Directors Walking Tightrope On ESG Disclosure

Author:Mr Timothy Stutt
Profession:Herbert Smith Freehills

In the context of BlackRock's climate 'epiphany' last month, as well as clear indications from significant fund managers such as Sir Christopher Hohn's TCI Funds Management that they will be taking more overtly activist steps to catalyse climate action in future, listed company boards have never been under greater pressure to fulsomely explain the environmental, social and governance (ESG) footprint of their business.

However, in their rush to meet shareholders' demands for greater information, directors are often unwittingly exposing themselves to additional litigious risks, particularly with respect to forward-looking statements on ESG risks and strategies. Common examples include statements regarding the impact of climate change on market demand for the company's products, the risks which will affect the company in the future and, depending on how they are framed, climate scenario plans.

Under the Corporations Act, when a person makes a representation to the market about a future matter and the person does not have reasonable grounds for it, the representation is automatically deemed to be misleading by law if it ultimately proves to be inaccurate. This is the case even where the person genuinely believed that the representation was true when it was made.

Where directors fail to correctly distinguish between expectation and fact, or fail to properly explain the assumptions underlying the company's analysis, they may be exposed to claims for misleading disclosure if events unfold differently to how they were anticipated. Similarly, aspirational statements, no matter how well intended, can be grounds for litigation if ultimately they are not achieved.

Increasingly, litigation for inaccurate or misleading disclosure is being used as a 'hook' by activists and consumers overseas when seeking to hold companies to account on ESG. Examples include the class actions filed against Mars, Nestlé and Hershey regarding their statements on sustainable sourcing and allegations of child labour in their cocoa supply chains, as well as litigation filed against Costco over statements regarding its anti-human trafficking disclosure.

The risk of misleading disclosure can be managed by having an effective disclosure process, sensible disclaimers, correct framing of information, and the robust 'testing' of information prior to disclosure.

However, in practice, companies typically develop their...

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