If You Don’t Have a Strong ESG Strategy, You Could Be a Target

As ESG litigation and enforcement cases continue to mount, companies that aren’t aware of their risks could face fines, lawsuits and – perhaps worst of all – reputational damage.

“Understanding your risk profile from an enterprise risk-management perspective is incredibly important,” said Conor Chell, head of the MLT Aikins ESG practice group. “I cannot stress that enough.”

Speaking at the Canadian Lawyer ESG Summit in Toronto on October 12, Conor discussed recent ESG enforcement and litigation cases. The “first wave” of ESG reporting started about 10 years ago, he said. Back then, companies largely treated ESG as a promotional exercise – and many still do.

“Until mandatory ESG reporting comes into effect, many companies cherry-pick the ESG standards and topics they report on, often glossing over real material issues,” Conor said.

But the days of using ESG as a marketing tactic are numbered. These days, companies that don’t back up their sustainability claims with reliable data could end up making headlines for all the wrong reasons.

“If you don’t have a strong ESG strategy, you could become a target for activist investors,” Conor said.

Last year, the Hague District Court ordered energy giant Shell to reduce its worldwide carbon emissions by 45% by 2030 after activist investors took the company to court. Shell made headlines again this year, when activist shareholders in the U.K. threatened legal action against Shell’s directors over the company’s net-zero plan.

“The fact that you have environmental groups going after directors in their personal capacity is an indication of how real this risk is,” Conor said.

ESG enforcement activity is also on the rise. The U.S. Securities and Exchange Commission (SEC) has targeted multiple companies for allegedly “greenwashing” their sustainability claims. Earlier this year, the SEC charged a Brazilian mining company over its sustainability reporting following a dam collapse that killed hundreds of people.

“The SEC in the U.S. is the most proactive regulator in the fight against greenwashing,” Conor said. “They’ve already charged five companies with ESG-related offences – and I expect that number to rise exponentially after mandatory ESG reporting requirements come into effect.”

European regulators are also cracking down on greenwashing. In May, German police raided the offices of Deutsche Bank to investigate greenwashing claims related to the bank’s investment portfolio.

“From my perspective, that was a public show of force,” Conor said. “It’s important to keep in mind the priority regulators are attaching to greenwashing.”

With mandatory ESG reporting requirements coming soon to Canada, the potential for enforcement activity and litigation has never been greater – and companies that treat ESG and sustainability reporting purely as a marketing exercise do so at their own peril.

The lawyers in the MLT Aikins ESG practice group have wide-ranging experience advising businesses in a variety of industries on their ESG strategies. We can help you prepare for upcoming mandatory ESG disclosure and take steps to avoid litigation and enforcement actions. Contact us to learn more.