Listen to the podcast here: Is sustainable finance just greenwash?
There is much talk in the market about mis-selling claims relating to ESG funds and investments, i.e. those funds and investments that market themselves as being sustainable. These largely stem from concerns that asset managers are “greenwashing”, i.e. where products and strategies are made to look more sustainable than they are, deliberately or otherwise. There are market concerns about active mis-selling, where sustainable credentials are being exaggerated or being presented in a misleading way, and also about more passive mis-selling, where there is simply a lack of consistency, data or benchmarking which allow asset managers to accurately track and test against the ESG statements they made.
Regulators and governmental bodies are already focusing on this area. The European Union is pushing through various taxonomy and disclosure regulations designed to be more sophisticated and specific frameworks to measure ESG credentials. The UK FCA and the US SEC are running consultations and setting up task forces to focus on this area. Specific investigations – such as a German regulatory investigation into the USS$1 trillion asset manager DWS – are also being commenced, to look into allegations that so-called ESG investments were deliberately mis-sold.
However, these steps necessarily won’t address all of the investments already sold, and it seems almost inevitable that civil claims will arise, particularly as this fact pattern comes at a time when there is a threatened explosion in group litigations (and funded litigation) across England, Germany and other jurisdictions. Whilst the ESG-focus of these claims may be new, the structure and law behind them is not. English law, for example, provides a clear framework for claims arising out of misstatements and omissions in listing particulars and other offering documents, and in other information published by corporates (under s90 and s90A of the Financial Services and Markets Act 2000) and there are other existing legal tools to allow such claims, in England and beyond.
The key question of loss
One key area that parties and the Courts will have to grapple with is around the losses that have (or have not) been suffered as a result of any mis-selling. It is perfectly conceivable, at least as matters currently stand, that investments that fall short of ESG promises and credentials may have, in fact, financially out-performed those that are “ESG-compliant”. In those circumstances, parties may have to look beyond traditional arguments to assert loss. Some green-focused or activist funds are already exploring the legal merit in a broader theories of loss, looking at the societal and climate-related impacts of failures to make sustainable investments.
Theories of loss may also change over time. If regulators do start to investigate and impose fines and other sanctions on non-compliant firms, the impact of those findings and financial sanctions may kickstart a chain of events which lead to loss, directly (as a result of fines) or indirectly (if investors are then forced to withdraw funds). Broader pressures – such as shareholder actions may also have financial impacts, and higher-profile concerns around mis-selling and mismanagement in relation to ESG may see investors start to turn their backs on non-compliant asset managers, which could then trigger losses which are fed down to investors.
Potential defendants will also have to assess the strategic risk of whether to fight speculative claims, or to pay-out, in the face of a “floodgates” risk. They may also be concerned about trends arising out of the “dieselgate” scandal and otherwise, where some damages theories have been equally focused on imposing punishment as well as recognising claimant losses.
Pallas Partners and ESG litigation
Pallas’ lawyers are highly accomplished lawyers with a laser-like focus on litigation, arbitration and investigations. They litigate the most complex and novel disputes, with particular expertise in financial litigation. Alongside that, the firm has an embedded interest in ESG, both as a subject-area and as part of its ambitious responsibility and sustainability strategy to drive positive change throughout the industry.
Fiona Huntriss has deep experience in litigating high-profile finance litigation, as well as commercial litigation, restructuring and insolvency litigation, shareholder disputes and sovereign debt disputes. She has longstanding rankings in Banking Litigation (Chambers UK 2022 and Legal 500 2022) and Commercial Litigation (Legal 500 2022). Her clients describe her as “a brilliant partner … a great tactician [who] knows the law inside out”, “technically outstanding but also unflappable and a real pleasure to work with”, “top drawer, calm under pressure” and as having a “seemingly effortless ability to brilliantly manage client relationships … stay on top of the facts and deliver razor sharp legal advice”. Fiona is also proud of the recognition she has got for her mentoring work, including being currently shortlisted for “Mentor of the Year” in the 2022 Women, Influence and Power in Law UK Awards.