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This article explores how the proliferation of ESG and climate-related disclosure requirements has focused regulatory minds on enforcement in relation to sustainability claims and how investigations in the area are on the rise globally. Please refer to our ESG blog here for previous instalments in this series.

The general landscape

Listed companies across various sectors and industries are grappling with how to manage and disclose ESG issues, particularly relating to climate. These issues include:

  • Accounting for carbon and other greenhouse gas (GHG) emissions of their business, suppliers and value chain partners.
  • Considering the downstream effects of their products and services.
  • Integrating energy transition plans and climate targets into their business strategy.
  • Deciding how best to communicate these plans and targets and their progress in relation to them, to all their stakeholders – shareholders, consumers, employees, lenders, investors and the wider public.

This communication of ESG targets and performance is attracting considerable interest from regulators tasked with managing and enforcing increasing levels of mandatory disclosures on ESG factors, climate change and GHG emissions. This has changed regulators' approach to greenwashing and enforcement in relation to sustainability claims and regulatory investigations into ESG disclosures are rising globally.

Disclosure requirements underpinning regulatory investigations

Risk of regulatory investigation has increased, alongside the development of various mandatory disclosure regulations and voluntary frameworks across the globe, trends that look likely to continue.

To date, the EU has led the charge by developing various mandatory ESG disclosure regulations. These include:

  • The Corporate Sustainability Reporting Directive (CSRD), which requires companies domiciled or operating within the EU, and above a certain size threshold, to report on a broad range of sustainability-related matters, including climate-related targets, policies, governance and progress in their business and across their value chain.
  • The Sustainable Finance Disclosure Regulation (SFDR), which requires asset managers to disclose the extent to which they consider ESG and climate factors in their entity-wide strategies and each of their funds.
  • The EU Taxonomy Regulation, which classifies all economic activities according to their contribution to six environmental objectives, with this classification feeding into various disclosures made by companies.
  • The upcoming Corporate Sustainability Due Diligence Directive (CS3D), which will require companies domiciled or operating within the EU, and above a certain size threshold, to conduct mandatory due diligence with respect to human rights and the environment in relation to their business and across their value chains.

We have also seen the development of international voluntary disclosure frameworks, including the Task Force on Climate-related Disclosures (TCFD), which is mandatory for UK listed entities; the Task Force on Nature-related Disclosures (TNFD); and the International Sustainability Standards Board's (ISSB) standards for broader sustainability-related disclosures. These standards have been developed to facilitate companies in establishing methodologies of assessing their impact on (among other things) the climate and environment, and vice versa.

In the US, the Securities and Exchange Commission (SEC) has proposed new rules that would require US listed companies to provide significant climate-related disclosures in their filings and audited financial statements. These proposals are partially modelled after the TCFD framework and GHG Protocol, with final rules pending. In California, two recently signed laws require some private and public US formed business entities to make significant disclosures regarding GHG emissions and climate-related financial risks, including reporting of indirect emissions.

In Australia, the federal government is finalising a mandatory climate reporting regime, which will be based on the ISSB’s standards and apply to Australia’s largest companies from 1 July 2024, with a phased introduction to other companies over the following three years.

You can read more about the development of international sustainability disclosure regulations here.

Potential avenues of investigation

Markets regulators have the role of ensuring clean markets and that disclosures are made correctly and on time. Due to increasing ESG disclosure requirements for companies across the globe – and the resulting increase in data available to stakeholders – regulators are looking to ensure these disclosures are done correctly, using the array of tools at their disposal. This may range from making compulsory requests for information to threatening or taking enforcement action.

Where companies appear to have missed the mark on disclosures, two primary avenues of investigation may be pursued by regulators:

  • Non-compliance and/or inadequate disclosures: Regulators will consider companies' adherence to relevant listing and disclosure rules, and other relevant mandatory climate-related disclosure obligations. Regulators may consider the (i) adequacy of companies' disclosure systems, procedures and controls, (ii) existence of any false, misleading statements or omissions, and (iii) completeness of relevant disclosures in companies' annual reports.
  • Market manipulation: Regulators will increasingly scrutinise public statements that may impact company stock price, including false or misleading statements or omissions made in annual reports, company websites, adverts and other media. Indeed, the EU Parliament and Council have reached provisional agreement on new rules banning misleading advertisements in relation to greenwashing that Members of the European Parliament are expected to vote on in November 2023.

Findings of wrongdoing following either of these avenues of regulatory investigation could lead to a wide range of consequences on the affected companies, including fines, public censure, restitution orders, public restatements and suspensions from trading, and significant reputational harm.

While beyond the scope of this article, there is a significant interrelationship between regulatory findings and potential litigation claims, with each acting as a catalyst for the other and the underlying facts leading to action in both arenas.

When considering their risk exposure in this area, companies should remember to check how their insurance might respond to such scenarios. For example, does current insurance have adequate limits or sub-limits for defence costs or investigation costs or, in the event of a claim against them, does the company need to consider making a notification to its insurers?

Enforcement so far – Case studies

Different regulators are at different stages in their ESG journeys, but the severity and frequency of regulatory investigations is expected to rise globally.

Case studies focusing on the approaches taken by regulators in the UK, Australia, and the US are set out below.

In its ESG Strategy, the FCA emphasised it will challenge firms where it sees potential greenwashing by clarifying its expectations and taking action to prevent consumers being misled.

In particular, the FCA has stated that it will initially conduct desk-based reviews and employ light touch follow-ups with companies, before launching preliminary inquiries where required.

In the context of climate-related matters, preliminary inquiries are intended to assess whether a formal investigation is warranted but also to function as a tool to improve the quality of future disclosures. In its investigations so far, the FCA has had a pronounced focus on the adequacy of procedures, systems and controls to enable compliance with climate-related disclosure obligations.

Some preliminary investigations have centred around compliance with market abuse provisions or listing or disclosure rules. However, more have focused on systems and controls: the completeness and accuracy of disclosures, the effectiveness of due diligence and verification, and companies' internal process of review, oversight and challenge.

The FCA has therefore signalled its interest not only in the content of companies' disclosures, but also the workings – that is, business models, base cases, target‑setting and transition pathways that underpin disclosures. On that basis, companies should expect to consider and explain these elements in their disclosures.

Companies should also be aware that the FCA's focus extends beyond climate-specific issues, including increasing scrutiny of governance and social issues such as non-financial misconduct, culture and access to banking services

The CMA has recently published its Green Claims Code, which seeks to help businesses understand and comply with their existing obligations relating to unfair commercial practices and general consumer protection when making environmental claims. Since publication, the CMA has been actively investigating companies' sustainability statements that fall short of the code recommendations.

So far, the CMA has had a heightened focus on companies in the fast fashion and fast-moving consumer goods industries – ie, essential products consumers use on a daily basis and/or goods that are regularly repurchased.

For example, the CMA investigated certain fashion companies, scrutinising their green credentials. In launching the investigation, the CMA cited concerns over these brands' product marketing to consumers, including the use of broad and vague statements, a lack of information about products included in the companies' "eco" ranges, and a lack of clarity regarding whether the accreditation applies to particular products or to the businesses’ wider practices. In particular, the CMA considered the fairness of comparisons that individual clothing items are "better for the environment" without qualifying how, claims surrounding the use of recycled materials in new clothing and the branding of entire clothes ranges as "sustainable".

Once the Digital Markets, Competition and Consumer Bill is adopted by the UK Government, the CMA will also have direct enforcement powers and be able to impose fines on companies found to have engaged in greenwashing

ASIC recently stated that the "antidote" to greenwashing is "meaningful, responsible and transparent disclosure". To guide companies to make such disclosure, ASIC has cited itself as having taken 35 regulatory interventions against greenwashing activity in the nine months to March 2023 alone. Misleading conduct in relation to sustainable financing including greenwashing is one of ASIC’s enforcement priorities for 2023, and the agency recently indicated that this will be announced as an enforcement priority for 2024.

ASIC's interventions, which initially consisted of guidance and review, resulted in 23 corrective disclosure outcomes, 11 infringement notices and the commencement of the first civil penalty proceeding in February 2023, which was followed by the commencement of two further civil penalty proceedings.

Primary reasons for interventions included:

  • Companies' net zero statements and targets not appearing to have a reasonable basis or being factually incorrect.
  • The use of terms like "carbon neutral", "clean" or "green", which did not appear to have a reasonable basis for the related claims.
  • The use of inaccurate labelling or vague terminology in sustainability-related funds.
  • The scope or application of a sustainability-related investment screen or exclusion being vague or overstated.

ASIC has also recently stated, while its current greenwashing interventions all broadly allege misleading and deceptive conduct, future cases are likely to scrutinise alleged breaches of “license obligations, D&O duties and a range of other obligations”.

The SEC's approach to greenwashing has been centred on the launch of the Climate and ESG Task Force within its Division of Enforcement, which is dedicated to developing initiatives to identify ESG and climate-related misconduct. This task force has a growing track record of cases across a variety of companies in different sectors, and considering misstatements, omissions, fraud and failing to follow company-determined policies and procedures.

One recent example is the SEC's $1.5 million fine imposed on an international investment and custodian bank for misstating and omitting information about ESG investment considerations for mutual funds that it managed. The allegations against the bank concerned misstatements in relation to its scrutiny of ESG data when making investments. According to the SEC, the bank represented to investors that all its investments were reviewed for ESG quality, even though investments in certain funds were effectively exempted from the review. The SEC supported its allegations by pointing to the bank's failure to adopt and implement policies and procedures to prevent the inclusion of untrue statements of fact in investor prospectuses and other documents. The SEC found that such failure resulted in 67 of 185 investments made by the bank between July 2018 and September 2021 being marketed as ESG-reviewed, despite lacking any ESG quality score.

Following a further investigation, the SEC has also recently charged a European asset manager in two separate enforcement actions, one of which concerned alleged misstatements regarding its ESG investment process. To settle the charges, the asset manager agreed to pay $25 million in penalties.


Following the proliferation of disclosure frameworks and increasing interest in climate-related performance by all stakeholders – including investors, lenders, shareholders, customers, and regulators – companies are likely to face regulatory scrutiny over their climate-related claims and performance.

Risks associated with getting this wrong – from regulatory fines and penalties to compensatory damages, injunctions prohibiting relevant conduct, related reputational damage and increased spend on corrective advertising and legal fees – are severe and need careful attention to be identified and managed.

To follow the rest of this series on climate change disputes, please subscribe to our ESG blog here or click here to view on our website.

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