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ESG litigation: shareholder actions under FSMA 2000: Important questions

Public companies need to be mindful of the risk of group shareholder actions under FSMA 2000 when publishing ESG statements to the market.

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Published 10 March 2022

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Public companies are under increasing pressure to publish information about their environmental, social and governance (ESG)-related policies and practices. This pressure is being generated by changing investor attitudes, with a growing number of investors only wanting to invest in companies which can demonstrate strong ESG credentials. Regulation regarding ESG disclosures is also increasing.

Publishing statements to the market always comes with regulatory and litigation risks for public companies if those statements are inaccurate. This is perhaps especially true for ESG statements, given current public scrutiny regarding “greenwashing”. For example, a report by the New Climate Institute has recently found that many large companies are routinely exaggerating or misreporting progress on tackling climate change.

This article discusses one of these risks, namely the threat of shareholder actions under sections 90 or 90A of the Financial Services and Markets Act 2000 (FSMA).

Sections 90 and 90A of FSMA provide a statutory cause of action for shareholders of listed companies, allowing them to sue the company for loss they have suffered as a result of false statements published by the company in prospectuses (s 90) or in other published information (s 90A). “Published information” would include, for example, annual reports and accounts, which for many companies are now required to contain ESG-related information.

Shareholder actions under FSMA are a growing, but still relatively novel, area of litigation. There have been some high-profile actions resulting in settlement, although none have yet reached trial. (Allianz v RSA is scheduled for trial in October 2022, unless it settles first). There remain some legal uncertainties regarding these actions, however.

This article answers some of the questions that companies or investors might have about shareholder actions in an ESG context.

1. How false must the ESG statement be to give rise to a valid claim? What level of dishonesty do investors need to demonstrate?

For s 90 claims, the prospectus must contain an “untrue or misleading” statement, or an omission of information that investors or their professional advisors would reasonably expect to find in a prospectus for the purpose of making an informed assessment of the company and its prospects.

The company can defend itself by demonstrating that the person responsible for the prospectus reasonably believed (having made reasonable enquiries) that the statement was true or that the omission was proper.

The position is trickier for investors under s 90A. The published information must similarly contain an “untrue or misleading” statement or an omission of a required matter, but the investor must also demonstrate that a “person discharging managerial responsibilities” knew, or was reckless about whether, the statement was untrue, or that the omission amounted to dishonest concealment”. Alternatively, investors must show a “dishonest delay” in publishing information.

Proving dishonesty by a sufficiently senior person within the company can be difficult. If there is a criminal or regulatory investigation into the company, for example, by the Serious Fraud Office, this can provide investors with the necessary evidence, but otherwise they will need to seek disclosure from the company during the proceedings.

2. To what extent must investors have relied on the false ESG statement, and how might an investor demonstrate this?

Given that ss 90 and 90A claims are only available to parties with securities in the company, it seems unlikely that activist environmental organisations would bring these claims. Claimants in an ESG context are more likely to be investment firms committed to ethical investment.

Under s 90, there is no explicit requirement for the investor to have relied on the false statement or omission. Although untested in the courts, this probably means that investors can bring claims under s 90 even if the false statement had no bearing on their decision to buy securities.

In contrast, under s 90A, the investor must have relied on the statement or omission, and it must have been reasonable for them to do so. Reliance is often a difficult element for investors to prove. Demonstrating reliance in an ESG context may be easier, however. For
example, an institutional investor may be able to refer to its own documented ESG investment criteria or objectives, showing that the ESG statement was relevant to the decision to purchase securities.

3. In what circumstances could a false ESG statement cause actionable loss to an investor?

The investor must show that it has suffered financial loss as a result of the false statement. It is not possible to claim for purely nonfinancial matters such as compromised ethical objectives.

A false ESG statement might not always be relevant to a company’s profitability. For example, whether or not a company gets its energy only from renewable sources might not affect the company’s bottom line. Nevertheless, the fact that the company has been caught making a false “greenwashing” claim might damage the company’s reputation and cause a fall in its share price. Most s 90/90A claims seek compensation for a “stock drop”.

Other than a fall in share price, another possible loss for an investment firm in an ESG context (although untested in the courts) is if them investment firm suffers reputational damage as a result of having invested in a company which made false “greenwashing” claims, and this has caused a demonstrable drop-off in new investors.

Originally published by ThomsonReuters © ThomsonReuters.

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Shorter Reads

ESG litigation: shareholder actions under FSMA 2000: Important questions

Public companies need to be mindful of the risk of group shareholder actions under FSMA 2000 when publishing ESG statements to the market.

Published 10 March 2022

Associated sectors / services

Authors

Public companies are under increasing pressure to publish information about their environmental, social and governance (ESG)-related policies and practices. This pressure is being generated by changing investor attitudes, with a growing number of investors only wanting to invest in companies which can demonstrate strong ESG credentials. Regulation regarding ESG disclosures is also increasing.

Publishing statements to the market always comes with regulatory and litigation risks for public companies if those statements are inaccurate. This is perhaps especially true for ESG statements, given current public scrutiny regarding “greenwashing”. For example, a report by the New Climate Institute has recently found that many large companies are routinely exaggerating or misreporting progress on tackling climate change.

This article discusses one of these risks, namely the threat of shareholder actions under sections 90 or 90A of the Financial Services and Markets Act 2000 (FSMA).

Sections 90 and 90A of FSMA provide a statutory cause of action for shareholders of listed companies, allowing them to sue the company for loss they have suffered as a result of false statements published by the company in prospectuses (s 90) or in other published information (s 90A). “Published information” would include, for example, annual reports and accounts, which for many companies are now required to contain ESG-related information.

Shareholder actions under FSMA are a growing, but still relatively novel, area of litigation. There have been some high-profile actions resulting in settlement, although none have yet reached trial. (Allianz v RSA is scheduled for trial in October 2022, unless it settles first). There remain some legal uncertainties regarding these actions, however.

This article answers some of the questions that companies or investors might have about shareholder actions in an ESG context.

1. How false must the ESG statement be to give rise to a valid claim? What level of dishonesty do investors need to demonstrate?

For s 90 claims, the prospectus must contain an “untrue or misleading” statement, or an omission of information that investors or their professional advisors would reasonably expect to find in a prospectus for the purpose of making an informed assessment of the company and its prospects.

The company can defend itself by demonstrating that the person responsible for the prospectus reasonably believed (having made reasonable enquiries) that the statement was true or that the omission was proper.

The position is trickier for investors under s 90A. The published information must similarly contain an “untrue or misleading” statement or an omission of a required matter, but the investor must also demonstrate that a “person discharging managerial responsibilities” knew, or was reckless about whether, the statement was untrue, or that the omission amounted to dishonest concealment”. Alternatively, investors must show a “dishonest delay” in publishing information.

Proving dishonesty by a sufficiently senior person within the company can be difficult. If there is a criminal or regulatory investigation into the company, for example, by the Serious Fraud Office, this can provide investors with the necessary evidence, but otherwise they will need to seek disclosure from the company during the proceedings.

2. To what extent must investors have relied on the false ESG statement, and how might an investor demonstrate this?

Given that ss 90 and 90A claims are only available to parties with securities in the company, it seems unlikely that activist environmental organisations would bring these claims. Claimants in an ESG context are more likely to be investment firms committed to ethical investment.

Under s 90, there is no explicit requirement for the investor to have relied on the false statement or omission. Although untested in the courts, this probably means that investors can bring claims under s 90 even if the false statement had no bearing on their decision to buy securities.

In contrast, under s 90A, the investor must have relied on the statement or omission, and it must have been reasonable for them to do so. Reliance is often a difficult element for investors to prove. Demonstrating reliance in an ESG context may be easier, however. For
example, an institutional investor may be able to refer to its own documented ESG investment criteria or objectives, showing that the ESG statement was relevant to the decision to purchase securities.

3. In what circumstances could a false ESG statement cause actionable loss to an investor?

The investor must show that it has suffered financial loss as a result of the false statement. It is not possible to claim for purely nonfinancial matters such as compromised ethical objectives.

A false ESG statement might not always be relevant to a company’s profitability. For example, whether or not a company gets its energy only from renewable sources might not affect the company’s bottom line. Nevertheless, the fact that the company has been caught making a false “greenwashing” claim might damage the company’s reputation and cause a fall in its share price. Most s 90/90A claims seek compensation for a “stock drop”.

Other than a fall in share price, another possible loss for an investment firm in an ESG context (although untested in the courts) is if them investment firm suffers reputational damage as a result of having invested in a company which made false “greenwashing” claims, and this has caused a demonstrable drop-off in new investors.

Originally published by ThomsonReuters © ThomsonReuters.

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