As your organization prepares to enter a new calendar year, you may be thinking of ways to increase profitability and avoid liability. One area that all companies should now be focused on is the extent to which they have any exposure for ESG claims and safeguarding against those risks. “ESG” is short for “Environmental, Social & Governance” and covers a host of issues relating to climate change, carbon emissions, air and water pollution, human rights and labour standards, gender and diversity, executive compensation, bribery and corruption. Of course, these are just a few of the heads covered by ESG.
ESG litigation is on the rise in Canada, the United States of America and elsewhere, and could very soon be a litigation threat for companies operating in Jamaica. With the rise in investor and consumer activism, ESG litigation is another mechanism for maintaining the accountability of companies and their directors. ESG related issues can arise in the context of arbitral proceedings or before the courts.
The exposure for ESG risks is not just limited to potential damages awards against your organisation but may also include reputational and other risks. Since customers/clients and consumers now use ESG criteria for assessing companies, it is best to have it high on your agenda. For example, manufacturers are now being compelled to consider environmentally friendly ways of manufacturing and doing business generally. Potential investors care about the long-term value to be derived from companies’ alignment with sustainability and climate-related objectives. Research in the UK reveals an increase in money invested in ESG-focused funds from £4.4 billion in 2008 to £15.4 billion in 2017.
Below is a non-exhaustive list of issues which your company should be considering.
- Conduct an Audit of Your Organisation’s ESG Risks
As a first step, your organisation should undertake an assessment of the areas that pose ESG risks. The audit may also include an assessment of ESG disclosures which have already been made by your organisation to ensure they are up-to-date and accurate. There are, of course, ESG checklists available to assist in conducting your audit but you should be acutely aware that they may not cover all the ESG risks inherent in your business. The assessment will therefore involve a number of legal and non-legal considerations and may require a team or committee. The risk factors may turn on the types of products manufactured, the services provided, the sector your organisation is involved in and the general social context of your organisation.
To be effective, these audits also need to be continuous, perhaps on a set periodic basis. Doing so will help your organisation to monitor the risks as they arise and evolve, and to implement strategies to deal with those risks.
- Develop an ESG Policy
If your company has not already done so it should, as part of its corporate governance policy, consider the implementation of an ESG Policy. Developing one is likely to give your organisation a competitive advantage but may also be a useful tool in defending litigation should it arise. So long as the policy is being implemented it may not only avoid risks but may be used in litigation as tool for defending yourself. There should therefore be training and implementation of the policy once it is developed.
Your policy should identify the ESG risks that are unique to your business and implement strategies, practices and procedures to safeguard against those risks. It should have a clear focus, identify the different stakeholders involved, and be measurable and transparent. Bearing these considerations in mind is crucial since having a policy in place is also important for business sustainability.
With the emergence of increased litigation in the area, regulators could also now impose obligations on businesses, to include the development of ESG policies.
- Affirm Your Organisation’s Commitment to ESG Objectives
Some local companies have already included statements on their websites regarding their commitment to achieving ESG objectives. Such representations may augur well for your organization as investors pay sharp attention to ESG issues. Although the statements from local companies are voluntary at present, there are jurisdictions in which such disclosures will soon become mandatory. In Canada, as of 2024, banks and insurance companies will be required to disclose climate-related risks.
If your company is making representations as to its environmental impact, you should ensure that they are clear and accurate representations to avoid “greenwashing” claims. These are claims in which allegations are made about the accuracy of a company’s ESG representations relating to how environmentally friendly their products are. For example, Keurig recently settled a class action in relation to its coffee pods which it had marketed as “recyclable”. There was no admission of liability in the settlement, but some could argue that the need to settle such a class action had its own financial and reputational cost.
- Consider and Address Exposure for Director and Officer ESG Liability
Directors and officers of a company may also find themselves involved in ESG litigation. Claims have already been advanced in other jurisdictions (in the United States, for example) against directors and officers of companies relating to their organisation’s efforts to address ESG issues. These claims are usually advanced as derivative actions, that is, a claim in the company’s name against a director or officer in their personal capacity. Such claims also apply to former directors and officers of a company.
These types of claims raise allegations that a director or officer failed to act in the best interests of the company (including its stakeholders). For example, in the United States, Exxon’s board of directors are facing a series of derivative action claims alleging a failure to mitigate the anticipated impacts of climate change on the company’s long-term business prospects, and misleading shareholders on these issues.
ESG issues can spawn a wide range of litigation, including allegations about the directors’ and officers’ efforts to address diversity and inclusion, corruption and misfeasance in organisational leadership, and failure to properly prepare for the future impacts of climate change.
Your organisation should have robust auditing systems in relation to ESG issues to ensure that they are addressed. You should also be reviewing your directors’ and officers’ insurance policies to assess the extent of coverage provided for ESG related claims.
As more ESG litigation arises, your organisation should be considering the appropriate steps for mitigating such risks. The ESG factors may pose a number of risks, including regulatory, legal and reputational risks which your organisation should be safeguarding against.
Litrow Hickson is an Associate at Myers, Fletcher & Gordon and is a member of the firm’s Litigation Department. Litrow may be contacted via firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.