Environmental, Social, Governance (“ESG”) Practices have become a top priority for businesses and stakeholders in the world today. ESG encompasses various subjects such as environment, ethics, human rights, corporate social responsibility, diversity, equity and inclusion.
This bulletin provides a brief overview of current issues related to ESG-related claims. McMillan publishes a series of bulletins that provide additional insight on ESG-related issues. McMillan previously published his summary of ESG-related trends for 2021. If you would like further information on these developments, or would like a detailed presentation on the impact of ESG regulation on your business, please contact one of the authors or your usual McMillan contact.
Misleading ESG claims
Consumers are willing to support companies and entrepreneurs whose products and services are ‘green’, ‘environmentally friendly’ and ‘sustainable’ and to promote positive ESG impacts . Companies are therefore encouraged to invest in her ESG initiatives.
A business’ ESG attributes are attractive to investors, consumers, and other stakeholders and can be promoted, for example, through trademarks, slogans, green symbols, marketing practices, or performance claims. But false and misleading claims can expose your business to myriad legal, financial and reputational risks. The potential regulatory liability of directors and officers (D&Os) for failing to make appropriate climate change risk disclosures and the increase in extreme weather events are putting pressure on companies to make such claims.
“green washingCompany disclosures, branding, or marketing that are false or false, such as claiming that a product or company is “green” or “clean,” exaggerating environmental certifications, misleading environmental initiatives, or underestimating emissions. Occurs when misleading environmental/sustainability information is intentionally or inadvertently included. Greenwashing includes attempts to capitalize on the goodwill of a positive environmental image, but not considering or disclosing negative environmental practices, such as in overseas supply chains.
Companies face increased regulatory scrutiny, government enforcement and civil litigation as greenwashing and false ESG claims continue to make headlines. Given the myriad of ESG-related claims made, the lack of consensus on what the classification really or should mean, and the lack of consistently accepted verification and certification systems. , which is not surprising. For example, how do we get our net zero carbon emissions pledges right? And who decides? So far, carbon offsetting is the most common subject of ‘greenwashing’. Are the specific carbon offsets advertised delivering real net benefits, or are they just shuffling the cards?
In this context, companies are navigating multiple regulatory regimes to ensure compliance while trying to maintain a positive attitude in the market about their ESG initiatives. But the risks of overenthusiasm are real. Greenwashing can impose substantial penalties and severe reputational damage on many types of companies, including report issuers (listed companies), investment funds, and private companies.
Securities regulators across Canada closely monitor marketing and compliance disclosure practices related to ESG-related investment activities, including portfolio managers, investment fund managers and exempt market dealers. This review was conducted amid concerns that the disclosures or marketing of the Fund may intentionally or inadvertently mislead investors about ESG-related aspects of the Fund.
In January 2022, the Canadian Securities Administrator (“CSA”) has issued a staff notice providing guidance on investment fund disclosure practices related to ESG. This is because CSA found that more than half of the funds reviewed lacked detailed disclosures of their investment strategies related to ESG, and one-fifth of the funds reviewed were inconsistent with the fund’s name, investment objectives, or investments. It was done after revealing that it had portfolio holdings that appeared to be strategy.
Securities regulators are expected to closely monitor ESG claims, especially in public disclosures.
The issue of greenwashing is becoming a priority for the Canadian Competition Bureau. In 2022, the Secretariat will issue a public warning, publicly launch investigations related to greenwashing, impose hefty fines on companies engaging in greenwashing, and announce a competition and green growth summit in September 2022. It hosted and explored the interplay of competition law and policy. and sustainability.
We expect the Bureau to continue to expand its investigations and enforcement of companies it believes are involved in misleading ESG claims.
US and European regulations
In the United States, the Securities and Exchange Commission (“SEC”) are also stepping up their ESG regulations. The SEC has released a proposal to require disclosure of certain climate-related information in public documents. In March 2021, the SEC launched the Climate and ESG Task Force to identify ESG-related fraud. The Task Force has submitted five ESG-related enforcement actions in 2022 alone.
On September 15, 2022, the U.S. Congressional Committee on Oversight and Reform held a hearing to investigate climate change statements by Exxon, Chevron, BP and Shell. The hearings are part of the commission’s investigation into “a long-running campaign to greenwash the fossil fuel industry’s role in spreading disinformation about climate change and contributing to global warming.”
The European Commission is considering and implementing several proposals to require companies to disclose ESG information and protect consumers from misleading ESG claims. The proposal includes mandatory reporting, requirements to substantiate claims, and restrictions on certain types of his ESG advertising.
Earlier this year, Germany’s financial regulator and the SEC launched an investigation into greenwashing claims by Germany’s largest fund manager, DWS.
Canadian consumer protection laws may also be relevant to ESG claims.In general, consumer protection in Canada is governed by provincial and territory law, but federal law Consumer Packaging and Labeling Act Regulations also have a consumer protection objective to protect consumers from false or misleading representations.
If consumers have been deceived or misled, they may be able to seek recourse against the business, including canceling transactions and collecting payments. Your business may be subject to enforcement actions, including administrative orders, fines and contracts, or revocation of its license (if you operate a licensed business under applicable consumer protection laws).
private disputes and litigation
In addition to regulatory action, civil ESG disputes are on the rise. If the company does not adequately address his ESG issues or makes misleading claims about his ESG, there may be risks of proxy fights and shareholder activism.
Businesses may also face civil lawsuits brought under Canadian competition law, securities law, or consumer protection law. Greenwashing and his ESR-related lawsuits are expected to increase in Canada, including class action lawsuits, shareholder activism and D&O lawsuits.
What does this mean for businesses?
Companies can continue to advertise and promote their ESG attributes, but as always, marketing and disclosures must be truthful and not misleading.
Given the growing sensitivity to ESG claims, companies should ensure that all ESG-related statements and practices are true, verifiable, soundly founded, and consistent with other public disclosures and representations of the company. must be especially diligent to ensure that ESG claims should be carefully scrutinized before publication. This includes, among other things, claims made in public notices, press releases, marketing materials and packaging.
Canada is expected to continue to see regulatory investigations, enforcement actions, and lawsuits related to ESG claims.
Similar to the calorie disclosure of food products and the health benefits of various consumer products, ESG claims aim to reflect a company’s value proposition and are designed to positively influence purchasers and consumers. increase. Therefore, such disclosures should be made with caution.
- do not do Make ESG-related claims indiscriminately or selectively across product lines.
- Enactment/Enforcement Internal policy on ESG claims, including how ESG claims should be made and who is responsible and accountable.
- hire and apply Definitions of established terms (not buzzwords) and key concepts such as ‘sustainability’.
- Ensure ESG claims (in whatever form, including images used) are clear, true, accurate, balanced, substantiated and verifiable.
- do not do Broadly claim that a product, service, supply chain, or partner is ‘green’, ‘sustainable’, ‘environmentally friendly’, ‘socially impactful’, etc.
- examination Independent external accountability and transparency frameworks such as B Corp accreditation.
- Stay up to date Review current guidelines for regulatory guidance on ESG-related claims and prepare for further regulatory changes.
- review ESG-related disclosure practices published by relevant regulatory bodies.When
- audit Review ESG performance, regulatory compliance and disclosure practices and address gaps.