As the reporting of environmental, social and governance (ESG) metrics has become more mainstream, at least with respect to large, publicly traded, corporations, the content of the reports and the implications of adopting ESG-friendly corporate practices are coming under increasing scrutiny by investors, regulators and even non-governmental organization (NGOs). This creates a challenge for boards of directors, who, in keeping with their newfound responsibilities, need to be cautious that their reports, and even more importantly their policies, do not run afoul of what in some instances are conflicting demands. Nowhere is this conflict more stark than when comparing supposed "greenwashing" claims with the so-called "ESG backlash" trend seen in some jurisdictions.
GREENWASHING
It is a fundamental rule of responsible ESG reporting that ESG claims must be: (1) truthful and not misleading; (2) specific and not general or ambiguous; (3) accurate and not exaggerated; and (4) substantiated and objectively verifiable. ESG claims that do not meet these criteria could be subject to claims of "greenwashing" which could result in sanctions from regulatory authorities.
In Canada, the Competition Bureau has adopted a series of practices for businesses to ensure that ESG claims, including any environmental and so-called 'green' claims are not considered to be misleading.
Greenpeace Canada v. Pathways Alliance
One of the most high profile "greenwashing" claims in Canada was launched by Greenpeace Canada who, in 2023, lodged a complaint to the Competition Bureau alleging that six of Canada's largest oil sands producers (those forming the "Pathways Alliance") were making false and misleading representations to the public in their "Let's clean the air" advertising campaign.
One of the remedies being sought by Greenpeace Canada is for the Pathways Alliance to pay a fine equal to $10 million dollars or 3% of worldwide gross revenues to organizations for the rehabilitation and clean up of oil sands.
Complaints like this, based on advertising claims or reports to investors are increasing and prudent corporations should carefully scrutinize any ESG statement they propose to make public in advance sometimes even engaging external auditors to ensure their statement meets the appropriate criteria of truthfulness and objective verifiability.
ESG BACKLASH
On the opposite side of the spectrum is a concept referred to as "ESG backlash." This concept reached high prominence in 2023, as several US state politicians advanced a view that ESG principles were inconsistent with the corporate obligation to maximise shareholder value.
State officials in Florida, Oklahoma, Texas, West Virginia and several other states have said some asset managers are pushing an ESG agenda at the expense of investor returns. Officials from the aforementioned states have advanced the view that ESG principles are not relevant to investment decisions, and, in some cases, have barred asset managers that use ESG benchmarks from handling state pension funds.
In March 2023 governors from 19 states pledged to use "state pension funds to force change in how major asset managers invest the money of hard-working Americans, ensuring corporations are focused on maximizing shareholder value rather than the proliferation of woke ideology."
In a joint statement the governors said "The proliferation of ESG throughout America is a direct threat to the American economy, individual economic freedom and our way of life, putting investment decisions in the hands of the woke mob to bypass the ballot box and inject political ideology into investment decisions, corporate governance and the everyday economy."
A Conference Board survey found that a majority of American companies surveyed expect this type of backlash to continue or even intensify during the next two years. However, so far it appears that the companies surveyed indicated they do not plan to retreat from their ESG commitments.
The "ESG Backlash" phenomenon appears to emanate mostly from the US, and primarily at the State level. Companies based in the European Union (EU) do not seem to be facing any similar pressure from federal or local government agencies.
However, it is important that Canadian companies keep an eye on this development, as Canadian policy is often informed by developments in the US as well as the EU, but Canadian companies doing business in the US could be directly impacted by this development.
FINDING THE RIGHT BALANCE
At the heart of the "ESG backlash" argument is the assumption that following ESG principles runs contrary to a corporation's obligation to maximise profit for its shareholders. However, it is important to note that even if one were to assume that a corporation's primary objective and obligation is to maximize shareholder profit, such an obligation is not unfettered. For example, no one would suggest an illegal course of action should be pursued simply because it is more profitable. But in the absence of legislation mandating ESG principles (an unlikely scenario in our view), corporations will need to make efforts to articulate how their ESG policies are truly consistent with maximizing shareholder value. This could be by reference to investor preferences, climate change concerns and their implications for the long term value of the corporation, in addition to local benefits and how that creates a more stable and loyal workforce, all the while making sure any claims they make are truthful, specific, accurate and objectively verifiable.
The task is not necessarily an easy one, but once articulated clearly, should be quite achievable by those that take the time to think it through. Done properly, following a reasonable roadmap which balances the maximization of shareholder value with ESG principles should minimize the risk of being caught in litigation from on side of the spectrum or the other.
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