk, audit and compliance functions, and to also consider other roles such as regulatory and stakeholder engagement and crisis management in effectively mitigating and proactively responding to climate risks in a transitioning economy. Boards should also seek to instil a culture of continuous improvement – staying apprised of local and global expectations on climate risk disclosure and management and how action on climate change is being reflected in expectations from consumers, investors and other corporate stakeholders.
If boards make commitments to achieve net zero emissions or other climate goals, they also need to ensure they put in place an overarching climate strategy and supporting transition plans, and implement business practices which can in fact achieve those goals. That may involve restructuring aspects of the company’s business and moving towards new funding options such as green financing and sustainability bonds. There is also a need to monitor progress in achieving relevant climate goals committed to, and to report that progress to the market at regular intervals. In each of these tasks, the board can be assisted by the climate risk board committee and the management-level climate committees referred to above, which ought to focus on proactive implementation and detailed progress reporting to the board against relevant KPI metrics and auditing outcomes.
Ideally, boards should also build and maintain positive engagement with shareholders on climate matters, explaining to them how the board will manage and mitigate rapidly evolving physical and transitional risks impacting on the company and its future. The ‘Say Yes on Climate’ initiative can play an important role in building this momentum towards board and shareholder engagement, instilling a culture of transparency, accountability and responsibility across the entire organisation.
These are evolving issues that will require careful management, flexibility and adaptability as we move towards a net zero global economy. However, by taking these measures, boards can reduce the risk of liability arising for greenwashing, both in the context of regulatory contraventions and shareholder activism and court enforcement proceedings.