See ESG credentials for big businesses. The investigation is on the rise.

In the year In the 2020s, discussions related to growth, climate change, the environment and equality and diversity are at the forefront of many people’s minds.

The corporate world is no different, with banks, energy producers and many other major businesses seeking to demonstrate their sustainability credentials through advertisements, pledges, social media campaigns and many other initiatives.

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

It has become a hot topic in recent years as a wide range of organizations try to boost their sustainability credentials – and public image – by developing what they call ESG-related business practices.

But here’s the rub: ESG definitions often vary and are difficult to nail down. This, in turn, creates headaches for businesses trying to keep in line with regulators and authorities.

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

“Instead, there is an article of domestic and international regulations.”

He said those rules were “administered by various bodies” such as Companies House, the Pensions Regulator, the Financial Conduct Authority, the Environment Agency, the Financial Reporting Council and “in terms of European law, the European Commission”.

Ross expands on his point, describing ESG as an “umbrella term.”

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

“Developing a universal definition is practically impossible,” Ross added.

Inspection, bans and penalties

Today, companies that label their products or services as ESG, sustainable or similar are finding their business practices and claims are being scrutinized by lawyers, the public, environmental organizations and regulators.

In late August, for example, an ad for consumer goods giant Unilever’s Persil brand of laundry products was banned by England’s Advertising Standards Authority.

In a detailed ruling, the ASA concluded that advertising describing Unilever’s product as “kind to the planet” was “potentially misleading” and “shouldn’t be revisited in its current form”.

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

The spokesperson added: “We recognize that this decision reflects a recent and important evolution by the ASA to verify environmental claims and the new standards the ASA is setting for advertisers.”

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

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In the United States, scrutiny of sustainability and ESG claims is also underway.

In the year In March 2021, the US Securities and Exchange Commission announced the establishment of a Climate and ESG Task Force within the Enforcement Division, which it said would “proactively identify ESG-related misconduct.”

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

In May, the regulator found BNYMIA liable for “misstatements and omissions in investment decisions about environmental, social and governance (ESG) issues for some of the mutual funds it manages”.

The SEC order found that from July 2018 to September 2021, BNY Mellon’s investment advisors stated in various statements that investments in the fund had undergone ESG quality assessments, although this was not always the case.

“The order reveals that several investments held by certain funds did not have ESG quality assessment results at the time of investment,” he added.

SEC BNYMIA neither admitted nor denied the findings, but agreed to a condemnation, cease-and-desist order, and a total penalty of $1.5 million.

In a statement to CNBC, a BNY Mellon spokesperson said BNYMIA “is pleased to resolve this matter regarding certain disclosures it made to six US mutual funds about the ESG review process.”

The spokesperson added: “While none of these funds are part of Binemia’s ‘sustainable’ fund range, we take our regulatory and compliance responsibilities seriously and have updated our materials as part of our commitment to ensure our communications to investors are accurate and complete.” .

This image shows a hunter taking a break following the collapse of a dam at a mine owned by Vale in Brumadinho, Brazil, from January 2019.

Mauro Pimentel AFP | Getty Images

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

In April, it accused Brazilian mining giant Val of “making false and misleading claims about the safety of its dams before the January 2019 collapse of the Brumadinho dam.”

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

Among other things, the SEC’s complaint alleges that Vale “repeatedly misled local governments, communities and investors about the environmental, social and administrative safety of Brumadino Dam.”

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

“Vale denies the SEC’s allegations,” the company said in a statement, including allegations that it violates U.S. law, and will vigorously defend such allegations.

“The company reiterates the commitment it made after the dam broke and has since been directed to repair and compensate for the damage caused by the event.”

More greenwashing controversy

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

“Globally, litigation related to climate change has doubled since 2015,” the report said.

More than 800 records were submitted between 1986 and 2014, and more than 1,200 records were submitted in the last eight years, bringing the total to 2,002 in the databases. A quarter of those were prosecuted between 2020 and 2022.

The report also points to an increase on the greenwashing front. “Climate-related greenwashing litigation or ‘climate-washing’ litigation is gaining momentum,” he explained, “in order to hold companies or states accountable for various climate misinformation before domestic courts and other bodies.”

The debate around greenwashing has become increasingly intense, with the charge often leveling at multinational companies with vast resources and high carbon footprints.

It’s what 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, a Reuters report in late May reported that the headquarters of wealth manager DWS and its main owner Deutsche Bank had been raided by German prosecutors. Citing 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 comment on the matter. In August, DWS said the allegations reported by the media were “baseless”, stating that it stood by its “annual report statements. We strongly dispute the allegations made against us by a former employee. It is part of his fiduciary role on behalf of his clients.”

This summer, several environmental organizations filed a lawsuit against aviation giant KLM.

In a July 6 statement, ClientEarth, one of the groups involved in the case, said the lawsuit was filed because the airline refused to stop misleading advertising that it would make the flight sustainable.

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

RPC’s Chris Ross said the high-profile lawsuits against KLM showed there was “a willingness and resources to investigate claims against major corporations and investigate their ESG claims”.

Elaborating on the matter, Ross also mentioned that retail shareholders and institutional investors have proposed a resolution against HSBC in February 2022.

“We can expect this trend of investigation and direct action to continue,” Ross added. “Given that background, it is in the interest of companies to ensure effective management and strict adherence to ESG requirements to avoid or at least reduce the risk of disputes.”

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