Laying Down the Law for Sustainability

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    Stockholm (NordSIP) – What do KLM, Shell, Facebook and the UK government have in common?  They have all been on the losing end of ESG-related lawsuits.  Sustainability’s gradual move into the mainstream is a welcome development, but it has also led to a proliferation of environmental claims and commitments from corporations and governments across the board.  Typically, institutional asset owners have neither the time nor the resources to verify the sustainability credentials of every holding in their portfolio.  Despite this, high profile greenwashing cases regularly hit the headlines.  So, who are the ESG detectives behind these revelations and how do they operate?

    Greenwashing can take many forms.  Companies signing up to high-level sustainability initiatives can use this as a mask for business-as-usual, while enjoying a place within various ESG indices.  There is also the fairly widespread practice of signing up to net-zero carbon commitments while actively supporting behind-the-scenes lobbying efforts against climate change mitigation, or systematically voting against climate-friendly board resolutions.  Many large banks also continue financing fossil fuel projects while their asset management arms sign from the ESG hymn sheet.

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    Navigating through the ESG smoke and mirrors

    The time-consuming job of injecting some clarity into this murky mess falls into the hands of various non-profit organisations and think tanks, typically maintaining their independence through funding from philanthropic foundations.  InfluenceMap and ShareAction provide a mine of information for investors on a range of ESG issues, including dynamic rankings of corporations, asset managers and banks based on their real-world lobbying, voting or funding behaviour.  The focus is often on “under the radar” activities in specialist corners of the financial markets.  Sweden’s own Anthropocene Fixed Income Institute (AFII) regularly sheds light on the persistently huge volumes of capital generated by the global bond markets for new fossil fuel developments.

    Putting greenwashers in the dock

    The work of these information providers can inform institutional investors’ investment and engagement decisions and put pressure on companies and financial institutions mindful of reputational risk.  Where exposure and shareholder pressure are deemed ineffective, some organisations will take things one step further by engaging in litigation.  In pursuing their case against KLM, Dutch environmental campaigning group Fossielvrij NL enlisted the help of environmental legal charity ClientEarth, who can call on more than 150 lawyers and policy experts to take greenwashers to task.  ClientEarth was also involved in exposing the gaping holes in the UK government’s net zero strategy.  The power of lawyers to preserve democratic institutions and the environment is similarly being harnessed by the UK’s Good Law Project.  In some cases, individual institutional investors that have sufficient financial clout will take matters into their own hands.  Sweden’s State AP7 fund has led a number of high-profile legal actions against the likes of Facebook and Alphabet.  AP7’s preferred approach is engagement, but they have successfully litigated when they deem it necessary and in the shareholders’ interests.

    As governments move from voluntary guidelines towards concrete environmental legislation, greenwashers and ESG laggards will have less and less room to hide.  This growing army of sustainability-focused non-governmental organisations and asset owners willing and able to expose and litigate against detrimental corporate behaviour will play a crucial role in global efforts to mitigate the climate crisis.

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