Environmental, Social, and Governance (‘ESG’) concerns are becoming increasingly important for many investors, and the market of financial products sold as ‘ethical’ or ‘green’ has correspondingly increased.
The Investment Association has calculated that in 2020, 38% of total net retail sales in the UK were in responsible investment funds. ESG considerations are also likely to play an increasing role in mergers and acquisitions, with 58% of executives saying that they would become a “significantly more important” factor for parties when deciding such moves.
However, alongside this growth, has been the emergence of accusations of ‘greenwashing’, the view that whilst a product is advertised as, in this case, environmentally friendly, the reality is very different, and that in many cases, ESG is ‘nothing but marketing.’
What are the concerns with ESG investing?
Concerns with ESG centre around the lack of transparency, lack of disclosure, and the lack of a recognised standard against which to measure ESG compliance. This has been recognised by the FCA which has set out its ‘ESG priorities’ centering on the ‘5 core themes’ of transparency, trust, tools, transition, and team. The latter three concern how the FCA supports the financial industry to meet its goal of ensuring that the UK is “at the forefront of ESG internationally.”
However, whilst setting this ambitious goal, the FCA has said that it is reluctant “to codify too much into the regulatory framework too soon…and hard wire the current state of knowledge and understanding.”
ESG investing disputes
It is easy to see how grand claims made about the ethical nature of certain products, increasing pressure from shareholders for companies to comply with ESG objectives, and a relative lack of (but increasing) transparency, alongside uncertainty as to precisely how ESG should be measured, will give rise to disputes across of broad range of areas.
This is likely to include:
- Mis-selling claims – e.g. a product is marketed as ‘green’ but includes investments in nuclear and/or gas which fall in value resulting in a loss to the investor who disputes their inclusion within the fund.
- Breach of contract – e.g. a clause is included within a contract with a supplier requiring compliance with a company’s ESG objectives, the supply chain is subsequently shown to include child/forced labour.
- Breach of warranties – e.g. warranties are given in a SPA in relation to ESG compliance that are breached. The breach causes reputational damage and damages the value of the company acquired and/or purchaser.
- Action by shareholders – e.g. shareholders commencing litigation to compel the company board to comply with ESG objectives.
Whilst failure to comply with ESG objectives is likely to generate disputes, it could conversely result in claims that such concerns have been prioritised at the expense of more traditional markers to the detriment of financial performance.
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