Clark Hill 2023 Automotive & Manufacturing Industry Outlook: ESG & Sustainability Update
If you feel like you can’t avoid seeing the letters “ESG” in the news, you’re probably not wrong. In the second half of 2023, the “ESG” headlines show no sign of stopping, as the attention of various stakeholders continues to linger on these “Environmental, Social, and Governance” (ESG) and sustainability issues. This (often skeptical) scrutiny of the ESG and sustainability claims made by companies has manifested itself as a rising number of allegations of “greenwashing” (or broader “ESG-washing”) against companies around the world. Relatedly, however, an opposing phenomenon known as “greenhushing” (i.e., withholding information on climate-related strategies and initiatives to avoid greenwashing accusations) is also taking center stage.
Green—Washing or Hushing?
Even without a crystal ball, companies can expect that greenwashing or ESG-washing concerns will increase through the remainder of 2023 and into 2024. A range of environmental, sustainability, and social claims made by companies are being targeted in and out of the courtrooms of the world, as claimants seek greater transparency from those companies. Among the claims facing increased scrutiny are “carbon neutral” and “net zero” claims, especially where those claims are based on carbon offsets. Social claims are also being questioned, especially those related to “responsible business” conduct and “pro-equity” agendas (e.g., Diversity, Equity, and Inclusion (DEI) policies and programming).
This trend is largely driven by what appears to be stakeholders’ genuine interest in holding companies accountable for the promises they make. And it is quite a range of stakeholders bringing these claims—from shareholders to regulators to employees to customers to the general public. Additionally, as new regulations and standards enter into force, they are often followed by a period of increased scrutiny and enforcement. This was true, for example, following the U.S. Federal Trade Commission’s (“FTC”) 2012 update to its Guides for the Use of Environmental Marketing Claims, (known as the “Green Guides”), and it is likely to be the case again after this upcoming update.
This negative attention is, expectedly, deterring some companies, especially from making voluntary sustainability claims. This does not simply mean that companies that may have been engaging in greenwashing practices stop those practices. It means that potentially non-liable companies also engage in “greenhushing”, whereby they purposely downplay or stay silent on their sustainability goals, even if they are well-intentioned or capable of substantiation, for fear of being accused of greenwashing and the associated reputational and/or financial harm that may ensue. Companies may also take similar “hushing” actions related to their social agendas, such as their DEI policies and programming, for fear of negative repercussions.
The Landscape in the U.S. vs. E.U.
With the rise in greenwashing and ESG-washing claims on both sides of the Atlantic, there comes the question faced by companies of whether to scale back their ESG- or sustainability-related initiatives to reduce their potential exposure. What about when companies are legally required to take certain ESG-related actions, such as making climate-related disclosures? Where certain disclosures are required, omissions can themselves mean liability for a company.
The landscape for mandatory ESG- or climate-related disclosures continues to evolve, with notable differences among jurisdictions—especially between the U.S. and E.U. For companies with global footprints or supply chains, this represents a level of chaos that must be controlled and coordinated. As an example, the E.U.’s Corporate Sustainability Reporting Directive (“CSRD”) took effect on January 5, 2023. It will create ESG reporting requirements for U.S.-based companies with European operations above a certain threshold—requirements that go far beyond what U.S.-based companies currently cover in their sustainability reports.
In fact, the scope of CSRD even exceeds the reporting scope that is expected under “The Enhancement and Standardization of Climate-Related Disclosures for Investors” proposed rule by the U.S. Securities and Exchange Commission (“SEC”). It is worth noting that the finalization of the SEC’s proposed rule has been delayed, in no small part due to the staggering 14,000+ comment letters it prompted to the SEC. While the final rule is now expected this fall, it is also expected to face significant legal challenges, including and up to a potential review by the U.S. Supreme Court.
Approaches to ESG and sustainability initiatives don’t just differ between the U.S. and E.U., though. In the U.S., certain states and lawmakers are rolling out what have been dubbed “anti-ESG” bills; investigations are being launched into antitrust concerns related to ESG initiatives; and conservative shareholder proposals are on the rise, despite low support in 2022. This highlights the need for companies to consider the different dimensions of their ESG and sustainability initiatives, including the legal and policy developments in different jurisdictions, as well to conduct effective stakeholder engagement to understand their constituencies’ priorities and to avoid negative repercussions, including reputational harm.
The statements and disclosures made by companies regarding their environmental and social initiatives will continue to face scrutiny, both through enforcement actions and litigation, including in the court of public opinion. This does not mean that companies should abandon these initiatives (in fact, there may be negative repercussions for doing so). Rather, this scrutiny is a helpful reminder of the importance of the “G” of ESG—governance.
Good governance practices, including adequate monitoring and oversight, are necessary to successfully manage and mitigate the various risks and liabilities related to ESG and sustainability initiatives. While the evolving nature of regulations and standards in this space can feel daunting, standard best practices continue to be helpful guides to remember, including: “Say what you do, and do what you say.” Whether making mandatory disclosures or voluntary statements, such as marketing slogans, it is important that ESG- and sustainability-related statements avoid inaccuracies, inconsistencies, and lack of substantiation. Such practices may not completely eliminate stakeholder scrutiny, but they can help mitigate liability and shore up defenses.
The views and opinions expressed in the article represent the view of the author(s) and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.
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