2023: Spotlight on ESG in the product and supply sectors
Whilst 2022 was ground-breaking in the number of new cases related to ESG issues, particularly in the US, 2023 is looking to be equally as important with more cases being brought through the courts across various jurisdictions. As there is a move towards incorporating ESG requirements into commercial contracts, we are likely to see a rise in ESG-related civil and regulatory disputes in the product and supply sectors.
One form these claims may take is in relation to “greenwashing”, where companies make claims about being environmentally friendly which are not true, overstated or otherwise misleading. We are seeing movements by UK regulators to crack down on this, for example the Competition and Markets Authority (“CMA”) which has opened an investigation into environmental claims made by a variety of well-known consumer brands regarding their green credentials and whether they are consistent with the Green Claims Code issued by the CMA. The Code consists of six key points the CMA will check to determine if an environmental claim is genuinely green (a claim must be (1) truthful and accurate; (2) clear and unambiguous; (3) not omit or hider important information; (4) only make fair and meaningful comparisons; (5) consider the full life cycle of the product; and (6) be substantiated with evidence.
The CMA investigations are likely to conclude in 2023, but the CMA has indicated that its focus is also likely to turn to the transport, food & beverage and product and supply sectors. These sectors have been identified as those where consumers appear most concerned about misleading claims, due to the increasing need for sustainable products and supply chains. The Advertising Standards Authority is also likely to strengthen its guidance on environmental claims in the light of the CMA’s indications, and has already taken steps to counter misleading ESG-related advertising (see the October 2022 ruling against ESG claims made in adverts by HSBC).
As the “E” in ESG is gathering momentum in relation to sustainable products and supply chains, the “S” has also received the spotlight over allegations of forced labour in supply chains. In late 2022, the European Commission adopted a proposal for a Regulation prohibiting sales, imports and exports of products made with forced labour. The new rules will have a considerable impact on product manufacturers operating cross border, as they will have to make sure that forced labour is not used throughout their supply chains if they want to sell their products in the EU or export them outside the EU.
A recent example of a claim relating to forced labour occurred in December 2022 when a letter before action was sent to Tesco alleging that clothes sold by Tesco in Thailand were made using forced labour, with the profits going back to Tesco in the UK. The claim is being brought by former workers at the factory, who allege that Tesco was negligent in not identifying the fact that forced labour was used, and was unjustly enriched by it. It is accused of negligence for permitting, facilitating and/or failing to prevent the unlawful working and housing conditions which caused the workers injuries and losses. They are also accused of being unjustly enriched at the expense of the adult workers and it is asserted that they are liable to make restitution of that enrichment under Thai law. Tesco denies this.
This is a particularly interesting case because a UK company has been threatened with litigation in the English courts over a foreign garment factory in its supply chain that it does not own. It is understood that Tesco has said that had it known of the conditions, it would not have countenanced continuing working with the factory as part of its supply chain. Irrespective of how far this case progresses, what is apparent is that companies should be doing closely monitoring all parts of their supply chains across the entire life-cycle of their products and seeking early advice when needed to ensure they are not exposed to potential ESG-claims. If they do not do so, the reputational and operational risks could be high.
Certain EU and non-EU companies (including UK companies with significant operations in the EU) will also need to be thinking about how they will be impacted by the Corporate Sustainability Due Diligence Directive (EU CSDDD) currently being negotiated. The EU CSDDD will create a duty on companies to carry out due diligence to identify actual or potential adverse human rights and environmental impacts in their operations, and throughout their corporate value chains, and then take steps to prevent, minimise, and/or remedy them, and publicly report on their efforts.