Big businesses trumpet ESG credentials. Scrutiny is on the rise

James G. Cole

As the 2020s progress, discussions about climate change, the environment and issues related to equality and diversity are at the forefront of many people’s minds.

The corporate world is no exception, with banks, energy producers and a host of other major businesses keen to trumpet their sustainability credentials through advertisements, pledges, social media campaigns and a range of other initiatives.    

Many of these claims are now viewed through the prism of ESG, or environmental, social and governance.

It’s become a hot topic in recent years, with a wide range of organizations attempting to boost their sustainability credentials — and public image — by developing business practices which they claim chime with ESG-linked criteria.

But here’s the rub: Definitions of ESG often vary and are hard to pin down. That, in turn, can create a headache for businesses looking to toe the line with regulators and authorities.   

Take the situation in the United Kingdom. “One of the major complexities in this area is that there is no single overarching regulation or statute in the UK governing ESG compliance,” Chris Ross, a commercial partner at London-headquartered law firm RPC, told CNBC via email.

“Rather, there is a patchwork of domestic and international regulation.” 

Those regulations were, he said, “administered by a disparate set of bodies” including Companies House, the Pensions Regulator, Financial Conduct Authority, Environment Agency, Financial Reporting Council and, “in respect of European law, the European Commission.”

Expanding on his point, Ross described ESG as being “an umbrella term.”

It covered “a very broad spectrum of considerations, from climate and pollution related issues through bribery and corruption, anti-money laundering, diversity and inclusion … health and safety, to modern slavery,” he said.

“Developing a universal definition would be practically impossible,” Ross added, “and for the foreseeable future companies will need to ensure they are compliant with the range of relevant law and regulation.”

Scrutiny, bans and penalties

Today, companies who label their products or services as being ESG, sustainable or similar are finding their business practices and claims examined in great detail by lawyers, the public, environmental organizations and regulators.

At the end of August, for example, an ad from consumer goods giant Unilever for its Persil brand of laundry products was banned by the U.K.’s Advertising Standards Authority.

In a detailed ruling, the ASA concluded that the ad, which described Unilever’s product as being “kinder to our planet,” was “likely to mislead” and “must not appear again in its current form.” 

In a statement sent to CNBC, a spokesperson for Unilever said it was “surprised” by the ASA’s decision and that the ad “had been cleared for broadcasting a number of times.”

“We acknowledge that this decision reflects a recent and important evolution in the ASA’s approach to substantiate environmental claims and welcome the new benchmark the ASA is setting for advertisers,” the spokesperson added.

“Persil will continue to lead bold environmental improvements in the laundry category and provide evidence to support “tough on stains, kinder to the planet” for future campaigns in line with the evolving requirements.”

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Over in the United States, scrutiny of claims about sustainability and ESG is also taking place.  

In March 2021, the U.S. Securities and Exchange Commission announced the establishment of a Climate and ESG Task Force in the Division of Enforcement, stating that it would “proactively identify ESG-related misconduct.”

Since its creation, a number of big names have found themselves in the task force’s sights, including BNY Mellon Investment Adviser.  

In May, the regulator announced it had charged BNYMIA for “misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds that it managed.”

The SEC said its order had found that “from July 2018 to September 2021, BNY Mellon Investment Adviser represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case.”

“The order finds that numerous investments held by certain funds did not have an ESG quality review score as of the time of investment,” it added.

The SEC said BNYMIA had neither admitted nor denied its findings, but agreed to a censure, a cease and desist order and payment of a penalty totaling $1.5 million.

In a statement sent to CNBC, a spokesperson for BNY Mellon said BNYMIA was “pleased to resolve this matter concerning certain statements it made about the ESG review process for six U.S. mutual funds.”

“While none of these funds were part of the BNYMIA “Sustainable” fund range, we take our regulatory and compliance responsibilities seriously and have updated our materials as part of our commitment to ensuring our communications to investors are precise and complete,” the spokesperson added.

This image, from January 2019, shows a rescuer taking a break following the collapse of a dam at a mine belonging to Vale in Brumadinho, Brazil.

Mauro Pimentel | AFP | Getty Images

It’s not just the financial world that has caught the SEC’s attention.

In April, it charged Brazilian mining giant Vale with “making false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam.” 

“The collapse killed 270 people” and “caused immeasurable environmental and social harm,” the SEC said.

Among other things, the SEC’s complaint alleges that Vale “regularly misled local governments, communities, and investors about the safety of the Brumadinho dam through its environmental, social, and governance … disclosures.”

When contacted by CNBC, Vale — which has an “ESG Portal” on its website — referred to a statement issued on April 28.

“Vale denies the SEC’s allegations,” the company said, “including the allegation that its disclosures violated U.S. law, and will vigorously defend this case.”

“The Company reiterates the commitment it made right after the rupture of the dam, and which has guided it since then, to the remediation and compensation of the damages caused by the event.”

More greenwashing litigation

In June, the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy published the latest edition of a report looking at trends in climate change litigation. It highlighted some key developments. 

“Globally, the cumulative number of climate change-related litigation cases has more than doubled since 2015,” the report said.

“Just over 800 cases were filed between 1986 and 2014, and over 1,200 cases have been filed in the last eight years, bringing the total in the databases to 2,002,” it added. “Roughly one-quarter of these were filed between 2020 and 2022.”

The report pointed to growing momentum on the greenwashing front, too. “Climate-related greenwashing litigation or ‘climate-washing’ litigation is gaining pace,” it said, “with the aim of holding companies or states to account for various forms of climate misinformation before domestic courts and other bodies.”

The debate surrounding greenwashing is becoming increasingly fierce, with the charge often leveled at multinational companies with vast resources and significant carbon footprints.

It’s a term that environmental organization Greenpeace UK calls a “PR tactic” used “to make a company or product appear environmentally friendly without meaningfully reducing its environmental impact.”

A continuing trend?

In Europe, the end of May saw Reuters report that the offices of asset manager DWS and the headquarters of Deutsche Bank, its main owner, had been raided by German prosecutors. Citing the prosecutors, Reuters said the raids were related to “allegations of misleading investors about “green” investments.”

Deutsche Bank did not respond to CNBC’s request for a statement on the matter. In August, DWS said allegations reported in the media were “unfounded”, adding that it stood by its “annual report disclosures. We firmly reject the allegations being made by a former employee. DWS will continue to remain a steadfast proponent of ESG investing as part of its fiduciary role on behalf of its clients.”

This summer also saw a number of environmental organizations file a lawsuit against aviation giant KLM.

In a statement issued on July 6, ClientEarth, one of the groups involved, said the lawsuit had been filed “after the airline refused to stop advertising misleading claims that it is making flying sustainable.”

KLM, which says on its website that it’s “committed to creating a more sustainable future for aviation,” did not respond to a request for comment.

For his part, RPC’s Chris Ross said high-profile lawsuits such as the one against KLM demonstrated there was both “the willingness and resources to bring claims against major corporates to test and scrutinise their ESG claims.”

Expanding on his point, Ross also referenced the filing of a resolution at HSBC by retail shareholders and institutional investors in Feb. 2022.

“We can expect this trend of scrutiny and direct action to continue,” Ross added. “Against that backdrop, it is in the interests of organisations to ensure effective governance and rigorous adherence to ESG requirements in order to avoid, or at least reduce, the risk of litigation.”

https://www.cnbc.com/2022/09/21/big-businesses-trumpet-esg-credentials-scrutiny-is-on-the-rise.html

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