Environmental, Social, and Governance (ESG) considerations have become a central feature of the financial landscape in the UK, where banks are facing increasing scrutiny over how they integrate ESG into their operations, products, and disclosures. With mounting regulatory pressure and heightened public awareness, legal challenges linked to ESG—especially ‘greenwashing’ (being the misrepresentation of a bank’s ESG practices) – are now emerging as a significant risk for financial institutions.
The Intersection of ESG and Banking Litigation
Banks, as key financial intermediaries, play a crucial role in shaping economic and environmental outcomes through their investment strategies and lending practices. However, as they respond to the growing demand for sustainable finance, they are increasingly exposed to litigation risks, particularly when the disclosure of their ESG products is misleading.
For example, if a bank exaggerates or misrepresents its ESG credentials by promoting their products as being “green” or “sustainable” without sufficient evidence, this can trigger legal action from regulators, investors, or advocacy groups. This type of ‘greenwashing’ is the main cause of ESG litigation matters in the financial sector.
A high-profile example was seen in the Advertising Standards Authority’s (ASA) 2024 decision to ban Lloyds Banking Group’s “low carbon economy” advertisement which was found to have been falsely claiming that Lloyds was a major investor in clean energy but omitted key information about its ongoing financing of fossil fuel industries. The ASA ruled that the advertisement breached the UK advertising code by misleading consumers, demonstrating the regulatory appetite to hold financial firms accountable for ESG misrepresentations.
Regulatory Crackdown on Greenwashing
Regulators such as the ASA and the Competition and Markets Authority (CMA) are actively targeting greenwashing across multiple sectors, including the finance sector. In addition to Lloyds, the ASA has taken action against numerous other institutions (including HSBC and Virgin Atlantic) for making misleading environmental claims. These cases demonstrate that financial firms need to be acutely aware of the significance and consequences of ESG misrepresentation where sustainability linked products are being promoted.
Moreover, the Financial Conduct Authority (FCA) is sharpening its focus on ESG disclosures. As of 31 May 2024, the FCA’s new anti-greenwashing rule requires all authorised firms to ensure that sustainability-related claims in their marketing are “clear, fair, and not misleading” and to be in compliance with the sustainability characteristics of the product or service. This rule complements the UK’s broader Sustainable Disclosure Requirements (SDR), which impose detailed labelling and transparency obligations on investment firms and asset managers.
The Legal Consequences of Misleading ESG Claims
Greenwashing is not merely a reputational risk; it is becoming a legal liability. Investors who feel misled by false ESG claims may seek redress through the courts, potentially triggering costly litigation cases. For instance, if a bank markets a fund as compliant with the UK Green Taxonomy or other ESG standards but fails to meet those benchmarks, it could face claims for misrepresentation or breach of fiduciary duty.
Navigating ESG Litigation Risk in the Future
As ESG continues to shape the financial sector, banks must approach sustainability claims with precision and integrity. Legal, regulatory, and reputational risks are increasing, and institutions must ensure that any ESG-related messaging is backed by verifiable data and consistent with internal policies.
To mitigate litigation risks, banks could consider:
- Implementing robust ESG due diligence processes
- Aligning their disclosures with recognised standards
- Providing full and transparent information in marketing and investor materials
- Regularly auditing their ESG communications for compliance
Conclusion
The legal landscape surrounding ESG in the UK financial sector is evolving rapidly. Although greenwashing was once considered merely a marketing obstacle, it is now firmly in the crosshairs of regulators and courts. The message for financial institutions is clear: ESG commitments must be credible, measurable, and legally defensible. As litigation risks grow, so does the need for a proactive, compliance-led approach to sustainability.
This update is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this update may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
