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Environmentally Friendly Securities Litigation?

Elizabeth Shimmin, Jason Yardley, and Oliver Thomson


  • Shareholder litigation and class actions are expected to grow in England and Wales, particularly in group claims, regarding environmental, social, and governance (ESG) disclosures.
  • Corporate disclosures have expanded to include information on ESG topics, and in some jurisdictions, these disclosures are mandatory.
  • ESG investors aim to channel capital towards investments with positive ESG credentials and away from polluting or anti-social companies.
  • Concerns exist regarding "greenwashing" and the need for objective evidence to support ESG claims, leading to regulatory initiatives for mandatory and detailed ESG disclosures.
Environmentally Friendly Securities Litigation?
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Never have environmental, social and governance (ESG) matters been a hotter topic. Might shareholder litigation provide a route for savvy investors to hold issuers of securities to account on their ESG disclosures?

While shareholder litigation and class actions are still relatively undeveloped in England and Wales compared with the United States, growth is forecast, particularly in group claims. Recent years have seen large shareholder actions against Tesco and RBS concerning accounting issues and the accuracy of regulated disclosures. SL Claimants and Ors v Tesco plc, the RBS Rights Issue Litigation. Might increasing disclosures around an issuer’s ESG claims fall within the securities litigation regime?

As corporates increasingly seek to promote their ESG credentials, corporate disclosures have expanded to include information on ESG topics. In a small but growing number of jurisdictions, those disclosures are mandatory. Considering the world through an ESG lens has also become an increasingly popular method by which investors seek to evaluate prospects.

Today, investors are sold equities that envisage substantial profits, while also, for example, aiming to prevent further damage to the environment or to end modern slavery.

ESG investors seek to channel capital towards investments with positive ESG credentials and away from polluting, carbon-economy, or anti-social companies. By shepherding capital in this way, ESG investors hope to increase the latter’s cost of capital, whilst making it easier for the former to raise new funds. In the oil and gas sector, for example, a higher cost of capital might mean that a company is less likely to invest in new production or exploration.

The results are clear to see. Global “sustainable” investments hit $35 trillion in 2020, up 15 percent in two years. Global Sustainable Investment Alliance, Global Sustainable Investment Review 2020. Multibillion-dollar ESG exchange traded funds now exist. This year, BlackRock’s Larry Fink made ESG the theme of his annual letter to chief executive officers, noting that “[n]o issue ranks higher than climate change on our clients’ lists of priorities” and that sustainable investing has sparked “a fundamental reallocation of capital” and represents an “historic investment opportunity.” BlackRock, Larry Fink’s 2021 letter to CEOs.

Greenwashing and Regulatory Concern

All is not plain sailing in the ESG world, however. There are concerns that “ESG” can sometimes represent form over substance.

In July 2021, the Financial Conduct Authority of the United Kingdom (UK) published a letter on the “design, delivery and disclosure of ESG and sustainable investment funds,” advising that a number of applications for ESG funds “contain claims that do not bear scrutiny.” The Securities and Exchange Commission (SEC) is also looking at funds and products that are marketed as “green” or “sustainable” without objective evidence to support those claims—a practice known as “greenwashing.” SEC, Prepared Remarks of Chair Gary Gensler before the Asset Management Advisory Committee (July 7, 2021).  

The European Union is introducing an ESG regime under the Sustainable Finance Disclosure Regulation and the Taxonomy Regulation. Last year, the UK government published a “Roadmap towards mandatory climate-related disclosures,” which envisaged mandatory disclosures across the economy. In the run-up to the United Nations Climate Change Conference of the Parties (COP26), Her Majesty’s Treasury published its Greening Finance road map, with details on sustainability disclosure requirements. These will eventually require every investment product to disclose the environmental impact of the activities it finances.

Amongst the COP26 noise, there is a clear trend towards mandatory and detailed ESG disclosures across the UK economy. Issuers are today providing more and more ESG-related disclosures in their reporting, albeit currently in a voluntary and non-uniform manner. It should be said that due to recent developments around COP26, we have focused in this piece predominantly on discussing climate-related disclosures. Disclosures relating to the S and G of ESG can have just as much import and effect and should not be overlooked.

Potential Claims

Against this background, there appears to be a risk of shareholder litigation where ESG disclosures prove to be erroneous or exaggerated and the issuer’s share price falls when the true position becomes known. While there are various routes available for shareholder claims, there is increasing appetite for statutory claims against listed companies pursuant to section 90 and section 90A/Schedule 10A of the Financial Services and Markets Act 2000 (FSMA). There exist other avenues for shareholder redress in respect of corporate disclosures, such as by section 2 of the Misrepresentation Act 1967 and the torts of negligent misstatement and deceit.

Section 90 of the FSMA enables investors to recover losses as a result of any untrue or misleading statements, or any omission of “necessary information,” in listing documents, such as prospectuses. Such a claim can be brought against any person responsible for the document, including the issuer and its directors. By contrast, section 90A permits recovery of losses from issuers concerning recklessly untrue or misleading statements or dishonest omissions via a recognised information service, such as a Regulatory News Service feed.

There are complexities with these types of claims. Many factors affect the price of securities, and it can be difficult to extricate isolated share price movements (and their causes) from wider market noise to evidence loss. However, financial experts are increasingly well practised in determining movements in the price of securities occurring as a result of new information hitting the market. Section 90A/Schedule 10A contains an express requirement for investors to show that they reasonably relied on the information in question in buying or holding the securities. (Section 90 contains no express reliance requirement, although there is no judicial authority on this point yet.) Reliance can be a difficult hurdle, but might it be easier to show where an investor is bound by a mandate to invest only in sustainable businesses? Might it enable investors to point to their mandate and the disclosures in question as a reason for making the investment? Whether an investor can credibly claim that it relied on the issuer’s information will likely depend on the nature of the misleading information. With no shareholder cases relating to ESG disclosures having yet reached the courtroom, it remains to be seen how this will work in practice.

Such questions are of concern to companies, directors, and “persons discharging managerial responsibilities,” or PDMRs, a term used in FSMA 2000. (Broadly speaking, the term refers to those occupying the position of director (by whatever name it is called), a member of the issuer (where its affairs are managed by its members), or any senior executive within the issuer who had responsibilities in relation to the published information.) They and (and their auditors) should, as a first priority, consider whether they have the necessary understanding of ESG matters to keep pace with regulation in this fast-moving sector. Parties considering securities litigation claims should bear in mind that they are potentially complex—but by no means impossible—claims to bring, and should seek specialist advice accordingly.