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Counsel Kate Gee comments in Compliance Week on the steps the UK must take to become a climate risk leader and the legal risks associated with ESG disclosures.

Kate’s comments were published in Compliance Week on 20 January 2022 and can be found here.

“One of the main reasons why companies and financial institutions may struggle with TCFD implementation is because it is difficult to identify, collect and analyse the relevant data, in sufficient detail, across the breadth of their organisations and operations. It requires attention at all levels of a company – from the board to the product teams, the client relationship teams and beyond. ESG disclosure needs to be brought in to the heart of an organisation’s reporting process.”

“A financial institution needs to identify and understand the activities that will form basis of its ESG disclosure, and devise and implement appropriate processes to ensure that the requisite data is captured. There is an unavoidable interplay between – for example – the institution itself, its clients and the relationships and connections generated by the products it offers and the business it conducts. This leads to a wide potential data pool and reliance on a number of data sources that may be outside of an institution’s own control.”

“From the starting point of an immature market, companies will need to maintain a degree of flexibility and responsiveness to their approach to reporting, as industry standards start to develop. At the outset, however, companies can take certain practical steps to manage ESG disclosure-related risk, for example: (i) detailed mapping of the data environment, (ii) identifying, monitoring and refreshing disclosure in relation to areas of greater risk, (iii) co-ordinating the approach to ESG disclosure across parent and subsidiary companies, (iv) creating or adopting industry-standard templates for disclosure where appropriate, and (v) recording, monitoring and disclosing data sources and any limitations in the approach or methodology, and including disclaimers where necessary. Crucially, as it is an ongoing commitment, firms needs to be prepared to adapt their processes to reflect how the market responds to disclosure requirements.”

“There is a concern that ESG disclosures will create liability risk for reporting entities and/or litigation, in the jurisdiction where the company is based and also potentially in jurisdictions where investors are located and damage has been suffered. Management of that ESG-related litigation risk is at the forefront of a company or financial institution’s approach to TCFD implementation. Disclosure needs to be accurate and transparent as regards approach, methodology and any limitations. If it is not, a company risks facing a claim for failure to disclose or for disclosure of misleading, inaccurate or incomplete information. Aside from ensuring accurate and complete disclosure, a company’s legal or litigation function can monitor and help to manage the litigation risk by tracking market developments and industry standards, and also monitoring emerging trends in ESG related litigation and disputes involving mis-selling and misstatement.”