Identifying your Greenwashing Litigation Risk – Claims under FSMA

Across a series of articles in the coming weeks, we will identify and explore five potential causes of action which could give rise to claims in the courts of England & Wales:

1. Section 90 and 90A claims under the Financial Services and Markets Act 2000 ("FSMA");
2. Derivative claims under the Companies Act 2006 ("CA 2006");
3. Claims for breach of fiduciary duty;
4. Claims for misrepresentation and negligent misstatement, both at common law and under the Misrepresentation Act 1967; and
5. Claims against professionals assisting businesses with ESG disclosures. 

The Achilles' heel of many of these claims to date has been the (in) ability of a claimant to demonstrate loss stemming from an alleged "greenwashing" statement. However, as regulator activity and consumer attention in the space are on the rise, it is, we would venture, only a matter of time before stakeholders are able to identify, trace and measure tangible financial losses arising out of overstatements of businesses' green credentials.

Potential cause 1: Claims under FSMA

The law: FSMA claims

Sections 90 and 90A of FSMA provide causes of action through which shareholders may hold public companies accountable for misleading statements made in published information and documents, either in listing particulars or prospectuses (s90), or statements made to the market more broadly through an information service (s90A). Liability may also extend to omissions where, for example, such omission relates to information which is either statutorily required or which is necessary to ensure that another statement is not misleading.

The difficulty with proving section 90 claims, particularly in the context of greenwashing, is that claimants must be able to demonstrate that they have suffered actual loss and show that such loss was caused by their reliance on the untrue or misleading statement.

Where section 90 claims only relate to statements (and omissions) made in listing particulars and/or prospectuses, section 90A was subsequently introduced in 2010 to extend a security issuer's potential liability to any untrue or misleading statement (or omission) made in published information, including by RNS. For liability to arise, a Person Discharging Managerial Responsibility ("PDMR") must have known the statement to be untrue or misleading or was reckless to that fact. The claimant must then show that they relied on the information when acquiring, continuing to hold or disposing of the relevant securities, and it was reasonable for them to do so.

What does this mean for Greenwashing Risk?

The recent ACL Netherlands v Lynch case has highlighted the high evidential burden in making out s90A claims. In considering whether or not a PDMR knew a statement to be untrue or misleading, or was reckless to that fact, Mr Justice Hildyard applied three principles derived from a fraudulent misstatement decision, Derry v Peek (1889) 14 App. Cas 337. A claimant must show that:

1. the defendant knew that the statement was misleading or untrue;
2. the fact that the statement was misleading or untrue was present in the defendant's mind when making the statement; and
3. in relation to omissions, the defendant must have known that there was a requirement to include the omitted fact.

For all claims under s90 and s90A of FSMA but particularly those arising in relation to greenwashing, the bar for potential claimants to clear has been set very high.

At Stephenson Harwood, we have expertise in all aspects of greenwashing risk: regulatory compliance, civil fraud, commercial and corporate litigation, competition and consumer protection. We are well placed to advise in every major industry and sector, ranging from multinational corporations, financial institutions, large and medium sized companies, and professionals.

Our Greenwashing Risk team is international with specialists spread across our offices in Europe, Asia, and the Middle East, which means that we can support you wherever your business interests are based.