Risk and regulatory headliners

DAC Beachcroft’s Boardroom survey, in collaboration with The In-House Lawyer, on the risks that are the focus of boardroom discussions is now in its fourth year. Since then UK businesses have dealt with the impact of Covid-19, the invasion of Ukraine, widespread material and labour shortages.

The survey has tracked how boards have adapted and we hope the next edition continues to provide useful insights into the impact of rapid change and new challenges. Due to be published in Summer 2023 it will be interesting to see if economic pressures have comprised ambition, even if just for the short term, and what risks are taking precedence.

Cyber security has been a growing risk since the Boardroom survey started. With rapid technological advancement and more innovative ways of attack constantly evolving, heavier demands are placed on board directors’ ability to keep pace. Elon Musk’s recent call for a pause in developing more powerful AI systems until we are more confident about the benefit and our ability to manage the associated risk, is a good example of how boards need to be on constant alert about the need for new ethical, strategic and operational discussions. AI language models, like Chat GPT, have allowed for significant developments in natural language processing and have become increasingly important in a wide range of industries. For all its advantages, these chat boxes expose businesses to harm in new ways. Phishing remains the dominant entry point for cyber attacks, but at least grammatical errors and unnatural expressions gave a clue to a present danger. AI language models can circumvent such deficiencies. Add to this AI’s increasingly sophisticated ability to generate code and use it maliciously; and its ability to create more convincing deepfake videos, all add weight to Musk’s call for greater caution.

Cyber security is an integral part of strong governance, with cyber risks now embedded as an ever constant threat. ESG in its entirety was just emerging as a regularly used term for the majority of businesses in 2019. It has, in the period, evolved from strategy to operational reality. Regulations around the issue, particularly those around environmental aspects, are continuing to increase and regulators are becoming ever more robust in the quest for compliance and consumer protection against ‘greenwashing’.

Laura Berry, partner and head of ESG in disputes and investigations at DAC Beachcroft, comments on the steps being taken to protect consumers from potentially misleading green claims in advertising and marketing materials: ‘Businesses should be even more vigilant as to the substance of their marketing activities…. The recent regulatory and investigatory initiatives by the Advertising Standards Agency, the Competition and Markets Authority and the European Commission were to be expected, and businesses should adapt their strategies to engage with these developments.’

The Advertising Standards Agency (ASA) has taken steps to clamp down on various issues arising out of green claims. The ASA published clear guidance in December 2022, requiring marketers to ‘always ensure that they have robust substantiation for their green claims’ and ‘not omit significant information about their claims’. In February 2023 the ASA then updated its guidance in relation to the use claims of being carbon neutral and net zero claims, as follows:

  • Avoid using unqualified carbon neutral, net zero or similar claims.
  • Claims about the reduction of carbon emissions must be substantiated.
  • Where a claim is made based on future goals to achieving net zero or carbon neutrality, ensure that it is based on a verifiable strategy to deliver these goals.
  • Offsetting claims should be substantiated with objective evidence.
  • Qualifying information about a claim should be sufficiently close to the key aspects of the claim, in order for consumers to identify and consider it before making a decision based on that claim.

In January 2023 the Competition and Markets Authority (CMA) launched an investigation into the environmental claims made about essential household items and fast moving consumer goods and whether such claims comply with consumer protection law. The CMA has identified ‘problematic claims’ including vague and broad statements relating to the sustainability of a product and its recyclability, and misleading claims about the use of natural materials. The outcome of the CMA’s investigation will be critical for the sector and is likely to have far-reaching implications for the marketing of household essentials.

The European Commission (EC) has also intensified its efforts to regulate environmental claims in the European Union. In March 2023 the Commisson proposed a Directive on green claims which would set minimum requirements on how traders must substantiate ‘explicit environmental claims’ about their products, and the communication of such claims and provisions on environmental labels.

For many businesses the strength of their environmental claims are an important competitive differentiator. The need for environmental marketing to be backed-up with evidence will be essential in the current and future regulatory climate. It is now more important than ever for in-house legal teams to ensure that they have strong relationships with their marketing departments, as it becomes critical for any suggestions of environmental benefits or sustainability claims to be substantiated.

On increasing environmental litigation, Laura said, ‘Businesses must also be aware of the increasing risk of litigation relation to environmental issues. Claimants, from activist groups to consumers, are increasingly willing to try to force behavioural and policy change through the courts, and such litigation can have significant financial and reputational consequences. If the past few months are anything to go by we can only expect much more activity on this front.’

The ground-breaking derivative litigation from ClientEarth against Shell’s board of directors in relation to its alleged failure to (i) adapt and implement an energy transition strategy that aligns with the Paris Agreement, (ii) manage the risks posed to the company by climate change, or (iii) deliver a 45% reduction in greenhouse gas emissions by 2030 is a recent and significant example. Whatever the decision of the High Court it is clear, from this case and others, that activists are determined to keep the pressure on defendants and potential defendants in relation to their climate-related decision making and strategy. They are not afraid to bring creative, and sometimes controversial, claims against government entities, individual directors and regulators.