In Focus: Megatrends  

Q&A: Understanding the legal risk around ESG disclosure

Other claims could target behavioural change, including derivative actions by shareholders for alleged breaches by directors of their duties.

In a recent example, ClientEarth (a Shell shareholder), announced that it was seeking to bring a derivative claim against Shell’s Board for alleged failures to implement an appropriate climate strategy. 

More generally, greenwashing claims in the UK may be facilitated by the increasing availability of third party litigation funding and the rise of multi-party (or class) actions.

FTA: Do advisers need to guard against regulatory action or litigation in relation to ESG/greenwashing? Can you describe a scenario in which such action might be taken against an advice firm?

WC: UK financial advisers must comply with professional rules and standards set and enforced by the FCA.

These include requirements to act with due care, skill and diligence, avoid recommending unsuitable investments, maintain effective systems and controls, and communicate information to customers which is clear, fair and not misleading.

Some or all of these rules (and/or others) could potentially be engaged in a greenwashing scenario, for example where an advisory firm has made inaccurate claims about its ESG expertise or performance, failed to undertake appropriate due diligence in relation to investment products it recommends, and communicated inaccurate information to customers about the ESG performance of those products.

Related claims by customers are also possible, e.g. in respect of the breaches described above (where actionable by private persons) and/or for negligent advice.

FTA: How could financial advisers who sell ESG investment products be impacted by regulatory action or litigation against other firms in the supply chain, for instance asset managers?

WC: As noted above, advisers need to comply with professional rules and standards, as well as duties owed to their customers.

If an adviser recommended investment products which were shown (following regulatory action or litigation against other firms in the supply chain) to be affected by greenwashing, this could potentially lead to customer complaints and/or regulatory enquiries.

Conceivably, where such complaints or enquiries indicated possible failures on the adviser’s part - for example, regarding the quality of due diligence, advice and/or assessment of suitability for the customer - the adviser could be exposed to the risks of regulatory penalties, claims by customers, and/or reputational damage.

FTA: What do advisers need to be aware of when it comes to ESG regulation?

WC: Financial advisers should have regard to their existing professional rules and standards, and consider how these could be engaged in the context of ESG investments and concerns around greenwashing.