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The legal challenges companies face in making net zero claims8 December 2022

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It has always been the case that companies need to be able to back up the claims they make, especially to consumers and in regulated sectors. That remains true of climate and other ESG commitments. Where companies are unable to show that they have appropriate short and long-term strategies to meet their commitments and data to demonstrate progress, there appears to be growing appetite for civil society organisations, regulators and individuals to use legal routes to seek to increase transparency, change policy or implementation goals and otherwise damage the reputation or cash flows of target corporates.

"Companies must carefully follow the guidance on avoiding misleading environmental claims."

In this article, we look at the main legal challenges being faced by companies making net zero claims and publishing carbon emissions, and what businesses should consider when making net zero claims. This follows our earlier article, which examined some of the main criticisms of net zero claims made in recent reports by advocacy organisations.

Potential legal challenges to net zero claims: some examples

Advertising watchdogs are increasingly banning adverts with ‘net zero’ claims that are perceived to be misleading consumers: On 19 October 2022, the UK’s Advertising Standards Authority (“ASA”) announced that HSBC could no longer run adverts promoting tree planting as part of its plans to reach net zero emissions. The adverts were found to be misleading consumers as they omitted material information and did not have evidence to prove that their efforts were environmentally beneficial. And, in the meantime, HSBC had continued to provide finance to the tune of US$100bn for fossil fuels investments. Companies, when making net zero claims in the UK, must carefully follow the guidance on avoiding misleading environmental claims that has been issued by the Competition and Markets Authority, as well as the ASA’s advertising guidance on misleading environmental claims and social responsibility.

"The claimants say the campaign broke European consumer law."

Globally, regulators are investigating companies making net zero claims: Glencore, one of the world’s largest coal companies, is relying on the use of offsets to meet its net zero plans and in its pledge to be aligned with the Paris agreement. It has been criticised for promoting offsets in place of committing to lowering its carbon emissions, whilst opening 19 new coal mines in Australia.

ClientEarth is supporting the Environmental Defenders Office, on behalf of The Plains Clan of the Wonnarua People (PCWP) and Lock the Gate Alliance as part of a multi-group complaint against Glencore in Australia. The complaint has been lodged with Australia’s corporate watchdogs against Glencore on the basis that their claims about its climate impact are flawed and misleading. Glencore is listed on the London Stock Exchange, so the UK’s Financial Conduct Authority (“FCA”) has been formally requested to coordinate with the Australian securities regulator, ASIC, on a robust regulatory response to address Glencore’s claims.

Advocacy groups are seeking to hold companies accountable under consumer law for allegedly misleading consumers with net zero claims: Lawsuits against fossil fuel companies making environmental claims are on the rise in a wave of greenwashing claims. A group of environmental organisations has filed a lawsuit in France against the country’s largest energy company, TotalEnergies, accusing it of misleading consumers about its efforts to fight climate change in its “reinvention” marketing campaign as a multi-energy company. The claimants say the campaign broke European consumer law by suggesting TotalEnergies can reach net zero carbon emissions by 2050 whilst still producing more fossil fuels. The challenge being made is to Total’s transition plan, which the claimants say is not scientifically proven and hence misleading. In their transition plan, Total claims that the use of natural gas is sustainable and promotes its plan of increasing use of natural gasses.

"TotalEnergies has, however, rejected Greenpeace’s methodology."

Companies are publicly facing criticism for the methodology used in estimating and reporting carbon emissions: TotalEnergies has more recently been accused of severely underestimating its reported carbon emissions. Greenpeace has estimated that TotalEnergies’ carbon emissions in 2019 could be four times those disclosed by the company, by using the emissions standards of the French state environmental agency (ADEME). TotalEnergies has, however, rejected Greenpeace’s methodology. Fossil fuel companies, including Shell and BP are also increasingly publishing carbon emissions as part of their pledge to address climate change. This has fuelled debate about companies claiming to be aligned to the Paris Agreement and the underlying assumptions used by companies in reporting carbon emissions.

Directors may face action from shareholders who do not agree with their climate strategies: On 15 March 2022, ClientEarth sent a pre-action letter of claim to the board of directors of Shell alleging the Board’s failure to properly manage climate risk in breach of the board’s duties under sections 172 and 174 of the UK Companies Act which respectively require that directors exercise their reasonable care, skill and diligence to act in a way that promotes the company’s success. According to ClientEarth, Shell’s board has failed to adopt and implement a climate strategy that aligns with the Paris Agreement.

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"When a company makes net zero claims, they should be consistent with the company strategy, clear and unambiguous, and backed up with data."

This follows the Dutch court’s ruling in May 2021 that ordered Shell to cut its global emissions by 45% by 2030. This decision is being appealed by Shell. This claim shows a growing trend in shareholder led activism in climate change issues and directors of companies should consider how their decisions may be challenged.

What businesses should consider when making net zero claims

When a company makes net zero claims, they should be consistent with the company strategy, clear and unambiguous, and backed up with data. There is also an increasing number of regulatory considerations which need to be taken into account. Companies registered in the UK need to consider the Green Claims Code, which consists of new rules designed to ensure that any environmental claims on goods and services do not mislead customers and can be substantiated.

Furthermore, UK registered companies should bear in mind that there is currently a Transition Plan Taskforce, launched by HM Treasury, to develop a gold standard for climate transition plans. It is envisaged that the Taskforce’s work will promote decarbonisation by ensuring that companies and financial institutions prepare comprehensive plans to achieve net zero. Companies will likely be required to follow guidance when preparing climate transition plans in the future. More recently, the FCA has proposed a package of new rules to improve trust in sustainable investment products. The measures will include restrictions on the use of terms, such as ‘sustainable’, ‘green’ and ‘ESG’ and promote the use of investment product sustainability labels.

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