Identifying your greenwashing litigation risk: Claims against auditors and advisors

Potential Cause 5: Professional negligence arising from greenwashing

The law: professional negligence

Negligence claims against professionals are common, as are regulatory and professional body investigations into breaches of professional standards.

As the demand for quality ESG reporting (and advice on preventing greenwashing) grows, so too does the need for comparable professional advice. Some recent counts have over 650 voluntary and mandatory ESG regulatory disclosure requirements with more coming every month. Although compliance with these requirements rest principally with the reporting companies, many are also reliant on their professional advisors to help navigate them through this complex new regime where the litigation, regulatory and reputational liabilities mentioned above can flow from getting things wrong. There is a growing number of accountants, lawyers, consultants and other professionals advising in this arena. Auditors have for a long time also provided independent assurance on companies' financial reporting and increasingly will now be required to audit the procedures, controls and governance behind the companies ESG reporting, as well as the reporting itself, with a view to preventing greenwashing.

What does this mean for greenwashing risk?

In the same way that preparers of ESG related disclosures will get this wrong, so too will the professional advisors. For example, the Law Society's 2023 guidance warns of the risks of (a) failing to advise on climate change issues relevant to the matter being advised on and (conversely) (b) providing negligent advice outside the knowledge and competence of the advisor. The FCA introduced the "anti-greenwashing rule" as part of the Sustainability Disclosure Requirements in November 2023, which will applies to firms as of 31 May 2024 (guidance here). As clarity and consensus on best practice around ESG reporting and preventing greenwashing claims emerges, we can expect to see the following types of claim against professional advisors:

• Professional negligence satellite claims arising from claims against companies, who have reasonably relied on questionable professional advice;
• Regulatory investigations by professional bodies where greenwashing/ESG advice has fallen short;
• Specific failures to warn of climate related risks incidental to other advice;
• Claims against auditors for not picking up misstatements that ought to have been reported differently.

So, what does this mean for my business?

Litigation risk can be difficult to measure. Claims, if they arise, may relate to decisions taken or statements made many years previously. It is difficult to know when a loss for a claimant may arise, and when a corresponding claim may therefore be brought.

However, underlying all of the above causes of action is the importance of good governance. Companies (and their directors) must ensure that:

• the information they publish is accurate and that they maintain an audit trail of credible evidence verifying all claims that they make;
• the decisions taken are on solid ground and in the best interests of the company; and
• reliance on professional advisers is made reasonably, which means approaching professional advice with appropriate scrutiny.

Greenwashing risk generally emerges when these governance structures break down or are neglected.

At Stephenson Harwood, we have expertise in all aspects of greenwashing risk: regulatory compliance, civil fraud, commercial and corporate litigation, competition and consumer protection. We are well placed to advise in every major industry and sector, ranging from multinational corporations, financial institutions, large and medium sized companies, and professionals.

Our greenwashing risk team is international with specialists spread across our offices in Europe, Asia, and the Middle East, which means that we can support you wherever your business interests are based.