The ESG Litigation and Enforcement Wave (Or Is It a Tsunami?) Has Arrived

Authors: MLT Aikins ESG practice group

If the first wave of ESG was about marketing and promotion, then the second wave is shaping up to be about litigation and enforcement.

Despite the recent pushback on ESG ratings and climate disclosures from prominent voices like Tesla’s head Elon Musk and HSBC’s head of sustainable investing, government agencies around the globe are taking compliance and enforcement of ESG disclosure very seriously to ensure transparent and honest reporting for investors and other corporate stakeholders.

SEC Sets the Tone

While the U.S. Securities and Exchange Commission’s (SEC) proposed rule on climate disclosures for publicly traded companies remains out for comment until June 17, 2022, the SEC is already taking strong action to tackle greenwashing and misleading claims related to ESG disclosure.

In April, the SEC announced it was charging Vale, a Brazilian mining company, for allegedly making false and misleading claims in its sustainability reporting and other public filings to investors around the risks associated with its tailings structures at the Brumadinho dam prior to the dam’s collapse in 2019. The SEC claims Vale’s disclosure relied on manipulated safety audits, fraudulent geotechnical stability certificates and false statements around environmental and social risk to local communities, governments and investors.

“By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities,” Gurbir S. Grewal, director of the SEC’s enforcement division, said in a statement.

In May 2022, the SEC proposed amendments to its fund “Names Rule” to guard against “materially deceptive and misleading use of ESG terminology.” The SEC is proposing that the only investment funds that may use the term “ESG” are ones that consider ESG factors centrally in the investment selection process.

Europe Looks to Stamp out Greenwashing

In a significant escalation of enforcement around greenwashing — and a potential sign of things to come in North America — German police raided the offices of Deutsche Bank on May 31 as part of an investigation into misleading claims around the investment bank’s “green” investment portfolio. The allegations have already led Deutsche Bank CEO Asoka Woehrmann to resign, with more fallout anticipated.

Is Canada Next?

With mandatory climate disclosures coming to Canada for banks and insurers (as discussed in our previous blog), Canadian banks have also been subject to greenwashing scrutiny from environmental groups and investors over their increasing use of sustainable-linked financing (SLF).

SLF allows banks to extend funding to companies that perform well from an ESG perspective, even if they are carbon intensive. Canadian banks are walking a fine line between strong action on decarbonization and supporting their Canadian corporate clients, many of whom are in extractive and carbon-intensive sectors. Banks and insurers will need to be judicious and transparent with their ESG disclosures and commitments, especially around climate, by 2024 to ensure they are not the next targets of enforcement action.

An ESG Tsunami?

Between 2017 and 2020, more than 1,800 ESG-related litigation cases were filed in 40 different countries. Recently, we have seen examples of ESG-related litigation commenced against companies and individuals. With mandatory ESG reporting coming soon to both Canada and the U.S., many companies may become ESG litigation targets if their reporting is incomplete or potentially misleading, as discussed in our previous blog. It seems likely that the ESG litigation and enforcement wave will soon turn into a tsunami, if it hasn’t already.

If an ESG litigation tsunami is coming, don’t let yourself get caught up in the storm. The MLT Aikins ESG practice group has wide-ranging experience advising clients in all industries on their ESG strategies. Our team can help you prepare for mandatory ESG disclosure and take steps to avoid potential litigation and enforcement actions. Contact us to learn more.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.