Increased litigation, ESG reporting overwhelm and the possibility of the UK Green Taxonomy being scrapped were all discussed in a webinar hosted by law firm Macfarlanes.
The webinar explored topical trends and themes, including changing legislation, the differences between EU and US ESG related investor requests, navigating the UK anti-greenwashing rule and other anti-greenwashing pressures, and the impact of strategic climate and nature litigation on businesses.
Here, PA Future rounds up the key takeaways.
UK Green Taxonomy
In November, chancellor Rachel Reeves announced the government would launch a consultation on the value and use case of the UK Green Taxonomy, which is set to close on 6 February 2025. First proposed in November 2020, the Taxonomy is meant to support investment into activities aligned with sustainability goals and to mitigate greenwashing. However, its implementation has been delayed multiple times, and this latest consultation is a response to “mixed feedback” on the value of taxonomies at large.
Rachel Richardson, head of ESG at London-based law firm Macfarlanes, said she “wouldn’t be surprised if the government decided to scrap the UK Green Taxonomy”.
She explained to PA Future: “When the Taxonomy was first proposed, it was November 2020. In the last four and a bit years, various regulatory regimes have stepped in to fill the gap: we now have mandatory Taskforce on Climate-related Financial Disclosures reporting, a labelling regime in the form of the UK Sustainability Disclosure Regulation (SDR) and an anti-greenwashing rule. The vast majority of our clients also market funds into both the EU and UK, hence they are already familiar with the EU Taxonomy, to the extent it is relevant to them. This also means they are subject to a vast array of regulatory requirements in the EU and UK.
“There is also a concern the proliferation of global taxonomies could lead to managers being forced to disclose against multiple taxonomies, resulting in increased cost); market fragmentation; and investor confusion with a mix of definitions for the same sustainable activities. Reducing the number of taxonomies globally mitigates this risk.”
Speaking to Joe Dharampal-Hornby, head of public affairs and communications at UKSIF, however, it seems there is still investor appetite for a UK Green Taxonomy. “A robust, science-based taxonomy can effectively guide investors towards genuinely decarbonising activities, and help guard against transition risk. The investment community typically welcomes clarity and certainty from policymakers, which the taxonomy could provide, but in its absence, they have instead focussed on measures such as transition plans which have seen more progress recently,” he said.
“Given repeated delays, we hope the consultation on use cases will progress quickly and continue to advocate for the implementation of an effective, science-based taxonomy at the earliest possible date.”
Regulatory burden
Richardson also outlined several key updates to the regulatory landscape. Firstly, the Labour government committed to ensuring the largest UK public companies and all UK-regulated financial services firms prepare and disclose credible transition plans aligned with the 1.5°C goal of the Paris Climate Agreement in its election manifesto.
Mandatory transition planning is not new. An existing Financial Conduct Authority rule covers transition planning but only serves as a suggestion on a ‘comply or explain’ basis. Equally, there is an element of transition planning in a TCFD report, but it is also not a substitute for a more focused transition plan, explained Richardson.
She also noted that the Transition Plan Taskforce published its disclosure framework in October 2023 and various supplementary guidance last year in 2024, but it is still unclear what ‘align with 1.5’ really means. For some, achieving 1.5 may rely on technology that doesn’t yet exist.
Elsewhere, the UK Sustainability Reporting Standards consultation is expected in Q1 2025.
Asked whether their clients feel that regulatory upheaval could lead to a compliance overload, Richardson agreed.
“ESG professionals are already suffering with an ever-changing and vast regulatory reporting burden. While it is good that the market has been maturing rapidly and regulation has stepped up to regulate it, capacity is constrained and budgets for additional reporting are not increasing with the workload.”
There are ways to mitigate the ESG reporting overwhelm, and some aspects of ESG reporting are already moving across to finance teams, Richardson continued. “For example, CSRD reporting will require a sustainability statement to be included within the annual report of a reporting business, meaning the finance team will need to be happy with the contents and might take the lead on the presentation of the information. However, while this means the ESG professionals may be able to share the burden, they will still remain heavily involved as the subject matter expert. I don’t see this getting better in the immediate future.”
ESG litigation
Macfarlanes also reiterated the threat of litigation resulting from greenwashing, with dispute lawyers beginning to see claims materialise beyond solely regulatory enforcement to non-regulated firms.
“The highest profile case in the UK is ClientEarth versus Shell. From a legal perspective, it was a failure, in that the High Court gave it short shrift by rejecting the claim at the first and second hurdle, claiming ClientEarth had failed to meet the relevant legal hurdles,” said Chloe Edworthy, partner at Macfarlanes.
“You might say, in one regard, that clients have nothing to worry about. These claims aren’t yet expressed in a legally coherent manner, and they’re not landing. But at the same time, you have research from the Grantham Research Institute that shows that even the receipt of a claim may impact the share price of a company, for example, by roughly 1% for energy companies. That’s obviously a material concern to senior management.”
Alongside legal action on supply chain failures, Edworthy also identified opt-out class actions as an area of particular interest. One such currently before the Competition Appeal Tribunal relates to Thames Water. Like all water companies, its consumer prices are linked to performance objectives, and the class action states Thames Water failed to accurately report causing pollution in advance of the penalties imposed by the regulator, which has led to increased consumer bills.
“If that gets off the ground, we can expect to see a large number of these types of cases being brought in response to similar instances in the future,” surmised Edworthy. “We know from experience that litigation funders are very interested in these types of cases. So, where they are reading in the papers that there is public indignation and outrage about something like this, the litigation funders are already thinking about book-building to bring these types of cases.”
Anti-ESG litigation
At the other end of the spectrum, earlier this month, a US district judge ruled that including ESG factors in 401(k) retirement plans was in breach of fiduciary duty, a case that involved American Airlines. Despite increasing political pressure, however, Edworthy does not expect to see similar cases brought to court in the EU or UK.
“The ‘anti-ESG’ movement has been prevalent for many years in the US – our contacts at US firms are often instructed by a well-resourced investor bringing claims against a company for damaging value by pursuing ESG objectives. Those claims have not surfaced here in the UK/Europe, but there are increasing political pressures and where the US goes, we often follow.
“That said, the public debate of these types of issues is currently very different here than in the US, and these types of claims would be challenging for investors in much the same way that climate activists face challenges where companies/boards can demonstrate that they considered the relevant factors and made a balanced decision. Further, it would be very difficult if the company could show that it was compelled to act in a certain way by reference to regulations or other legislation.
Another factor specific to the US, Edworthy agreed, is district judges are a political appointment, and so are much more swayed by political trends, as opposed to those in England who “tend to staunchly apply the law as written”.
“In short, therefore, we do not expect a tidal wave of these types of cases but would not be surprised to see one or two given the right fact pattern.”
