Background

Sustainability is nowadays a crucial aspect of corporate communication and marketing strategy: ESG (Environment, Social, and Governance) profiles are a real macro-trend that is increasingly being translated into claims and ads that recall and proclaim a company’s commitment and social responsibility.  Indeed, businesses are aware of the growing sensitivity of consumers and investors to climate changes and that the environmental impact of their business and products (and related advertising) is one of the key factors that increasingly influences commercial and investment choices.

Sustainability also influences the financial sector.  ‘Sustainable finance’ is the application of the concept of sustainable development to financial activities, with the aim to create value in the long term by directing capital towards activities that not only generate economic surplus, but are also useful to society by creating value not at the expense of the environment.

Indeed, the last years have seen increasing investments in ESG funds, i.e. in assets managed according to ‘sustainable and responsible’ investment strategies.  In a nutshell, the focus is on investments (seeking a profit) on businesses that pursue the typical aims of financial management taking into account environmental, social and governance aspects, usually claiming their ‘virtues’ in favour of sustainability and the preservation of ecosystems.
In this context, companies seeking capital are increasingly eager to address ESG issues and enhance their reputation by improving their credentials in this regard.

In this context, it is critical to be well aware of the risks involved in this arena.
Indeed, making inaccurate or misleading statements regarding green or environmental credentials of an impact financing product may result in mis-selling allegations and compensation claims from investors and shareholders.
Below we look at some of the avenues that potential claimants could use to file a claim, and we focus on other major risks that companies may face in this context, and suggest how they can be mitigated.

Greenwashing-related financial litigation risks?

We are not aware of any Greenwashing-related financial litigation against companies in Italy to date, but we may expect to see an increasing volume of those lawsuits in the incoming months. The following remarks can be made on potential options that prospective claimants could choose to pursue to bring a claim.

Greenwashing financial products: investors’ potential legal initiatives

• Under applicable Italian statutes governing financial brokerage, an investor might seek to claim damages vis-à-vis the financial product issuer, responsible for preparing the prospectus, when this contains false or misleading information. In other words, the issuer is liable “for the damages suffered by the investor who reasonably relied on the truthfulness and completeness of the information contained in the prospectus”. ¹ In the absence of case law covering the subject matter to date, this provision could be invoked in Greenwashing scenarios. As clarified by the Italian Supreme Court of Cassation by judgement 2654 of 30 January 2019, ² the nature of such form of responsibility may be qualified as pre-contractual liability since the information contained in the prospectus is capable of influencing the formation of the contractual will of the investor.  The burden of proof of the harmful behaviour of the issuer, of the suffered damages (including loss of profit, if any), the issuer’s fraud or negligence and causation all lie on the investor claiming damages. A cumbersome burden of proof.
• Investors might also be able to bring claims for breach of contract under article 1218 of the Italian Civil Code when a statement or a representation made in the context of an agreement turns out to be untrue. The investor’s burden of proof would be less cumbersome in this case, as it would be limited to filing the executed contractual arrangement incorporating the untrue statements and substantiating the damages incurred (including loss of profit, if any).

Issuers, intermediaries and other sellers should thus be well aware of the above issues when making any statement about a financial product.

Greenwashing and company performance: shareholders’ potential legal initiatives

Greenwashing companies’ economic performance may also entail litigation risks, especially when it comes to environmental reporting.
Indeed, in order to reduce deplorable and counterproductive Greenwashing issues, by Directive 2014/95/EU, as implemented in Italy by Legislative Decree no. 254/2016 ³, the European Union introduced a relevant modernization factor in business communication by requiring the disclosure of non-financial information by certain large companies and corporate groups.
For the time being, in Italy, starting from financial year 2017, only large companies with over 500 employees and a turnover exceeding €40 million (or, alternatively, accounted assets exceeding €20 million) are obliged to draw up a ‘Non-Financial Declaration’ amounting to a ‘Sustainability Report’ to be attached to the traditional annual financial statements and to be shared with both shareholders and investors. Such Declaration must report, among others, on the company’s environmental and social performances and results.
Legislative Decree no. 254/2016 also provides for an administrative fine in case of breach of the duty to accurately and truly draw up the ‘Non-Financial Declaration’: indeed, directors and members of the board of auditors can be personally held liable to pay an administrative fine ranging between €50,000 and €150,000. ⁴
Considering the growing attention towards a more sustainable finance in Italy, it seems appropriate to consider that the above reporting obligations may soon be extended also to other companies, perhaps in some simplified form, with the application of fines in case of breach of the relevant duty.
In light of the above, shareholders might seek to bring claims for redress of damages (including loss of profits, if any) caused by irregularities or omissions in the information reported within the ‘Non-Financial Declaration’ or even by delays in publishing the same.  Also, a company’s directors could held liable to pay compensation for the damages incurred by shareholders arising out of breaches of directors’ duties pursuant to article 2395 of the Italian Civil Code. ⁵

Potential litigation relating to environmental disclosures is thus a risk that financial institutions and businesses should always take into account.

Other Greenwashing-related risks?

Litigation is not the only risk arising from Greenwashing.  Businesses should also be aware of:

• Risk of fines: as said, under Legislative Decree no. 254/2016, in the event of a ‘Non-Financial Declaration’ incorporating untrue information, or lacking mandatory information, an administrative fine, ranging between €50,000 and €150,000 can be applied to directors and members of the board of audit;
• Regulatory risk: ‘green’ products are currently very much on regulators’ radars; and
• Reputational risk: business reputation may be harmed if a company loses credibility with environmentally concerned investors, shareholders and the general public.

How significant are the risks also in light of recent European regulations?

The European Union attempted to curb Greenwashing issues by adopting the Disclosure Regulation 2019/2088/EU, ⁶ the Taxonomy Regulation 2020/852/EU ⁷ and the Final Report on draft Regulatory Technical Standards in early 2021. ⁸

The Disclosure Regulation in conjunction with the Taxonomy Regulation define new standards for dealing with sustainability risks, negative sustainability impacts, advertising social and ecological aspects, as well as sustainable investments.  Both Regulations explain the levels and characteristics of disclosure for financial market participants and financial advisors, which have been further specified by the Final Report in recent times.

Sustainability risk can arise in environmental, social, and business contexts and can negatively affect the value of an investment. To enable financial investors and retail customers to make fully-informed decisions, it is important that they are made aware of any sustainability risks and of the sustainability impacts on the business, and that they have access to information regarding sustainable investments.  Additionally, they need to be empowered to assess social and ecological advertising of financial products. The Disclosure Regulation ensures that such information is properly disclosed and helps customers to make informed decisions.

The Taxonomy Regulation sets out a classification system for environmentally-sustainable economic activities and, in doing so, aims to create a common language to be used when assessing whether economic activities have a substantial positive impact on the environment.

The Final Report adds a more detailed view. Here, the general requirements of the Disclosure Regulation are substantiated by concrete contents and methodologies of sustainability-related disclosures for ultimate implementation.

At the same time various organisations have sought to bring further clarity into this area. The International Capital Market Association (ICMA) have published Green Bond Principles (“GBP”) ⁹, Green Loan Principles and Sustainability Linked Loan Principles.  Among these guidelines, the recent GBP 2021 is the sixth version of the ICMA GBP in which the original intention of the GBP has not changed, namely: to implement transparency regarding disclosures, so investors can make informed decisions.

In light of the above and, in particular, of the entry into force of the Disclosure Regulation, the Taxonomy Regulation and the Final Report, it can be observed that, at least for companies operating in Europe, legal uncertainty is being progressively superseded in the absence of a universally-accepted standard for what is to be considered ‘green’ and related risk of Greenwashing claims.

Now businesses in Europe can use the Taxonomy Regulation to identify sustainable business activities and the Disclosure Regulation, together with the Final Report, to correctly provide information to investors and thus limit the risk of being accused of Greenwashing.  Following the existing rules and guidelines - where relevant - should help to minimise the risk of accidental greenwashing and, where needed, to supersede greenwashing allegations.

Final remarks and next steps

As many other countries, Italy will be looking to make a green recovery in the wake of COVID-19, thus increasing the prevalence of impact financing even more.  Now is the time for businesses to take steps in order to mitigate legal risks in this area.
To this end, the following practices might be adopted:

1. Be accurate in providing information to investors at all stages of a financing transaction, including during pre-contractual negotiations, following Disclosure Regulation 2019/2088/EU and the Final Report.
2. Follow the Taxonomy Regulation and other available guidelines regarding what constitutes a ‘green’ product before indicating it as such, and in case of use of ‘green’ terminology that does not have a generally-recognised meaning, make sure it is carefully and clearly explained and defined.
3. Seek to obtain a second opinion on a product's ‘green’ credentials and environmental disclosures in company reports from a qualified independent expert; consider appointing a third party to monitor adherence to a product's ‘green’ standards throughout its lifecycle.
4. Make every effort in legal risk assessment, stay up to date with legal and regulatory developments in this fast-moving area and seek legal advice where needed.

References:

¹ See art. 94, paragraph 8, Italian Consolidated Act for Provisions Concerning Financial Brokerage (TUF), Legislative Decree 58, of 24 February 1998.

² Italian Supreme Court of Cassation, Div. I, judgement no. 2654 of 30 December 2019, in Guida al Diritto 2019, 15, at 46.

³ See Legislative Decree no. 254 of 30 December 2016.

⁴ See art. 8 of Legislative Decree no. 254 of 30 December 2016.

⁵ The cause of this tortious liability is a wrongful act, whether intentional or negligent, which is carried out by corporate bodies in violation of their functional duties and which directly damages the corporate shareholders’ interests. The burden of proof of (i) the wilful or negligent misconduct of the director(s) and (ii) the damage suffered and (iii) the causal link between the wrongful act and the damage suffered, lies on the shareholder(s).

⁶ See Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector, which came into force on 10 March 2021.

⁷ See Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088, which entered into force on 12 July 2020.

⁸ Final Report on draft Regulatory Technical Standards (JC 2021 03) (link to the website).

⁹ See ICMA’s Green Bond Principles (link to the website).

Authored by Filippo Chiaves and Martina Di Sano.