UK Investment Association's Net Zero Forum: Climate Disclosure and Managing Legal Risk

Against a dynamic and fast-paced policy and regulatory backdrop the UK Investment Association is working closely with its members in the area of sustainable and responsible investment, and among other work and initiatives, it is a supporting partner organisation to the Net Zero Asset Managers initiative. 

Vanessa Havard-Williams, Partner and Linklaters global head of environment and climate change, and Raza Naeem, Counsel in our London financial regulation practice, joined the IA’s Paul Scaping at the IA’s most recent IA Net Zero Forum on 10 February 2022, to discuss the management of the challenges and legal risks associated with making climate related disclosures in a rapidly shifting environment:

Responding to a moving target

We are currently at the early stages of a period of very rapid acceleration of disclosure requirements, and a key challenge is that the financial services industry is being impacted at the same time (and occasionally before) underlying sectors. Increased scrutiny from the media, shareholders, regulators, NGOs and other stakeholders, together with a dependency on external data (where it is even available) for reporting entities and a lack of alignment between data providers, creates its own challenges. Disclosures therefore may need to be more iterative in nature and make use of appropriate disclaimers in order to articulate any challenges.

Liability/enforcement risks

There are of course a number of other risks including:

• Reputational issues, for example in the event of greenwashing, or where there is an inconsistent message between a manager’s products and its advocacy on ESG reforms
• Both UK and EU regulators have confirmed that they are very focussed on ESG, and indeed the FCA has confirmed that even where its ESG regime is not fully embedded, there is an expectation that regulated entities will comply with existing rules with ESG in mind
• Civil or contractual liability could arise, for example the tort of misrepresentation in the context of greenwashing or negligence in the context of the use of data.

A structured approach

These risks point firmly to a need for a robust compliance programme to be in place with, among other things:

• effective governance (including senior management responsibility, adequate resourcing and budget) and oversight of disclosures and the use of data inputs;
• stress testing of disclosures, considering carefully the adequacy of any data inputs and dealing with changes and corrections (for example as the available data develops and improves), as well as ensuring that a disclosure is not giving a misleading impression about a products green credentials;
• effective record keeping (particularly where difficult decisions are made, to ensure that if judged in hindsight a clear narrative is evident);
• careful use of disclaimers; and
• tight control over communications and advocacy.

Of course this must also be considered in the context of managing parallel climate disclosure rules - here ensuring that processes have room for growth and improvement in a rapidly shifting environment can make a difference.

These issues and more were covered at this IA Net Zero Forum. Future forums will continue to provide a platform for IA members to find solutions in their journey to net zero.

Our Sustainable Futures blog is located here.

See here for more on the IA’s support of the Net Zero Asset Managers initiative, including its monthly “Path to Net Zero” bulletin.