4.3.2.1 Higher litigation involving Environmental, Social and Governance statements

Sustainability reporting has grown significantly in recent years due to voluntary(e.g. GRI, IIRC, the Sustainability Accounting Standards Board (SASB), the UN Global Compact, the UN-supported Principles for Responsible Investment) and mandatory initiatives (e.g. EU, Brazil, South Africa) around the world. In 2011 less than 20% of the S&P 500 companies had issued sustainability reports compared to 70% in 2013 (Sara K. Orr, 2015).1 Social awareness of ESG risks has been also on the rise given constant advancements in technology of communication. Governments reflect increasing social demands by engaging in international sustainability commitments. The corporate sector is increasingly required to report about their long-term ESG strategies by consumers, Governments, peer competition and investors demand. Different stakeholders are acting on the base of corporate ESG disclosures.2 The quality of sustainability reports has grown but lack of consistency, accuracy and comparability of the information disclosed still persist. Besides, companies may provide false and misleading information regarding their products quality, their ESG initiatives and long-term strategy, which increasingly gives rise to litigation.34 Through greenwashing companies mislead consumers and investors, and increasingly face potential liability in court to those who relied on their wrongful statements.5 This new trend highlights the need for accurate sustainability reporting and careful management of long-term ESG strategy and engagement with relevant stakeholders. New legal demands also give a sign to the increasing relevance of mandatory sustainability reporting and suggest the future growth of sustainability reporting rule making. Increasing litigation involving corporate ESG statements are an argument favoring mandatory sustainability reporting.6 Companies are always afraid of lawsuits which could trigger higher ESG regulation and higher compliance. Globally sustainability reporting remains mostly a voluntary practice7 however, it can be subject to litigation, as they fall under “truth in advertising” (ACCA, 2004).8 In the US, where sustainability reporting is a voluntary practice, the notorious case Nike vs Kasky illustrates the possibility of litigation under consumer protection laws. In the Nike vs Kasky case, Marc Kasky sued Nike, under Californian consumer laws, accusing Nike of making false claims in its social report, and that these claims were part of Nike’s “commercial speech”. Nike argued that those statements were political and not part of their advertising. The case was mutually settled in 2003.9

In the EU, the non-financial reporting Directive recommends all member states to facilitate the enforcement of compliance with the Directive, allowing individuals and organizations with a “legitimate interest” to enforce compliance with the Directive.10 This opens the possibility of lawsuits and private enforcement actions.11 Litigation about misleading ESG disclosures opens the precedent and is a driver for higher litigation on these matters. Therefore, higher litigation on misleading ESG disclosures also represents a driver to create more regulation on ESG disclosures.