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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.
Listed companies across various sectors and industries are grappling with how to manage and disclose ESG issues, particularly relating to climate. These issues include:
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.
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:
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.
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:
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?
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.
Senior Associate, London
Partner, New York
Senior Associate, Sydney
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2023