The Race to Green: A Perfect Storm for Heightened Scrutiny and Litigation
This article originally appeared in our Canadian Securities Litigation: Trends to Watch 2023 publication, which provides an in-depth overview of the most significant developments in the Canadian securities litigation landscape in 2022 and trends to watch for in 2023. Download the full publication here.
The increasing prevalence of physical, financial and social impacts arising from the climate crisis has shifted stakeholder sentiment and created a unique opportunity for value creation in the transition to a net zero economy. Global inflows into sustainable assets reached over US$4 trillion and Canadian investments in sustainable funds more than doubled in 2021 with the growth tapering in 2022.[i] This paradigm shift in the global allocation of capital demonstrates the importance of factoring climate-related risks and opportunities into the price of investments to ensure efficient capital allocation as well as the importance of managing the concomitant increased risk for potential “greenwashing” or “climate washing”.
This “race to green” is happening against the backdrop of a rapidly evolving landscape for sustainability-related disclosures and a growing wave of greenwashing litigation against companies and their directors and officers. Greenwashing allegations span claims of inaccurate or misleading statements about climate-related financial and operational impacts and risks, climate-related commitments or strategies and sustainability-related attributes of products or corporate activities. Activists are increasingly using innovative climate-related litigation strategies to not only obtain monetary damages, but also to garner publicity and to drive corporate change.
Evolving Disclosure Landscape
An evolving disclosure landscape and the lack of any global baseline for consistent comparable mandatory sustainability-related disclosures creates unique challenges for issuers and asset managers, including increased risk of scrutiny by stakeholders for greenwashing. In Canada, mandatory climate-related disclosure requirements are relatively limited:
- private companies are only required to meet federal disclosure requirements for greenhouse gas emissions on a facility basis, subject to certain thresholds; [ii]
- publicly-listed issuers are subject to mandatory climate-related risk disclosures with enhanced mandatory climate-related disclosure rules proposed by Canadian securities regulators (expected to be final in the near term),[iii] and are also subject to mandatory federal disclosure requirements for greenhouse gas emission on a facility basis, subject to certain thresholds; and,
- investment funds are not subject to any mandatory sustainability-related specific disclosures or taxonomies. Canadian securities regulators have only provided guidance aimed at reducing the potential for greenwashing[iv]within the context of the existing disclosure requirements relating to investment strategies and marketing materials.
The Canadian federal government has proposed mandatory climate-related financial disclosures for federally regulated banks and other financial institutions, expected to be final in early 2023 and implemented through a phased approach beginning in 2024.[v] These proposed disclosures, as well as those proposed by Canadian securities regulators are largely consistent with the voluntary framework established by the Task Force on Climate-related Financial Disclosures framework (“TCFD”).[vi] A Canadian taxonomy for the use of green or transition terms or labelling has not yet been developed nor has any global taxonomy been endorsed, although the federal government has published a framework for the development of a taxonomy.[vii]
Mandatory enhanced climate-related disclosure requirements for issuers and investment funds are at various stages of implementation in other jurisdictions, including the US, UK, Europe and Australia.[viii] We anticipate that Canada will adopt some of the requirements that have been implemented or proposed in these jurisdictions in the coming years.
Even prior to the implementation of enhanced mandatory sustainability-related disclosure requirements, globally regulators have indicated that they will hold companies (and their directors and officers) and asset managers, responsible for their sustainability-related statements, whether in regulatory filings, voluntary sustainability reports or marketing materials, using a range of tools from disclosure deficiency warning letters to enforcement proceedings.
Although no securities enforcement proceedings have yet been commenced in Canada, securities regulators have issued warnings and reports about sustainability-related disclosure deficiencies for both public companies and investment funds and recently made strong statements that enforcement will be used to address greenwashing by capital market participants.[ix] The Canadian Competition Bureau has also signaled that greenwashing is a high enforcement priority.[x]
Recent disclosure reviews demonstrate that there are significant deficiencies in climate-related disclosures, even under the current, less prescriptive regime. The Canadian securities regulators 2021 review of public company disclosures showed that:
- more than 40% of climate-risk disclosures were boilerplate, vague or incomplete;
- 25% did not address the related financial impact at all; and
- none of the companies quantified the financial impact of the identified climate-related risks.[xi]
The 2022 review highlighted an increase in overly promotional and unsubstantiated sustainability-related disclosures and identified greenwashing in core regulatory filings and voluntary filings (such as sustainability or ESG reports), including unsubstantiated net zero or carbon neutral commitments.[xii] The 2022 review of investment funds’ disclosure highlighted that more than 50% of funds with sustainability-related investment strategies failed to identify or explain any of the sustainability-related factors underlying their investment strategies, more than a third of the funds held investments in industries that should have been excluded based on their stated investment strategy and 20% had holdings that appeared inconsistent with the fund’s name or investment strategies.[xiii] Given such deficiencies in sustainability-related disclosures and increased investor reliance on such disclosures, there is a significant risk of enforcement action in Canada.
US[xiv], UK[xv] and Australian financial regulators have also signalled that “greenwashing” or “green fraud” is a top priority.[xvi] The SEC recently established a separate ESG enforcement unit[xvii]and commenced a number of greenwashing and other climate-related enforcement investigations and proceedings.[xviii]The Australian securities regulator also commenced enforcement proceedings for greenwashing in 2022 against an energy company and an asset manager.[xix]
We also expect increasing whistleblower complaints by investors and other stakeholders to regulators relating to sustainability-related disclosures, including net zero commitments and other climate-related statements and strategies. Securities and competition regulators in Canada have implemented formal whistleblower programs (some of which provide monetary rewards) through which interested stakeholders can submit complaints alleging inaccurate or misleading climate-related disclosures and have seen a sharp increase in sustainability-related complaints.
There have been several high profile greenwashing complaints to the SEC in 2022 and 2023 relating to net zero commitments and other climate-related statements and strategies. In January 2023, an environmental activist filed a whistleblower complaint with the SEC alleging misleading disclosure by a global company relating to a $3.2 billion sustainability-linked green bond issuance by a global meat company which were marketed based on a net zero which failed to include certain greenhouse gas emissions that comprise 97% of the company’s climate impact.[xx] Likewise, in February 2023 an activist group filed a complaint with the SEC alleging a global energy company overstated its financial investment in renewable energy by including fossil fuel-related investments.[xxi]
The Canadian Competition Bureau recently commenced a number of greenwashing investigations and enforcement proceedings following complaints filed by environmental groups and other stakeholders, including: an investigation of a Canadian bank for alleged greenwashing statements regarding its climate and sustainable finance commitments; an investigation of an industry association greenwashing statements that natural gas is “clean”, affordable and a part of a sustainable energy future[xxii]; an investigation of 23 manufacturers and distributors that marketed their wet wipe products as “flushable”[xxiii], and a recent settlement involving allegations of misleading statements regarding the recyclability of its products against a consumer coffee products company, which resulted in a $3 million fine, $800,000 charitable donation, enhanced compliance program and product packaging modifications.[xxiv]
In the US, whistleblower complaints have similarly lead to regulatory investigations, including complaints filed by environmental groups with the Federal Trade Commission alleging misleading statements regarding investment in renewable energy investments and carbon emission reductions[xxv] and by former employees against the asset management arm of a global bank with the SEC alleging that misleading statements regarding use of sustainable investing criteria for the US$1 trillion of assets under management.[xxvi] Recently, several activist groups filed a complaint with the Australian competition and securities regulators (and formally requested that the UK financial regulator coordinate with the Australian regulators on the regulatory response) against a global mining company alleging misleading statements about its climate impact, net zero commitment and accounting of carbon emissions.[xxvii]
Greenwashing Civil Actions
There has been a steady upswing globally in civil litigation, including class actions, against companies alleging inaccurate or misleading sustainability-related practices, commitments or product features. Activist stakeholders are increasingly leading such litigation with the primary objective of modifying corporate conduct – a marked shift in the litigation dynamic. For example, a class action by an Australian pension fund member alleging inadequate disclosure and investment strategy regarding climate-related risks resulted in a settlement whereby the fund committed to a net zero target.[xxviii]
Securities and consumers class actions against companies for misleading climate-related disclosures and misstating sustainability-related aspects of their products are also increasing.[xxix] In one of the first proposed greenwashing class actions in Canada, six major retailers have been accused of falsely labelling or advertising their plastic bags as “recyclable”.[xxx]The plaintiffs rely heavily on a report prepared for the government of Quebec, which concluded that many bags described as recyclable are discarded by the sorting centres in Quebec[xxxi] and seek damages a well as a declaratory order requiring the retailers to cease marketing their bags as “recyclable”. The same consumer coffee products company that settled with the Competition Bureau is also facing class action suits in multiple jurisdictions in Canada and the US alleging it has engaged in unlawful and unfair practices by making misleading statements regarding the recyclability of its products.[xxxii]
In Europe, Australia, and the US, a number of greenwashing claims have been commenced by activist shareholders against major oil companies relating to net zero or carbon neutrality commitments, climate-related financial impacts and the financial value and attributes of oil reserves or alternative energy sources. [xxxiii] In addition, activist organizations have also commenced class actions against financial institutions alleging false or misleading net zero or other climate related commitments.[xxxiv] In February 2023, an activist organization, with the apparent support of several institutional shareholders, commenced a “first of its kind” claim in the UK against the directors of a major oil company alleging breach of their duties by failing to manage material climate-change related risks and failing to implement a energy strategy that moves away from fossil fuels fast enough.[xxxv]
Given the global focus on sustainability-related disclosures and the ongoing implementation of more prescriptive mandatory sustainability-related disclosures regimes, we expect continued growth in sustainability-related litigation, complaints, and regulatory enforcement action.
There are a number of steps Canadian issuers and their directors and officers can take to mitigate such risks, including:
- Goals, aspirations and actions: Mind the gap between the company’s sustainability-related goals and its actions. A credible action plan for achieving climate-related commitments, such as net-zero pledges and a robust governance structure for proper monitoring and oversight of the activities under such plan are critical to effectively mitigate litigation risk. Be mindful of any need to revise the action plan and any stated goals as a result of internal and external developments.
- Implement deliberate and process-driven disclosure and marketing practices: Treat sustainability-related statements and the use of sustainability-related labels with the same level of care and scrutiny that is applied to other material financial and strategic disclosures or representations to ensure alignment between market representations and the action being taken. Ensure a clear documented record of the process.
- Put in place the governance structure to ensure sustainability-related issues are being appropriately embedded and prioritized throughout your firm. Consider the use of a cross-functional steering committee.
[i] Morningstar Research Inc., Sustainable Assets are Teetering on the $4 Trillion Mark, (November 1, 2021), and Sustainable Investing Landscape for Canadian Fund Investors, Q4 2021, (January 24, 2022), and Global Sustainable Fund Flows: Q3 2022 in Review, (October 27, 2022).
[ii] Government of Canada, Reporting Greenhouse Gas Emissions, (January 28, 2023).
[iii] Canadian Securities Administrators, Consultation- Climate-related Disclosure Update and CSA Notice and Request for Comment- Proposed National Instrument 51-107- Disclosure of Climate-related Matters, (October 18, 2021).
[iv] Canadian Securities Administrators, CSA Staff Notice 81-334- ESG-Related Investment Fund Disclosure, (January 19, 2022).
[v] Office of the superintendent of Financial Institutions, Draft Guideline B-15 Climate Risk Management, (May 2022).
[vi] Canadian Securities Administrators, Canadian Securities Regulators Seek Comment on Climate-Related Disclosure Requirements, (October 18, 2021).
[vii] Sustainable Finance Action Council, Taxonomy Roadmap Report released March 3, 2023.
[viii] U.S. Securities and Exchange Commission, SEC Proposes to Enhance Disclosures by Certain Investment Advisors and Investment Companies About ESG Investment Practices, (May 25, 2022); Financial Conduct Authority, FCA proposes new rules to tackle greenwashing, (October 25, 2022); European Securities and Markets Authority, ESMA launches a consultation on guidelines for the use of ESG or sustainability-related terms in funds’ names, (November 18, 2022); Securities and Exchange Commission, The Enhancement and Standardization of Climate-Related Disclosures for Investors; The Companies (Strategic Report) (Climate-related Financial Disclosure Regulations 20222), 2022 No. 31; and Australian Securities & Investments Commission, How to avoid greenwashing when offering or promoting sustainability-related products, (June 2022).
[ix] Financial Times, Regulators step up scrutiny over investment industry ‘greenwashing’, (November 7, 2021).
[x] Matthew Boswell, Commissioner of Competition, Competing for Green Growth, (September 20, 2022).
[xi] Ontario Securities Commission, Consultation Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 Disclosure of Climate-related Matters, (October 18, 2021) at p 34.
[xii] Canadian Securities Administrators, CSA Staff Notice 51-364- Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2022 and March 31, 2021, (November 3, 2022).
[xiii] Ontario Securities Commission, CSA Staff Notice 81-334- ESG-Related Investment Fund Disclosure, (January 19, 2022).
[xiv] Tim Quinson, The SEC War on Greenwashing Has Begun, (June 15, 2022).
[xv] Financial Conduct Authority, FCA proposes new rules to tackle greenwashing, (October 25, 2022) and Mick Gallagher, Our climate guilt is a weapon for fraudsters promising to help us help the environment, (November 25, 2022).
[xvi] Australian Securities & Investments Commission, 22-141MR How to avoid ‘greenwashing’ for superannuation and managed funds, (June 14, 2022).
[xvii] U.S. Securities and Exchange Commission, SEC Announces Enforcement Task Force Focused on Climate ad ESG Issues, (March 4, 2021).
[xviii] The SEC charged BNY Mellon Investment Advisor Inc. on May 23, 2022 and BNY Mellon agreed to pay $1.5 million to settle the charges (U.S. Securities and Exchange Commission, SEC Charges BNY Mellon Investment Advisor for Misstatements and Omissions Concerning ESG Considerations, (May 23, 2022)). The SEC charged Goldman Sachs Asset Management on November 22, 2022 for failing to have or follow adequate policies and procedures involving ESG investments in various funds (U.S. Securities and Exchange Commission, SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments, (November 22, 2022)). The SEC is also investigating Deutsche Bank’s asset management arm DWS regarding its use of sustainable investing criteria (Sims and Uhlig, U.S. SEC investigating Deutsche Bank’s DWS over sustainability claims, (August 26, 2021) and charged Vale SA for false and misleading statements in its sustainability reports (U.S. Securities and Exchange Commission, SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse, (April 28, 2022)).
[xix]Australian Securities & Investments Commission, 22-294MR ASIC acts against greenwashing by energy company, (October 27, 2022), Australian Securities & Investments Commission, 22-336MR ASIC issues infringement notices against investment manager for greenwashing, (December 2, 2022) and 23-043MR ASIC launches first Court proceedings alleging greenwashing (February 28, 2023)
[xx] Mighty Earth, Mighty Earth files complaint with US Securities and Exchange Commission against JBS ‘green bonds’’, (January 18, 2023).
[xxi] Global Witness, Shell faces groundbreaking complaint for misleading US authorities and investors on its energy transition efforts, (February 1, 2023).
[xxii] Canadian Association of Physicians for the Environment, Canada's Competition Bureau opens investigation into the Canadian Gas Association's alleged greenwashing of methane gas as clean, (November 10, 2022).
[xxiii] The Canadian Press, 'Flushable' wipes? Environment group asks Competition Bureau to probe claim, (May 1, 2019).
[xxiv] Competition Bureau, Keurig Canada to pay $3 million penalty to settle Competition Bureau’s concerns over coffee pod recycling claims, (January 6, 2022); Canadian Association of Physicians for the Environment, Canada's Competition Bureau opens investigation into the Canadian Gas Association's alleged greenwashing of methane gas as clean, (November 10, 2022); Reuters, Canada's watchdog launches investigation into RBC over climate complaints, (October 12, 2022).
[xxv] Reuters, Green Groups File FTC Complaint Against Chevron over Climate Claims (March 16, 2021).
[xxvi] The Wall Street Journal, US Authorities Probing Deutsche Bank’s DWS Over Sustainability Claims, (August 25, 2021).
[xxvii] Reuters, Glencore faces Australian challenge over net-zero strategy, (September 8, 2022).
[xxviii] McVeigh v. Retail Employees Superannuation Trust, NSD 1333/2018.
[xxix] See for example: Jochims v. Oatly Group AB, 1:21-cv-06360 (S.D.N.Y. Oct. 26, 2021) (a US class action which alleges that an oat milk company made false and misleading representations regarding the products’ sustainability). Lizama et al v. H&M Hennes & Mauritz LP 4:22 CV-10070 (Eastern District of Missouri Nov. 4, 2022) (a US proposed class action that alleges a clothing line is deceptively marketed as sustainable.) Dwyer v. Allbirds, Inc. 7:21-cv-05238 (a New York class action regarding marketing claims about the sustainability of the defendant’s sneakers).
[xxx] Sonia Cohen v. Dollarama S.E.C. et al. No. 500-06-001200-225.
[xxxi] CIRAIG, Rapport Technique Finale- Analyse Du Cycle De Vie Des Sacs D’emplettes au Quebec, (December 2017).
[xxxii] Legal Wire, Ontario court awards carriage to Consumer Law Group to be class counsel in Keurig coffee pods case, (January 6, 2023).
[xxxiii] See for example: Ramirez v. Exxon Mobil Corp., 334 F. Supp. 3d 832 (N.D. Tex. 2018); ACCR, Australasian Centre for Corporate Responsibility expands landmark Federal Court case against Santos, (August 25, 2022); Reuters, Environmental groups sue TotalEnergies over climate marketing claims, (March 2, 2022); Alcantara S.p.A. v. Miko S.r.l (Italy); and The Guardian, Shell directors personally sued over ‘flawed’ climate strategy, (February 9, 2023).
[xxxiv] ASA, ASA Ruling on HSBC UK Bank plc, (October 19, 2022); and Kukpi7 Judy Wilson, Eve Saint, Chloe Tse, Jennifer Roberge, Jennifer Cox, and Richard Brooks, supported by Ecojustice and Stand.earth, Application for inquiry regarding the Royal Bank of Canada’s apparent false and misleading representations about action on climate change while continuing to finance fossil fuel development (April 19, 2022), Financial Post, Competition Bureau opens investigation into RBC over climate claims, (October 12, 2022) (hereafter Application to Competition Bureau).
[xxxv] The Guardian, Shell directors personally sued over ‘flawed’ climate strategy, (February 9, 2023) and Reuters, Institutional investors back Shell board lawsuit over climate risk, (February 10, 2023).