Sustainability performance has become a top priority for many companies across various sectors, including Automotive and Manufacturing, and related to that, demand for environmental, social, and governance (ESG) strategies and programs has continued to grow. In 2023, companies can expect that ESG, and sustainability regulations, enforcement, and litigation will continue to evolve, as the global landscape becomes more complex creating both risks and opportunities for businesses.
Regulations
When it comes to the ESG and sustainability regulatory framework, all signs point to things getting worse before they get better. The related regulations around the world continued to take shape in 2022, and this will remain true in 2023, as “soft law” regimes harden into hard law, bringing direct legal obligations for global businesses. Companies doing business in multiple jurisdictions are increasingly likely to see ESG- and sustainability-related regulatory requirements transcend geographic borders as these evolving regimes focus on and follow the global value and supply chains of companies. For example, the European Union (EU) recently adopted new ESG and sustainability reporting requirements under the Corporate Sustainability Reporting Directive (CSRD), which is expected to apply to both EU-based companies and non-EU-based companies with significant operations in EU jurisdictions.
As more regulations in this area, like CSRD, are introduced around the world, companies must develop and implement a strategy for keeping up and complying with the increasingly complex (and sometimes conflicting) web of requirements if their operations, customers, or supply chains exist in multiple jurisdictions. At a minimum, companies can expect to receive increased requests for data and reporting from international customers, who face their own local or regional requirements in this space.
Enforcement
In the U.S., there has been (and continues to be) no shortage of rulemaking activity related to ESG and sustainability; however, even as such proposed rules remain in flux, including potential legal challenges, it is important for companies to be aware of the possibility of enforcement actions under existing regulations. Of note in 2022, were multiple proposed rulemakings by the U.S. Securities and Exchange Commission (SEC), as well as the Federal Acquisition Regulatory Council (FAR Council). Nonetheless, ESG-related enforcement actions are already being taken, including six such actions taken by the SEC in 2022, and this trend shows no sign of stopping in 2023.
Additional enforcement actions can also be expected from the Federal Trade Commission (FTC) and comparable state agencies related to false advertising and other deceptive or unfair trade practices. Specifically, the FTC announced in December that it is seeking public comment on potential updates and changes to its “Green Guides for the Use of Environmental Marketing Claims” (a/k/a “Green Guides”), which the FTC uses to help marketers avoid making environmental marketing claims that are unfair or deceptive under Section 5 of the FTC Act—i.e., “greenwashing”. As with the last update in 2012, a refresh of the Green Guides will likely lead to increased scrutiny and enforcement on both the state and federal levels related to greenwashing. Companies should consider legal review of environmental and sustainability-related marketing claims, including statements made to both consumers and other businesses.
Litigation
Beyond the enforcement context, greenwashing (or broader “ESG-washing,” which addresses unsubstantiated claims related to all aspects of ESG) will also be under the microscope via litigation in 2023. This is a natural continuation of the attention being paid by customers, regulators, investors, and other stakeholders to this topic, as well as the FTC’s update of the Green Guides and other comparable regulatory activities around the world with an emphasis on consumer protection and ensuring fair competition among businesses. Consequently, if companies fail to weave ESG considerations throughout their different operational units (e.g., contracting, procurement, marketing), then risks are likely to arise related to the companies’ ability to substantiate claims they make on topics such as human rights in supply chains; diversity, equity, and inclusion (DEI) initiatives; and “green” products or services.
Such emerging litigation, enforcement, and regulatory actions present both risks and opportunities for companies as they navigate the evolving (and expanding) global patchwork of ESG and sustainability obligations. In that regard, this year will be no different than last year—prudent companies seeking to mitigate and monetize such risks and opportunities must take proactive steps and stay ahead of these emerging trends.
