As part of our Group Proceedings Horizon Scanning series, we have been considering the potential impact of the new group proceedings legislation in Scotland. As this continues to gain more momentum following its introduction in 2020, a growing number of sectors will find themselves facing an increased litigation risk. This blog considers the risk to organisations, particularly those in the financial services sector, which fail to adhere to their environmental, social and governance (ESG) commitments.
Most organisations will recognise the increasing importance of ESG factors to potential investors who wish to ensure that the companies in which they invest operate in an ethical and sustainable manner. As a result, many companies make ESG pledges and commitments, such as reducing their carbon footprint, making charitable donations or increasing diversity in their workforce.
In the financial services sector, ESG funds have become more and more popular with investors looking to make 'green' investments. But what happens if the ESG promises upon which these investors have relied are found to have been exaggerated or "greenwashed" to entice the socially conscious market into investing?
In addition to the obvious reputational risks for the organisations involved, one potential consequence is that investors whose decision to invest was based upon a fund's ESG credentials may be in a position to claim that the fund has been mis-sold – even if, from a financial perspective, it is performing better than expected.
In general terms, mis-selling is where people are enticed into parting with their money due to mis-leading or mis-represented information, of which there have been various high-profile examples in the financial services sector, most notably the mis-selling of PPI. ESG-related claims may be the next such example.
The potential significance of the introduction of group proceedings in this context is that groups of disgruntled stakeholders who find themselves in a similar position may now be able to combine their claims and raise proceedings in Scotland as a group. Whereas an individual investor may be less inclined to pursue such a claim, particularly if the relevant funds are doing well, the prospect of opting into a mass litigation which is being run on their behalf, and in respect of which the risks and potential cost exposure will be lower, is likely to be far more appealing.
Accordingly, organisations who are making ESG commitments, or offering investment products based on ESG credentials, should be aware of the potential risks of doing so if they are unable to fulfil their commitments. The level of exposure here will depend upon the representations which have been made and the value of the investments. However, if these organisations are not careful and do not have suitable processes in place to manage the risks, they may become involved in a new wave of mis-selling claims raised by groups of unhappy investors.
Brodies will continue to monitor the group proceedings landscape in Scotland and further entries in this series will follow. If you have any queries relating to group proceedings, please contact Ross Campbell, Craig Watt or your usual contact at Brodies.