ESG spells out why firms must remain socially conscious

Investors will not be amused if firms are found to be 'greenwashing', writes Craig Watt, partner and solicitor advocate, Brodies LLP (Image: Brodies LLP)

But what happens if the ESG promises upon which investors have relied are found to have been exaggerated or "greenwashed" to entice the socially conscious market into investing?

In addition to the obvious reputational risks for the organisations involved, one potential consequence is that investors whose decision to invest was based upon ESG credentials may be in a position to claim that the fund has been mis-sold – even if, from a financial perspective, it is performing better than expected.

The potential significance of the introduction of group proceedings in this context is that groups of disgruntled stakeholders who find themselves in a similar position may now be able to combine their claims and raise proceedings in Scotland as a group. Whereas an individual investor may be less inclined to pursue such a claim, particularly if the relevant funds are doing well, the prospect of opting into a mass litigation which is being run on their behalf, and in respect of which the risks and potential cost exposure will be lower, is likely to be far more appealing.

Accordingly, organisations who are making ESG commitments, or offering investment products based on ESG credentials, should be aware of the potential risks of doing so if they are unable to fulfil their commitments.

The level of exposure here will depend upon the representations which have been made and the value of the investments. However, if these organisations are not careful and do not have suitable processes in place to manage the risks, they may become involved in a new wave of mis-selling claims raised by groups of unhappy investors.

WHAT CAN BUSINESSES DO TO MITIGATE THE RISKS ASSOCIATED WITH GROUP PROCEEDINGS?

While the raising of a claim does not necessarily mean a positive result for those bringing the action, the potential reputational repercussions and the costs associated in defending a court action (regardless of its merits) can be debilitating for a business. There are, however, steps that businesses can and should take now to mitigate their exposure to the risk of group proceedings, these include:

Engaging lawyers early to agree strategy on the prospects of early procedural challenges to prevent court sanction of the group action proceeding;

Consider lodging caveats at the Court of Session, which act as an early warning system providing notification, at the earliest stage, that group proceedings are being proposed against your business;

Checking insurance policies to ensure coverage for group proceedings actions;

Notifying insurers as soon as group proceedings are threatened;

Considering 'After the Event' insurance if no insurance is in place; and

Hiring a PR representative, given that group proceedings are new and will attract press attention.

Many businesses may be nervous that the introduction of group proceedings in Scotland may expose them to a tsunami of claims that they would not have faced previously.

While that remains to be seen, with the number of UK class actions on the up, one thing that is clear is that an awareness of the rules, the potential impact on your business, and taking steps now to minimise exposure should ensure, in so far as possible, a Hollywood ending.

By Craig Watt of Brodies LLP