By now, most CFOs are aware of the strong business case for embracing ESG reporting as part of their corporate sustainability responsibility. In turn,
By now, most CFOs are aware of the strong business case for embracing ESG reporting as part of their corporate sustainability responsibility. In turn, the move is giving rise to reputational and regulatory difficulties, inaccurate disclosures in this area can also open the door to potential litigation risk. Millennium Consulting considers the ESG litigation landscape, and why robust and reliable reporting is a must.
Why ESG is gathering pace
For the time being at least, mandatory ESG (Environmental, Social and Governance) reporting only applies to a relatively small number of public companies.
Reports suggest that as many as 88% of publicly traded companies and 79% of venture and private equity backed companies have ESG initiatives in place. From these figures, almost a fifth of small and medium-size companies are already using ESG standards.
In most of these cases, organisations are voluntarily evaluating operations against ESG criteria before placing much of that information in the public domain. It includes metrics as diverse as energy consumed and targets for waste reduction (Environmental), pay equity and workforce demographic breakdown (Social) and audit accuracy rates and director remuneration information (Governance), among many others.
Key drivers for ESG adoption include the fact that both customers and investors are now much more likely to scrutinise a company’s ethical credentials before making decisions.
Particularly under the ‘environmental’ criterion, keeping track of metrics around issues such as energy consumption and materials waste can help drive cost reductions.
For many companies, there is also a desire to act now on a voluntary basis, to pre-empt compulsory reporting further down the line.
Litigation risks – what’s the problem?
Let’s say a company has chosen to make ESG information publicly available. The fact that this has been done voluntarily does not negate its general responsibility to ensure the data disclosed is accurate and verifiable.
A few examples of how litigation risks may arise include the following:
The disgruntled shareholder
Your reports, accounts and prospectuses include references to various ESG targets and progress on meeting those targets to date. Post-IPO, one of your new shareholders is less than satisfied with stock performance. They hone in on alleged inaccuracies and missing figures in the information disclosed, alleging that they relied on misleading information when deciding to invest.
Based on this, they seek to present a claim against you for compensation under Section 90 or 90A of the 2000 Financial Services and Markets Act.
The eagle-eyed consumer
Volkswagen has already settled tens of thousands of legal claims following the “dieselgate” emissions scandal. In that case, emissions testing was actively gamed. It’s worth remembering however, that product information does not have to be deliberately misleading to give rise to a potential claim for misrepresentation.
If you showcase your ESG credentials via product labelling and elsewhere, it raises the potential for a consumer class action if said information turns out to be incorrect.
The supply chain partner seeking contract rescission
A major commercial partner has an ambitious plan in place for reaching carbon net zero across its entire supply chain over the next decade. In the contract pitching process, you presented convincing (but not wholly accurate) information that suggested your progress on carbon emissions reductions were in line with those of your new partner.
When inaccuracies in this come to light, your partner seeks to unravel the contract.
Embracing ESG, while reducing litigation risk exposure
If an ESG initiative is worth doing, it’s worth doing right.
As well as being a potential embarrassment, inaccurate statements, reports and forecasts will always provide an easy way for lawyers to exploit; something that’s as true for ESG as it is for any other aspect of reporting.
It is also worth bearing in mind that even speculative or spurious claims can be expensive and time consuming to resolve.
Risk mitigation means keeping a close and frequent eye on your sector’s regulatory requirements, along with the expectations of investors and other stakeholders to decide what (and what-not) to report.
What’s more, the data you use as the basis of your reports needs to be accurate, verifiable and complete. From data collection and consolidation, right through to forecasting capabilities, it’s important for CFOs to ensure their reporting infrastructure is up to the task.
Want to know more about putting your ESG initiatives on the right track? In Millennium Consulting’s white paper, you will find comprehensive insights on ESG trends, reporting frameworks, challenges and opportunities, as well as the what and why of ESG, how to build your capabilities and how to use it as a strategic lever.