What is ESG and Why Does It Matter?
23 October 2022
Professor Paul Q. Watchman
Special Legal Adviser to the United Nations Financial Initiative and the Net Zero Insurance Alliance
Principal Author and Project Leader on The Freshfields Report on ESG and Investment Decision-Making.
The acronym or moniker ESG stands for “Environmental, Social and Governance”. It is one of the most cited acronyms in law, politics, economics, and finance. There has not been a day in recent years when there has not been coverage in the financial press of ESG or related ESG matters. For example, “Greenwashing” by HSBC, Ryanair, Shell, BlackRock or DWS. Given the importance of ESG and the rise of ESG Law Firms and ESG Advisers of all sorts it may be helpful as one of the few founders and insiders to set the record straight on ESG.
ESG is a Scam
ESG is controversial. Elon Musk, the CEO of Tesla, stated that “ESG is a scam” after the EV company was removed from the S&P 500 ESG Index while oil and gas companies such as Exxon Mobil, which are largely responsible for global warming, were given top marks. The problem is not with ESG but the plethora of over 100 rating agencies or bodies which use different methodologies to assess ESG and to provide ESG Ratings. There is a Global Initiative for Sustainability Ratings (GISR) but more than a decade after it began, we are no further forward.
Who Coined ESG?
There have been many false claims made about the creation of the ESG acronym. As someone who was a Special Legal Adviser to the UN EPFI at the time, I can corroborate that it could have been SEG or GES but Paul Clements-Hunt, then Head of the UN EPFI, now with Mishcon de Reya with his small team comprising Paul, James Gifford, now of Credit Suisse, Jacob Malthouse and Gordon Haggarty were the co-creators of the acronym ESG. This matters because it is necessary to understand the intellectual underpinning of ESG. It also is of some importance to know that the “S” was put in the centre because otherwise it might be ignored or downplayed. Finally, the “G” is important because if you get the “G” wrong it is unlikely that the “E” or “S” will be adequately addressed longterm.
The Freshfields Report
The UN Report, “A legal framework for the integration for the integration of environmental, social and governance ….” is reputed to be the most downloaded and fastest downloaded in the history of the United Nations. It underpins the UN Principles of Responsible Investment (UN PRI) which has 5,020 signatories representing US$121 Trillion Assets Under Management (AUM) and explains that globally consideration of ESG factors as part of a financial risk assessment of risks and opportunities is not only consistent with discharge by trustees, directors, or asset managers of the fiduciary duties but in some cases required. For example, in relation to mining where there are obvious impacts on the environment and communities, but mining companies should have governance frameworks to ensure that human rights and biodiversity are protected.
The UN EPFI approached me to request that I look at this issue as there was strong pushback in the financial and legal world to ESG based on an unsophisticated understanding of the Friedmanite aphorism that “the business of business of business is business” and several cases, including Scottish cases and the peculiar case of Cowan v. Scargill. The last being an attempt by the President of the Mineworkers’ Union to raid the NUM pension fund for money to support the miners’ strike. The team arrived in London on 7 July 2005, the day of the London Bombings and we reported in October supporting the case for ESG consideration in financial decision-making. The nexus is critical. The findings of the report were not universally welcomed by the financial sector or law firms. Nor, indeed, were they embraced by Freshfields partners who worried about the reaction of their clients. The Freshfields Report, however, was to revolutionise the financial world.
The UN Principles of Responsible Investment
The UN PRI is the world’s largest voluntary corporate sustainability initiative. It was launched at the New York Stock Exchange in December 2005 by the then UN Secretary-General Kofi Annan but founded on 27 April 2006 with 51 signatories. Figures vary for the present number of signatories and AUM but the UN PRI Annual Report for 2022 states that in 2021 – 2022 1,069 new signatories adopted the UN PRI increasing the number of signatories to 4,902 in over 90 countries with an estimated USD $121.3 Trillion AUM.
The Law Commission Report 2011
There was hiatus between 2005 and 2011 as the financial world collapsed around us in 2007-2008. The Big Short gives a mild flavour of the wreckage that was during the period the banking and investment world. Unsurprising, given that the focus was on preventing the systemic collapse of the global financial system little interest was sown in developing ESG financial products although asset owners and asset managers began to add (but not integrate) ESG risks and opportunities to their investment decision-making.
In 2011, however, the financial world was turned upside down when the Law Commission of England and Wales gave us a Double-Starred First for our work on ESG, investment and fiduciary duties which gave us some respite from the brickbats that had been thrown at us since the launch of the report.
The Paris Agreement
The Paris COP 21 in 2015 was the shift in the tectonic plates when 196 Parties adopted a legally binding international treat to reduce global warming to below 2 degrees Celsius. By 2016 even law firms recognised that this was an area of phenomenal growth and that many clients were now adapting their businesses to meet the risks and opportunities of ESG and the challenge of achieving NetZero by 2050. Climate Change is core of ESG, but ESG is wider than climate change alone and takes account of sustainable finance, business and human rights and governance.
The Growth of ESG Funds
The growth of ESG funds was glacial between 2005 and 2016. However, since then it has grown exponentially. The Institute of Charted Accountants England and Wales (ICAEW) estimated on 24 June 2022 that in 2021 money held in sustainable ESG Funds rose globally by 53% to $2.7 Trillion with a net $596 Billion, according to Morningstar Direct, flowing into ESG funds. According to Morningstar Direct the number of ESG Funds grew to 5,932 by December 202, an increase in almost 2,000 from December 2020. The value of these funds also increased to USD $2.74 Trillion from USD $1.28 Trillion in 2020 and USD $1.28 Trillion at the end of 2019.
The incentive to create ESG funds is obvious. There have been, however, several examples of greenwashing. Former Heads of Global Sustainable Investment Tariq Fancy at BlackRock and Desiree Fixler of DWS have whistle blown ESG greenwashing and Stuart Kirk, Former Head of HSBC Investment, made a Bloomberg presentation in which he basically said that ESG was irrelevant and a confidence trick. HSBC is the first bank to have been held by the UK Advertising Standards Authority to be guilty of greenwashing their position on fossil fuel funding. Green washing is not restricted to the financial sector. Ryanair, KLM, Shell, Aramco, Chevron, Drax, Exxon, Equinor, INEOS, RWE to name a few and excluding the food producers and retailers, fast food outlets, fast fashion, and sports fashion industries. A particular favourite is Scottish CEO Alan Jope ‘s Unilever because it was greenwashing with washing powder. On 31 August 2022 The Guardian reported that the UK ASA had found that Unilever were guilty of greenwashing because they claimed that their new Persil was “kinder to the planet’ without adducing any scientific evidence that it was in fact kinder to the planet, such as a life-cycle analysis.
The Growth of ESG Law Practices
In Chasing the Dragon: The Rise of the ESG Law Firm (2021) we documented 55 law firms worldwide which claimed to have ESG legal practices. Our findings were that most claims for ESG competence and experience made by law firms worldwide were difficult to substantiate. In October 2022 we published Riding the Dragon: The Future of ESG Law. We concluded that while several law firms had made substantial progress in developing ESG practices there was still a dearth of ESG lawyers and that a crude attempt by law firm to fit litigation or real estate lawyers into this Procrustean bed of ESG and Climate Change Law was not working. When a lawyer has spent 30 years defending tobacco companies it is difficult to accept them as reborn as Business and Human Rights lawyers, particularly as throughout a long career they have shown little interest in promoting human rights or knowledge of the subject.
ESG as Process
Witold Henisz, Faculty Director of the ESG Initiative at The Wharton School of Business at the University of Pennsylvania said in September 2022 that “taking climate risk as investment risk is just good business” and that “the idea that ESG is ideological and not economics is a political argument”. This is the central claim for ESG. Why would in assessing investment risk would an investor not consider the impacts of a company on the environment or communities, employees, and clients? A chemical company may lose its permit to pollute if it exceeds its requirements. In such a case the company’s value may plummet if it is unable to operate because of water pollution or air pollution. Equally, a poor human rights or employee care or health and safety record may lead to a customer boycott of a fast fashion company. Bp and Deep-Water Horizon and Texas City, Deliveroo and the Gig Economy and the safety of riders, Nestle, Mars, Cargill chocolatiers, cocoa plantation farmers and child labour, Lafarge and complicity in human rights abuses, and Southern Water (check) and water pollution, Credit Suisse and money laundering.
An explanation of ESG as process is Michelangelo’s chisel. Why if Michelangelo had an especially fine chisel which enhanced his skills as a sculpture would he leave unused in his tool bag? The same with ESG. Why ignore relevant and material considerations in making investment or other business decisions?
ESG as a Pious Aspiration
The mantra goes that “you can do good or well by doing good”. Unilever The Hellmann’s mayonnaise , Persil, Magnum, Ben and Jerry’s and Sunsilk shampoo behemoth said on its website that the company’s 400 product brands are on “a global mission to do good.”. Really, really? ESG is about impact not ethics or global missions. In June 2022 the Financial Times reminded its readers that the two should not be confused. The returns on ESG investments have in general for many years been quite positive in relation to other non-ESG funds. However, it is difficult to proof. Certainly, more difficult in proving that doing bad loses value and reputation, as in Purdue Pharma and the US opioids scandal. Unilever is a case in point. For many years during the stewardship of Paul Polman and Alan Jope Unilever has been a leader in ESG management but its shares have underperformed. There is inevitably a trade-off between doing good by doing good. ESG investing and management are not charities. ESG is a financial risk assessment tool. Climate change is an existential risk which demands that we achieve NetZero by 2050 therefore investment in coal and oil and gas which are key factors in global warming must be curtailed or ended. ESG, however, is not a substitute for investment decision-making but part of that process.
ESG as Profits
The financial Times reported in June 2020 that the majority of ESG funds had outperformed the market over a 10-year period and in October 2022 it was predicted that ESG funds would outpace the entire market in terms of fund growth. That was, however, before the Russian-Ukrainian war which ballooned the price of oil and gas company shares.
ESG for Plaintiffs
OMG. For asset managers, lawyers, and accountants ESG has been a fee generator par excellence.
The Big4 Accountancy Firms are investing Billions in staff-training on ESG and developing their accountancy, legal and consultancy practices to deal with ESG. Law firms are opening up ESG Legal Practices faster than grease lightning. In one day in 2021 4 US law firms announced that they were open for ESG business. Corporations and governments are using ESG competence and experience widely as a screen to determine the award of contracts and procurement of services. There is a tale of the Senior Corporate Partner of a Magic Circle firm being asked before the Board of Directors of a major client about Scope 3 emissions and how the law firm could assist the client with the company’s supply chain and value chain or measuring and reporting them. Long silence. When the Senior Partner returned to the office, somewhat embarrassed, the development of an ESG legal practice became a priority for the firm.
Climate change litigation according to the Sabin Center for Climate Change Law and the Gresham Institute for Climate Change at the LSE is now running at 200 -250 cases per year worldwide. Class actions with third party and law firm funding are beginning to fill up the law reports. ClientEarth, Friends of the Earth, Poghurst Goodhead and many more alternative or plaintiff law firms are providing a greater equality of arms against multinational companies. No longer “ambulance-chasers” but “Justice-Jedi” or “Climate Change Law Warrior”. On the side of people and planet and less easily dismissed and better funded.”
ESG cases against Mastercard, Wirecard, Volkswagen, bp, Shell, Nestle, Cargill, Olam, Purdue Pharma are starting to fill up Law Reports world-wide. The most recent unanimous Court of Appeal decision relating to the failure of mine tailing dames in Brazil had over 200,000 claimants suing BHP which was represented by an army of QCs, Counsel, and a leading Magic Circle firm. It is not only litigation departments which have benefited from this tsunami of law and legislation but corporate and financial departments. Real Estate lawyers now recognise the need for green buildings and carry The Chancery Lane Guidebook and Precedents under their arms.
ESG as Products
Morningstar calculated in June 2022 that ESG issues held USD $357 Billion at the end of 2021, a fourfold increase from the amount held by ESG issues in 2018 and that in December 2021 there were 5,932 global ESG funds, an increase of almost 2,000 in one year. Many of these assets (USD $2.2 Billion) were in European and UK sustainable funds. MSCI monitors 52,000 investment funds so ESG funds have gone from about zero to over 10% of that cohort in less than 20 years. In fact, most of that growth has been in the last 5 years. Global Sustainable Investment according to McKinsey has increased tenfold since 2004 and almost 70% since 2014 to over USD $30 Trillion.
ESG Investment Funds, Green Bonds and Sustainability-Linked Loans have grown like topsy but unfortunately a substantial number of them has been found to be greenwashed empty hulks as what was inside these bonds and loan according to Bloomberg did not match up to their labels . It is predicted that ESG financial instruments will outpace the market in less than a decade.
It is not only financial instruments which have been affected by the climate change and ESG revolution, Climate change and ESG has also led to many innovations both to measure and track the performance of companies but as an accelerator to innovation and new technologies. Tesla and Arrival make EVs. Shipping companies are looking at green hydrogen ships, energy and oil and gas companies are investing heavily in renewable energy and CCS, CCUS and DAC, battery storage technology, the use of drones and satellite surveillance to protect woodlands, recycling, the circular economy and many more initiatives have been propelled by climate change and ESG. Walmart, General Mills, Mars, Nestle, hp and countless other companies look at ESG as part of their life-cycle and stewardship duties.
ESG as PR
ESG is a great marketing tool and, as the discussion on greenwashing demonstrates, few corporations have been able to resist its alure. Carbon offsetting is a good example. Fly with Ryanair or KLM and pay a few Dollars to offset a long-haul flight? Buy petrol from bp or Shell and offset so your journey from London to Glasgow is carbon neutral. Ki-Kat, which is owned by Nestle the world’s largest food producer, has a campaign “lets give the planet a ‘break”.” The “C-suite” is becoming more aware, from a very low starting point, of climate change and ESG and see the potential of positively profiling their companies over their rivals by espousing the marketability of both. ESG allows a business to stand out from the pack. But is Persil really “kinder to the planet”? Kinder than Fairy?
ESG as Policing
It is not often the British and German police raid the offices of a bank or regulators cooperate internationally (SEC, CMA, BaFin, DoJ, ASA) to bring a bank to account but that it exactly what happened in May 2022 when the offices of asset manager DWS which is owned by Deutsche Bank were raided as part of a greenwashing investigation. The fact that the Police forces led the charge indicates that they considered greenwashing as a traditional crime, such as fraud.
Regulators internationally are becoming more robust about climate change, ecocide, greenwashing and ESG and the fines are starting to climb higher. £90 Million fine for callous business as usual is cheaper than allowing excrement to be discharged into rivers and coastal waters and a USD $1.5 Million fine for greenwashing ESG investments BNY Mellon.
ESG as a Placebo
The Top 20 ESG Funds in the world hold on average 17 fossil fuel companies in each of their portfolios, together with tobacco, weapons, and alcohol. And in October 2022 BlackRock, Vanguard and other leading asset owners and managers revealed that there were not going to divest from fossil fuels. Bloomberg also found that that USD $8.3 Billion in Russian asset (Gazprom, Rosneft and Sberbank) and Russian bonds were held by ESG funds. Geopolitical Risk, Sovereign Risk and Defence and Security Risk can be addressed within an ESG if ESG is seen as a process rather than a piety. China, Russia, and Saudi Arabia can also be accommodated and, arguably, in terms of Climate Change and ESG impact on the world’s economies must be included. If you wish to shift the dial divestment is a last resort but one which in relation to pariah States must be exercised.
ESG as Politics
ESG is also the whipping boy of the left and the right. Stuart Kirk, formerly Head of Sustainable Investment at HSBC lost his job over debunking ESG to the embarrassment of HSBC Investment and HSBC. HSBC has not had its troubles on ESG to seek being the first UK Bank to be formally censored by the Advertising Standards Agency for Greenwashing.
In the last year or so, ESG has become a political football in the USA with Southern Republican Senators creating the means to drop funds like BlackRock which dabbles in the dark arts of ESG investment and other card-carrying ESG wokes from managing State and City Pension funds because of their apparent lack of investment in fossil fuel companies.
In Europe ESG has been buffeted by the winds of the Russian-Ukrainian war which as had consequences for energy supplies, energy costs and energy security and which as a consequence has called into question for many countries their Green Plans to achieve NetZero.
ESG as People Magnet
PwC has confirmed what was evident to law firms and businesses, including Unilever’s CO, Alan Jope, for some time that ESG is not only attractive to the millennials, but it is an important factor in the recruitment and retention of staff. 86% of employees prefer to support or work for companies that care about the same issues they do. The milk-rounds of law firms of universities have become largely ESG Law Rounds with Magic Circle firms like Clifford Chance and Linklaters offering tailored ESG packages to entice the unwary into law factories.
It is not just the Diversity, Equity, and Inclusiveness (DEI) aspects but working for a company or a firm and clients whose values are aligned around core values, such as reducing carbon footprints, human rights, and good governance.
In a sense it is a series of value and supply chains, and each link reinforces the other. For example, companies like Nestle, Tiffany, Olam and Tesco and banks and professional advisers where over 80-90% of emissions are likely to be Scope 3 emissions can make a real impact by adapting ESG values.
ESG and Pay
Should the remuneration of company executives be based on achieving ESG targets? There is currently a debate that ESG and the pay of company executives should be linked. The UN Global Compact reported that 11 out of 12 companies do not do so but PwC cites that 3 in 5 FTSE 100 companies link ESG to executive remuneration that 10-30% should be subject to ESG achievement. There are a number of share activists which are promoting ESG and Pay but does not seem to be a general appetite for this linkage at present.
The End of ESG?
ESG should not be necessary. Surely all investment decisions must be based on an assessment of material impacts. You can banish sin stocks (tobacco, munitions, and alcohol) and divest in coal or oil and gas as a matter of risk and opportunity assessment. The only reason ESG was created was because asset owners and investors chanting “the business of business is business” argued wrongly that it was a breach of fiduciary duties, or as a Shetland businessman once termed it “fishing taxes”. These were “non-financial” considerations which was rubbish. Reputation is everything to modern businesses and benefitting from child labour, deforestation, sweat shops, ancient and modern slavery, artisanal mining, ecocide and destruction of biodiversity is not good for a company’s reputation. Some mineral and oil and gas companies appear to be immune from these market pressures, but they are not. Bp, Shell, BHP, Volkswagen, BMW, Totalenergies, Nestle, Cargill and countless other companies may remain profitable enterprises but for how long? Much management time and shareholders money is taken up with third-party funded class actions, litigation and regulation. The war between Russia and the Ukraine shows how short-sighted governments and businesses can be. A £6 Billion fine here and a 200,000-plaintiff class action for £5 Billion and we are soon talking real money. Will corporations, banks, insurance companies, asset owners and investors repeat the mistakes of the financial crisis of 2007-2008. It looks like shareholders, share activists and lawyers and law firms may not allow them to abandon the need to repurpose and accept that ESG is now part of their DNA.
Notes
“Money makes the world go around
The word go around,
The world go around
Money, money, money
Money, money, money
Money makes the world go round.”
The Money Song, Cabaret
Introduction
The growth of the ESG funds market has been phenomenon. From practically nothing in it grown to more than $35 Trillion in 2020. It has been estimated that the market for ESG funds may be over $41 Trillion by 2022 and will exceed $50 Trillion in assets under management by 2025.[1] The total value of Assets Under Management (AUM) is just over $103 Trillion in 2022 and are predicted by PwC to be over $145.4 Trillion by 2025.[2] However, small that may be of the total value of AUM it is the growth rate which has been truly impressive.
The ICAEW estimated on 24 June 2022 that in 2021 money held in sustainable ESG Funds rose globally by 53% to $2.7 Trillion with a net $596 Billion according to Morningstar flowing into ESG funds.
The UN PRI has 7,000 Corporate Signatories in 135 countries. It is the world’s largest voluntary corporate sustainability initiative. Its Annual Report of 2021 stated that PRI investor signatories had increased 26% that year from 2701 to over 3404 and that the AUM represented by all 3826 PRIsignatories increased by 17% from USD $103.4 Trillion to just over USD $121Trillion.
The 6 UNPRI Principles are explicitly ESG principles. You can see Paul Clements-Hunt on the NY Stock Exchange Platform under the Stars and Stripes on the left hand side of the photograph with Kofi Annan.
£41Billion per annum is spent on ethical goods and services.
Top 20 world’s ESG Funds hold on average 17 fossil fuel companies in each of their portfolios, together with tobacco, weapons and alcohol.[3]
Greenwashing by Governments and Government Agencies
Arguably, some of the worst examples of greenwashing come from Government Departments and Government bodies, in some cases hybrid bodies with both regulatory and promotional responsibilities for industry sectors. An example of this would be the UK The North Sea Transition Deal (UK NSTD). [4]
This is a deal is between the UK Government and the Oil and Gas Industry.
According to the North Sea Transition Authority (NSTA):
“Through the package of measures, the Deal is expected to support up to 40,000 jobs across the supply chain and expected to cut pollution by 60 million tonnes by 2030 including 15 million tonnes from oil and gas production on the UK Continental Shelf – the equivalent of annual emissions from 90% of the UK’s homes.”
Greenwash Regulators
CMA,
SEC,
BaFin,
FCA
FCR (?)
Dutch Authority for Consumers and Markets
Netherlands Advertising Code Committee (Stichting Reclame Code)
and other regulatory bodies recognise that sheer scale of investment in ESG funds (how much now ) and spending on ESG and ethical goods and services are very powerful inducements for businesses to make
“misleading, vague, or false claims about the sustainability or environmental impact of what they sell”
The use and meaning of the term “greenwashing” has changed during the last 50 years or so.
1970-1980
“Greenwashing” has been compared to money-laundering.[5]
This is an apt comparison because the term “greenwashing” was also used originally in the [1970s] to describe the process used by drug lords and cartels of exchanging dirty drugs money for clean crisp US Dollars, popularly known as “Greenbacks”.[6]
1980-1990
The coining of the phrase “Greenwashing” in the environmental context, however, is attributed often to a 1986 essay written by Jay Vesterveld, an environmental activist, on hotels which dressed up saving money on laundering towels by suggesting to guests that if they recycled dirty towels rather than having clean towels daily, they could “Save Our Planet”.
A grossly exaggerated environmental claim used to justify the hotels making more money by cutting back on their laundry bills.[7]
Greenwashing in an environmental context often has these two basic elements exaggerated claims to make the greenwashing claimant money.
1990 – 2020
Since the late 1980s, however, the term “greenwashing” has been more widely used to cover the many activities associated with misleading claims about the sustainability of products or services. The juxtaposition of images of adorable wildlife or delightful biodiversity and oil and gas companies being a popular form of misinformation as are claims which do not bear scientific or any scrutiny, such as the low carbon emissions of air carriers or the unsubstantiated claims made for carbon credits, carbon offsetting or Carbon Capture and Storage, Carbon Capture Utilisation and Storage or Direct Air Capture.[8]
A somewhat surprising aspect of greenwashing by business (at least until very recently) is the extent to which Governments and Regulators have been complicit or participate in greenwashing.[9] A minor example being the re-badging of the Oil and Gas Authority to the North Sea Transition Authority announced with the North Sea Transition Deal in March 2021.[10]
2020 – Present Date
Prior to the publication in September 2021 of its Green Claims Code and Guidance, a review of hundreds of websites by the Competition and Markets Authority (CMA) found that 40% of the claims on the audited websites could be misleading greenwash.
BY Mellon?
FINES
DEFINITIONS OR CORE ELEMENTS OF GREENWASHING
There is no universally agreed legal definition in statute or otherwise of greenwashing, but it has a number of core elements. The following are some examples put forward by regulators and others to describe greenwashing.
Definition 1
CMA November 2020: “Misleading, vague, or false claims about the sustainability or environmental impact.”
Please note the hierarch should be “vague” which may be unintentional as in the case where a claim is “misleading” but “false” either means intentionally untrue or reckless to the truth.
Examples from CMA:
1. Exaggeration of the positive environmental impact of a product or service
2. Use of complex or jargon-heavy language
3. Implying that items are eco-friendly through packaging and logos when this is untrue.
4. Failing to provide all relevant information about sustainability of a product or a service
Definition 2
CMA September 2021
The CMA in its Green Claims Code lists six principles to which environmental claims should adhere to avoid being responsible for greenwashing:
1. Be Truthful and Accurate
2. Be Clear and Unambiguous
3. Disclose Material Information
4. Make Fair and Meaningful Comparisons Only
5. Provide Information of the Full Lifecycle of Products and Services
6. Be Able to Prove or Substantiate claims
The Onus of Proof
Where a company or business makes an environmental impact or sustainability claim the initial onus of proof is on the company to establish the case not on the regulator to prove it. However, (unless liability is absolute or strict) if the regulator decides to take civil action the onus of proof is on the regulator to proof greenwashing on the balance of probabilities or in criminal cases beyond reasonable doubt.
Leading Examples of Greenwashing
There have been several cases of whistleblowing[11] and successful [complaints] to regulators about greenwashing by companies in many sectors, including fossil fuel companies, air carriers, banking, asset-owners, asset managers, hedge funds, fund managers, fast fashion, multinationals such as Unilever (Persil) etc.[12]
Aviation
RYANAIR
“Europe lowest fares, lowest emissions airline”.[13]
ASA found advertisement to be greenwashing.
Mark Sweeney, ‘Ryanair accused of greenwash over carbon emission claim, The Guardian, 5 February 2020. UK ASA banned campaign because of greenwashing.
See also, Arthur Nelsen, ‘Ryanair is the new coal: airline enters EU’s top 10 GHG emitters list, The Guardian 1 April 2019 with 9.9 mega tonnes of greenhouse gas emissions in 2018.
KLM
Dutch Airline being taken to court by ClientEarth etc. said to be the first of its kind.
KLM has been repeatedly found to be guilty of greenwashing by Dutch Advertising Authority.
Fossil Fuel Companies
ClientEarth gives 9 examples of greenwashing by fossil fuel companies:
Aramco
Chevron
Drax
Exxon
Equinor
Ineos
RWE
Shell
Shell ran campaign “Drive CO2 Neutral” promoting the buying of petrol or diesel as carbon neutral provided carbon offsetting was used.[14] The Netherlands Advertising Code Committee (Stichting Reclame Code) found this to be greenwashing.
TotalEnergies [15]
BP Complaint against BP by Client Earth to UK National Contact Point for the OECD Guidelines for Multinational Enterprises date? alleging misleading advertisements by BP presenting itself as a low-carbon company. The OECD Guidelines provide that there must be “clear honest, accurate and informative communication between enterprises and the public”.[16]
CAR MANUFACTURERS
Diselgate
VW
BMW
JLR
Daimler
Ford
Tesla
FOOD AND HOUSEHOLD GOODS RETAILERS AND PRODUCERS
FOOD COMPANIES, FOOD RETAILERS AND FOOD OUTLETS
McDonalds
Burger King
Danone
Starbucks
*UNILEVER
On 31 August 2022 The Guardian reported that the UK ASA had found that they were guilty of greenwashing because they claimed that their new Persil was “kinder to the planet’ without adducing any scientific evidence was kinder to the planet, such as a life-cycle analysis
*BlackRockTariq Fancy accused BlackRock of Greenwashing.
*DWS
Three regulators, 2 US, Department of Justice and the Securities and Exchange Commission, the CMA, and 1 German (BaFin ) investigating claim by former DWS Head of Sustainability
Desiree Fixler turned whistle-blower that DWS ESG Funds were greenwashed. German Police and City of London Police have raided DWS German and British headquarters.
*HSBC Asset Managers
Stuart Kirk former Head of Sustainable Investment resigned after controversial Moral Money presentation. He has subsequently recanted and suggests ESG should be broken in two.
BNY Mellon
BNY fined £1.5M for misstatements.
FUND MANAGERS
Net Zero Fund Managers Initiative
BANKS
Net Zero Banking or Bankers Alliance?
Guidelines for Climate Target Setting for Banks
HSBC
Credit Suisse
Deutsche Bank
INSURERS AND REINSURERS
NZIA
AXA
Allianz
Swiss Re
Munich Re
Hanover Re
QBE
Zurich
Lloyds of London
Tokyo Marine
Lion
PRIVATE EQUITY
CVC
CinVen
KKR
Apax Invesments
VENTURE CAPITAL
CLOTHING AND FAST FASHION
Air Birds
H&M
Zara
M&S
ASDA
George
ASOS
Decathlon
MapInfluence Report of Car Manufacturers
ASSET OWNERS
HSBC and Stuart Kirk.
NZAOA
INSTITUTE OD CHARTERED ACCOUNTANTS ENGLAND AND WALES (ICAEW)
‘Greenwashing: the next mis-selling scandal’
Climate Action 100+
327 investors in 2019 now 700 investors managing $68 Trillion in assets and engaging 166 companies responsible for about 80% of greenhouse gas emissions by 2022.[17]
It has as signatories the Asia Investor Groupon Climate Change, Ceres, Investor Group on Climate Change, IIGCC and the UN PRI. Climate Action 100+Net Zero Company Second Round found that while 69% of focus companies had committed to achieving net zero emissions by 2050 or sooner it was alarming to find that “the vast majority (83%) of companies have not set medium-term emissions reductions targets aligned with 1.5 O C or fully aligned their expenditure with the goals of the Paris Agreement.”
In plain English all words and no action. Committed in theory but not in practice.
58% of focus companies had not included Scope 3 emissions.Only 5% of focus companies had explicitly committed to align their capex plans with their long-term GHG reduction targets.
A list of their more important but bleak findings of Carbon Tracker Initiative (Cti) :
1. Less than one-third of electric utility focus companies have a coal phase out plan consistent with limiting global warming to less than 2 0 C.
2. Almost two thirds of oil and gas focus companies are still sanctioning projects inconsistent with limiting global warming to less than 2 0 C
3. Considerable gap between what companies are saying publicly on climate lobbying and doing in practice
4. Only 2% of focus companies are aligned with the Paris Agreement in their indirect climate policy engagement activities via their industry associations
5. Almost no steel, cement or aviation focus on companies’ emissions intensities are aligned with limiting global warming to less than 2 0 C.
6. Most utility companies are not adding renewables and other low-carbon technologies fast enough to limit global warming to 1.5 0 C.
7. Most auto companies are not phasing out internal combustion engine vehicles and adding enough electric vehicles and hybrid vehicles fast enough to limit global warming to 1.5 0 C.
ShareAction in its May 2022 Report, Greater ambition and transparency needed to revive Climate Action 100 + initiative ahead of relaunch, stated that after 5 years there is little evidence that climate Action 100+ has succeeded in achieving its goal to get the world’s large GHG emitting companies to take the necessary action to reduce GHG emissions in alignment with the Paris Agreement. Engagement in this case clearly has not worked out.
In other words this looks like greenwashing with the help of the Climate 100+ signatories.
IOSCO
IOSCO is the International Organisation of Securities Commissions.
Government Initiatives
UK The North Sea Transition Deal (UK NSTD)[18]
This is a deal is between the UK Government and the Oil and Gas Industry. According to the North Sea Transition Authority (NSTA): “Through the package of measures, the Deal is expected to support up to 40,000 jobs across the supply chain and expected to cut pollution by 60 million tonnes by 2030 including 15 million tonnes from oil and gas production on the UK Continental Shelf – the equivalent of annual emissions from 90% of the UK’s homes.”
The NSTA also includes revisiting the unproven and fantastically costly CCS and CCUS which the Treasury Select Committee as recently 2017? branded as a complete waste of £100 Million.[19]
US pumping Billions into DAC through its Infrastructure Fund (Biden)USA
SEC
Policy against greenwashing
GREENWASHING REGULATORS
There is a myriad of regulators which have as part of their function some responsibility to monitor and address greenwashing.
Market Securities
IOSCO
SEC
Stock Exchange
Advertising
ABA
Netherlands Advertising Code Committee (Stichting Reclame Code)
Competition, Securities and Consumer Protection
SEC
CMA
FRC
FRA
Prudential Authority?
Charities Commission
Dutch Authority for Consumers and Markets
BaFIN
AAA
Securities
SEC going after Vale under Stock Exchange legislation for misrepresenting state of dams to the financial market.
Consumer Protection
Massachusetts State prosecuting ExxonMobil for greenwashing using consumer protection laws.[20]
European Union
The EU Sustainable Finance Disclosure Regulation (SFDR) Articles 8 and 9 provide a reporting framework and mechanism for ESG labelling.
UK
The CMA and the ASA work closely together and with other regulators and bodies.
Competition and Markets Authority (CMA)
In November 2020 the CMA announced that it would investigate “descriptions and labels used to promote products and services claiming to be ‘eco-friendly, and whether they could mislead consumers.”[21] With a market of £41Billion per annum spent om ethical goods and services the CMA and other regulatory bodies recognised that there were powerful inducements for businesses to make “misleading, vague, or false claims about the sustainability or environmental impact of what they sell”
In September and October 2021 the CMA launched and adopted a “Green Claims Code” and guidance and began a consultation exercise .on environmental sustainability.
Advertising Standards Authority (ASA)
Plastic Rebellion complained to the [ASA and] about misleading claims made by Coca-Cola owner Innocent Drinks
North Sea Just Transition Authority
Formerly the Oil and Gas Authority. Greenpeace v. Bp Greenpeace v. Cambo and Vorlich?
The Netherlands
Dutch Authority for Consumers and Markets
Advertising Authority
US
SEC
SEC going after Vale for misrepresenting state of dams to the financial market
SEC disclosure limited and not based on double materiality and Scope 3 voluntary.
ISSB standard needs binned.
EU much more onerous on disclosure and scope 3.
France
In July 2021 the French Government, which for some time had urged the EU to pass an EU Directive to prohibit greenwashing, enacted Law No. 2021-1104a Climate and Resilience Law[22] against “greenwashing”, ecocide, etc.
There is a 5 year pilot of the legislation which is remarkable given that the problem is now.
Germany
Denmark
Civil Society Organisation,
NGOs,
Share Activists
ClientEarth
Share Action
Greenpeace
Friends of the Earth
ACCR
Just Share
Reap as You Sow
Sierra Club
TBLI
One of the things I have noticed recently is the markedly increased extent to which national sectorial and market/competition regulators and international sectorial and market/competition regulators work together and share experiences, precedents and good practices.
In 1988 when I looked at this for our book, Crime and Regulation (Butterworth, London, 1989) regulators tended to be in sector silos quite isolated from each other and have quite different enforcement styles.
We compared the continuum from “soft” regulation (EA, HSE, IR, FCA, CMA, FRC), Medium (???) and “hard” regulation (HM C&E).
The first believing that their role was that of teachers or dominie and that when a regulated business failed it was their fault, poor education and inability to instils values. The Alkali Inspectorate boasted that they had only prosecuted on factory owner in 100 years. God knows what the factory owner did, decapitate a child worker?
I first noticed this cooperative trend with the ASA and CMA on some of the greenwashing adverts. I then noticed it in the same area with equivalent Dutch authorities. I saw later that those Dutch and UK regulators were meeting regularly. I can cite examples but KLM and Ryanair and Shell and BP spring to mind.
What I think is new, or at least new to me, is the beginning of an understanding of the extent to which various regulators in different countries are working together across international boundaries. Of course, this makes a lot of sense in terms of the financial crash, tax, competition law and climate change. Apple, Microsoft, Diesel-gate, and Amazon are obvious examples, but it was the Dutch and UK authorities I noticed most.
Then the German police kicked down the doors of DWS and not only BaFIN but the SEC were involved.
I then looked behind the scenes at some court transcripts of major actions, such as Purdue and Shell, and other sources to identify the actors.
Advisers
Accountants
The Big 4 were obvious but so are the law firms which are developing, sometimes through litigation, advisory, white-collar crime and bribery and corruption groups.
Consultants
McKinsey & Co. Purdue Pharma, Non-Prosecution Agreement. $500 Million Dollars. Directors and CEP ‘disciplined”.
Law Firms
Magic Circle
Freshfields
Allen & Overy
Clifford Chance
Slaughter & May
Linklaters
Freshfields was easy for me RWE, VW, Mastercard, Wirecard, JTI but others were more interesting.
White Shoe Law Firms
Debevoise,
Gibson Done with Dunne,
Paul Weiss,
Hoag & Foley,
Baker McKenzie
DLA Piper.
Not sure to what extent large law firms have developed a regulatory/litigation practice which runs through the DNA of the firm.
Difficult balancing act but let's assume that for various reasons the Top 30 Law Firms plus the specialist litigation firms, such as Clyde & Co. and DCA Beachcroft, worldwide are bound to be corporate, banking, insurance, and finance defendants’ lawyers.
Three questions:
1. How does a law firm land a practice which deals with advisory work for GCs and the Boards of Directors and gets the litigation when ClientEarth or the international plaintiffs group which now includes As You Sow, Greenpeace and Friends of the Earth raise multiple legal actions against the Board and the company.
2. Latest large class action in England against BHP, I think, has over 200,000 plaintiffs
3. How do you tie energy lawyers and project lawyers with finance lawyers, regulatory lawyers and litigators?
4. Horizontal and vertical integration within the firm?
5. Global Challenge
6. Transition Challenge
https://publications.parliament.uk/pa/ld200607/ldselect/ldrgltrs/189/18909.htm
House of Lords - Regulators - First Report
CHAPTER 6: HOW REGULATORS WORK—COOPERATION BETWEEN REGULATORS AND THE RELATIONSHIP BETWEEN REGULATORS AND GOVERNMENT
6.1. This chapter is concerned with three different types of relationship—relationships between the sectoral regulators; relationships between the sectoral regulators and the competition authorities; and relationships between both types of regulators and the Government.
6.2. In examining these three types of relationship this chapter seeks to answer the following three questions: Do the regulators work together to ensure that best practice is shared and unnecessary duplication of work is avoided? Do the regulators work effectively with the competition authorities and are the concurrency arrangements functioning well? What is the nature of the relationship between regulators and government departments—are the regulators sufficiently independent from the Government?
6.3. This chapter also takes a look at the issue of the accountability of the regulators. As explained in Chapter 2, the Constitution Committee of the House of Lords covered this issue comprehensively in their 2004 report. We do not seek to duplicate their work here by covering the issue in detail again. Rather we make recommendations on the arrangements that we believe should be put in place to ensure the ongoing effective scrutiny of regulators' work at the parliamentary level.
Do regulators work together to ensure best practice is shared?
6.4. Some regulators have a clear need to work with one another. For example TPR claims to work very closely with the FSA, "we have very structured and regular contacts, as you might expect, with the Financial Services Authority with which we have a great deal of common interest" (Q 225). Such relationships are clearly necessary and are to be welcomed. However, in this inquiry, we were more interested in relationships between sectoral regulators whose paths do not cross so naturally. Is there a need for sectoral regulators to work together? If so, do they do so effectively?
6.5. The regulators all seem to believe in the principle of sharing best practice. They think that they have something to learn from each other and in evidence sessions there was mention of a core transferable skills set—"there is a core regulatory skill set which is transferable between different economic regulators" (Q 70).
6.6. In theory then, the sectoral regulators are signed up wholeheartedly to the idea of working together. How much of this intent translates into practice?
6.7. A Joint Regulators Group [JRG], comprising the regulators that call themselves "economic regulators" (Q 784), does exist and seems to meet fairly regularly, every quarter (Q 136). Minutes of these meetings are published on regulators' websites once they have been agreed by the Group as there is no separate JRG website. The group is "self-started" and there is no ministerial requirement for it to exist (Q 785) so it should be said that the regulators have taken the initiative here. However opinions vary as to the effectiveness of this body, the level of formality it operates at and the opportunities for "joined up thinking" it provides.
6.8. The ORR felt that "the JRG and CWP[44] provide sufficient opportunities for co-operation, communication and co-ordination between the sector regulators" (p 88). Others were less positive. More striking than any explicit criticism, however, was the extent to which the Group was simply ignored in evidence. Many of the regulators did not mention the JRG in their written submissions[45] or merely gave it a cursory mention[46], and other witnesses from the regulated industries said they were unaware of any arrangements in place to enable individual regulators to establish good working relationships with other regulators (p 540).
6.9. In addition to joint working through the JRG, individual regulators have sometimes got together to complete mutually interesting pieces of work. Ofgem told us that they have done some joint working with Ofwat—"we recently concluded a joint study with Ofwat that examined a number of important issues (such as gearing levels, regulatory risk and the cost of capital) relating to the financing of networks" (p 70).
6.10. The regulators also stressed the value of the informal networks that exist between them. Sarah Chambers, of Postcomm, explained how these networks operate—"the things that really matter as well are the informal networks between us which are ad hoc informal networks but [which are] actually quite strong in terms of sharing best practice … [and] finding ways to share resources" (Q 784).
6.11. So the regulators were broadly positive about the state of relationships between them. Regulated industries and other commentators' opinions on how successful the regulators' efforts at joint working had been, however, were largely negative. Although most agreed with David Newbery that "for the public utilities there has been a great deal of learning and establishing precedents" (Q 8), there was a feeling that the learning and sharing had not gone far enough.
6.12. The Regulatory Policy Institute thought that although "The working relationships among regulators appear to be broadly satisfactory … there is no doubt scope for further improvement" (p 595)—an opinion that was shared by many of our witnesses. The Royal Bank of Scotland Group (RBSG) pointed in particular to problems caused by regulators not communicating consistently with one another. They were especially concerned by "the lack of consistency resulting from various regulators pursuing different agendas (or indeed interpreting the same agenda in a different fashion)" and said that they "would therefore welcome moves which ensure clear and consistent decision making from the variety of regulators involved in any specific industry" (p 600).
6.13. Sir John Bourn expanded on the areas in which more joint working between the regulators would be genuinely helpful: "what I do think could be developed helpfully is cooperation between the regulators … what one is looking to see is more cooperation between regulators and more learning from each other … to the extent that the economics of sustainable development is something they are all going to have to pay more attention to, it may be on things of that kind they could work together and produce reports which all of them could have their work informed by" (Q 712).
6.14. Stephen Haddrill, of the Association of British Insurers (ABI), suggested that relationships between regulators are much less developed than they might be because regulators naturally gravitate towards their own policy silos and to varying extents tend to forget the bigger picture—"we have this kind of spaghetti of relationships between a very large number of regulators. From my own experience in government it is not a natural state of being for regulators to be intimate with each other: they tend to do their own bit, driven by their own objectives" (Q 587). The views of most of our witnesses seemed to be summarised by the Finance and Leasing Association (FLA) who put in a plea for "much more joined up thinking and approaches by the economic regulators" (p 526). They stressed the importance of "actions rather than just words and commitments, as currently appears to be the case" (p 526).
6.15. We agree that action is necessary to improve regulators' joint working. There needs to be more structured and formal cooperation between the regulators if it is to be meaningful. We welcome the regulators' willingness to develop relationships between themselves to increase their effectiveness.
6.16. We believe that if the Joint Regulators Group is to prove a successful forum for the sharing of best practice it needs to be formalised. The Group should establish a secretariat, and suitable arrangements for leadership, to ensure greater consistency of focus and a clearer direction of effort. The Joint Regulators Group should publish its agendas and minutes of its meetings on a tailored JRG website online to enable interested parties to have easy access to them. Additionally the JRG should produce an Annual Report outlining the discussions it has had over the course of the year and the details of any joint work it has undertaken.
Do regulators work effectively with the competition authorities? Is concurrency working?
6.17. The regulators all claim to work effectively with the competition authorities and vice versa. To single out a few specific comments, Ofcom has said that its "relationship with the OFT is a very close one and it is a very good one" (Q 33) and Ofgem has said much the same—"it is a very good working relationship both from the John Fingleton level right the way through the organisation" (Q 111).
6.18. Other witnesses seem to agree with the regulators' assessment of these relationships. Again, to single out a couple of specific remarks, David Thomas, from the Financial Ombudsman Service, spoke up for the FSA's relationship with the OFT—"I can assure you from personal experience there is a high degree of liaison between the FSA and the OFT in its competition aspects" (Q 613)—and the Rail Freight Group claimed to "have seen evidence of good co-operation between the ORR and OFT/CC" (p 337).
6.19. The competition authorities were also positive in their assessment of their relationships with the sectoral regulators. Indeed, the OFT went so far as to say that the sectoral regulators helped them with their investigations—"Does that actually happen in your experience, that sectoral regulators help you in your investigations? / Yes. We work closely with the Civil Aviation Authority, with the Financial Services Authority and we work closely with all of the regulators" (Q 246).
6.20. There was a recognition that the current web of relationships between the sectoral regulators and the competition authorities[47] is still relatively immature and there was a feeling that the relationships are improving steadily over time—"The main lesson we have taken away in the last two years—and we have had a much better relationship as I have mentioned—is that we understand each other's respective responsibilities and we understand the skills that each organisation has that they can bring to the table, and we do not effectively compete as regulators" (Q 320).
6.21. So, the picture is broadly positive. There was, however, some concern expressed over overlapping inquiries and duplication of work. This point was raised particularly in respect of various recent investigations in the UK airport sector. The British Airports Authority (BAA) explained the situation clearly—"Once the OFT announced its investigation into the UK airport sector in May and then June of last year, we then had three regulators potentially about to start work on us, the CAA, the OFT and the CC" (Q 561). Such a situation is clearly inherently undesirable but BAA also went on to criticise a lack of communication between the regulators involved—"We did not perceive much interaction between them and it has meant that two reviews started to the minute on the same day" (Q 561). Manchester Airports Group supported BAA's assessment of the situation "We certainly could see that there was perhaps less dialogue between the regulators than would have been desirable" (Q 561). It would be hard to disagree with BAA's conclusion that the investigations could have been timetabled in a more helpful way for all concerned (Q 561).
6.22. The same point was also raised in relation to the FSA. The Association of British Insurers (ABI) raised the example of regulators' co-ordination over payment protection insurance, noting that "Initially the FSA and OFT investigations were not well coordinated though this has improved in recent months" (p 373). The Association of Independent Financial Advisors (AIFA) also raised this example and had similar concerns—"FSA and OFT have jointly studied the payment protection market. This relationship has, from the perspective of the firms involved, seemed uncoordinated at times" (p 366).
6.23. The CAA and the FSA were not alone; similar concerns were raised in relation to other regulators, including Ofwat—"It is not clear to British Water that the Competition Commission and the Office of Fair Trading do communicate sufficiently with Ofwat for an understanding of the work of each other to fully develop" (p 508).
6.24. The Competition Commission also raised a different issue. The CC is a "second stage" competition authority which deals in depth with complex enquiries but only in cases referred to it by the "first stage" authority (usually the OFT, but also a sector regulator). In its written evidence, the CC expressed some concern about the lack of references to it by utility regulators. The CC said no regulatory references have been made to it since 2002 which, in the CC's view, means it is being under-used and that the important threat of a reference to the CC is becoming less credible (p 152). The CC further expressed some concern over the nature of the cases that have been brought to it—in some instances it felt that it was not receiving the meatiest cases—"there have been one or two cases which have been a little small, a little specific" (Q 258). The CC explained the reluctance of the regulators to make referrals as being related mainly to the costs of appeals, the uncertainty, the delays to decisions, the possibility of compromises between regulator and regulated being unpicked and concern that a body unfamiliar with the industry might not properly balance various "public interest" considerations. Nevertheless, the CC pointed out the importance to the regulators of there being a credible threat of a reference to the CC if they are to achieve reasonable settlements (p 152).
6.25. Whilst relationships between the sectoral regulators and the competition authorities seem to be broadly sound, there is clearly a need for improved communication between the various bodies over the timing and content of their investigations of particular markets.
6.26. We also recommend that, where possible, utility regulators should look to bring more cases to the competition authorities and that the regulators should work to ensure that the cases most likely to establish useful precedents are brought to the CC.
6.27. In addition to taking evidence on the state of the general relationships between the sectoral regulators and the competition authorities we looked specifically at the concurrency arrangements in place between them.
6.28. "Concurrency" arrangements in the British regulatory system refer to the arrangements under which decisions are made about whether competition law is applied sectors by the relevant sectoral regulator or by the OFT. Many of the regulators, besides having duties to promote effective competition under their respective sector-specific legislation, have been assigned competition powers concurrent with the OFT. This can make effective use of the sector regulators' specialist knowledge of the sectors they regulate and assist in co-ordinating the use of sector-specific regulation with the exercise of general competition law. However, without some clear concurrency arrangements for deciding whether the OFT or the sector regulator will deal with competition issues there is likely to be uncertainty for the regulated companies and there could be inconsistencies in dealing with competition matters.
6.29. Of the regulators which are the subject of this inquiry, those with concurrent powers are Ofcom, Ofgem, Ofwat, ORR and the CAA (for air traffic services only). Neither the FSA nor Postcomm has concurrent powers nor does the CAA as far as airport regulation is concerned.[48]
6.30. The concurrent powers in question are: to make market investigation references under the Enterprise Act 2002 where a market appears to have anti-competitive features; to investigate possible infringements of the prohibitions in Chapters 1 and 2 of the Competition Act 1998 and Articles 81(1) and 82 of the EC Treaty in the UK (against anti-competitive agreements and abuse of a dominant position); and to carry out market studies.[49]
6.31. Once it has been decided, under the concurrency arrangements, which authority will exercise the necessary functions, another authority cannot exercise those functions unless there is a formal transfer of responsibility.[50] When a case is brought under the Competition Act which relates to a regulated sector, the OFT formally decides whether it should undertake a case or hand it to the sector regulator. In doing so, it will consider the sectoral knowledge of the regulator, whether the case affects more than the regulated sector, any previous contact between the parties or complainants and a regulator or with the OFT, and any recent experience in dealing with any of the undertakings or similar issues that may be involved in the proceedings. These arrangements are set out in the Competition Law Terms of Reference for the Concurrency Working Party.
6.32. A report in 2006 by the DTI and the Treasury [51] concluded that concurrency arrangements were generally working well. A Concurrency Working Party set up in 1997 acts as a "… forum in which views on current practice are exchanged" and, as far as procedures for deciding who deals with which complaints are concerned, "… the OFT generally [passes] cases over to a regulator if the complaint involves a regulated sector." The report concluded, however, that it would be beneficial to enhance existing co-operation between the OFT and sectoral regulators. It also encouraged regulators to consider whether they could be "… more proactive in using competition law, including the use of market investigation references".
6.33. In general, the evidence received by the Committee supported the conclusion of the DTI/Treasury report that concurrency arrangements are working satisfactorily. However, some reservations were expressed.
6.34. One matter which came up in evidence and has concurrency connotations is whether a sector regulator, given its involvement in the relevant market, is likely to be assiduous enough in investigating competition issues. Two entrants to the water industry in England and Wales—Albion Water and Aquavitae (UK)—both expressed doubts about Ofwat`s actions. In Aquavitae's written evidence, for example, it argued that the access pricing regime in water established by Ofwat has the effect of protecting incumbents and acting as a barrier to entry (pp 490-493). Moreover, according to Aquavitae, despite adverse findings by the Competition Appeal Tribunal in relation to an appeal under the Competition Act 1998 by Albion Water regarding Ofwat`s regime, Ofwat was very resistant to making changes to it (p 493).
6.35. Another example was provided by Energywatch which argued that when it raised a Super Complaint on behalf of energy consumers, Ofgem's solution did not "go to the heart of the problem … Self-regulatory measures were promised despite being untested and without any regulatory supervision and there was no guarantee that any of the underlying problems would be resolved" (p 237).
6.36. As not all economic regulators have concurrent powers under competition legislation the question arises of whether there would be advantages in their being brought into line with the regulators who do have such powers.
6.37. Postcomm, the postal services regulator, lacks concurrent powers but there seems to be no pressure either from the regulator or from market participants for it to have them. The DTI/Treasury report on concurrency states that Postcomm feels that if it had concurrency powers it would need to carry out the same groundwork as now and would pursue cases in similar ways.[52] According to the OFT's written evidence, a memorandum of understanding between it and Postcomm and "co-operative work on the ground" substitute well for formal concurrency arrangements and Postcomm itself did not suggest, in its evidence to the Committee, that it would like concurrency powers.
6.38. The FSA also lacks concurrent powers though it has a subsidiary duty to promote effective competition. According to the OFT's evidence, it is committed to working closely with the FSA on competition and consumer protection matters despite the absence of formal concurrency powers (p 133). Again, neither the FSA nor financial firms suggests that the absence of concurrency is a significant problem.
6.39. The case of the CAA raises different issues. It has concurrent powers insofar as air traffic services are concerned, but lacks them for an important part of its functions—regulating airports. Like Postcomm, it has a memorandum of understanding and co-operates with the OFT. Written evidence from the CAA sets out the case for extending concurrency to its airport regulation functions—"combining competition law and regulation of airports in a single body to take advantage of the unique features of the airports market" (p 53). However, the CAA also points out the resource implications: joint working with the OFT might be required because the CAA may not have enough staff to cope with competition law casework. BAA, in its written evidence, does not mention concurrency as such but expresses some reservations about "disjointed" interactions between the CAA, OFT and CC, particularly since it is undergoing two references to the CC at the same time, on different timescales (one as part of a normal regulatory reference by the CAA and the other a market investigation reference by the OFT) (pp 354-355).
6.40. Where the sector regulators have been assigned competition powers concurrent with the OFT, these arrangements are generally working satisfactorily. However, this is not universally the case and a concern arises as to whether a regulator charged with promoting competition is the best body to review complaints under competition legislation as to the effectiveness of competition in the industry concerned (since the regulator might be perceived as having an interest in rejecting such complaints). Where regulators do not have concurrent competition powers, much of the evidence we have received suggests that the liaison between the sectoral regulators and the OFT is satisfactory and the regulators in question did not consider that the lack of concurrent powers had hampered their effectiveness. But some concern has been expressed about disjointed interactions between the sector regulators and the competition authorities, and the CAA has made a case for full concurrent powers.
6.41. We recommend the following:
Concurrency arrangements should be retained.
In some cases complainants perceive that a sectoral regulator is so deeply involved in regulating the industry as it stands that it pays insufficient attention to the importance of establishing and maintaining effective competition. Complainants should therefore be given the option of requesting the OFT rather than the sectoral regulator to take the lead in investigating complaints.
In cases where regulators do not have concurrent powers, even though they are carrying out very similar functions to regulators which do have such powers, there is a case for giving concurrent powers.
What is the nature of the relationship between regulators and government departments? Are the regulators sufficiently independent from the Government?
6.42. The question we consistently asked witnesses when considering the nature of the relationship between regulators and the Government was "are the regulators sufficiently independent?"
6.43. The regulators were all set up as different types of bodies, with different funding models, and arrangements for protecting their independence vary. The table below outlines the status of the different regulators:
TABLE 5
Status of the regulators
Name of Regulator
Nature of Organisation
Ofcom
Public Corporation[53]
Postcomm
Non-ministerial government department[54]
Ofgem
Non-ministerial government department
Ofwat
Non-ministerial government department
ORR
Non-ministerial government department
CAA
Public Corporation
FSA
Private company, limited by guarantee
TPR
Non-departmental public body[55]
OFT
Non-ministerial government department
CC
Non-departmental public body
6.44. Overall, we found that there seemed to be few problems around the issue of the independence of regulators. The regulators all believe themselves to be independent (e.g. p 14, p 153) and the regulated trust in their ability to be so (e.g. p 336). Ed Richards, of Ofcom, made an interesting point when he said that "one of the things which I think people underestimate is the extent to which the idea of independent regulation has become almost quasi-constitutional" (Q 45). The evidence we took certainly seemed to support his opinion. It was taken as read by the regulators, the regulated and the Government that the regulators are to be fully independent and that no undue influence should be put on them at any point.
6.45. There was widespread support, too, for the systems by which the different regulators are funded. Ministers, in particular, defended the regulators' funding arrangements and claimed that they had no effect on independence.
6.46. The only potential problem witnesses raised in this area was the funding of Postcomm. Postcomm is funded by the industry it regulates which means it is funded largely by Royal Mail—and the sole Royal Mail shareholder is the Department for Business, Enterprise and Regulatory Reform (formerly the DTI). In effect then, Postcomm is funded by its sponsoring department. As the Mail Users' Association (MUA) put it to us "Postcomm is after all, an 'independent' regulator that is funded by the shareholder of the very company it is principally required to regulate" (p 320).
6.47. The MUA and Postwatch thought there was a genuine problem here. The MUA pointed to an example of when they thought the DTI had put pressure on Postcomm—"Postcomm were reluctant to pursue Royal Mail regarding the quality of service standards that they were required to meet in the bulk service compensation scheme and we believed—and I use that word in the broadest sense—that that was pressure from the Royal Mail shareholder, the DTI" (Q 526). Postwatch noted that on this issue perception may be as important as reality—"there is a perception out there that because of the funding model and the relationship in terms of who makes the appointments, that there is a danger that Postcomm's independence may be compromised. We have no evidence to say that it is and we do not know how we would prove it either, but I think the perception itself is quite an important issue" (Q 526).
6.48. We recognise that there is a perception that Postcomm's independence might be compromised by its method of funding. We believe that whilst in theory the funding of Postcomm by Royal Mail (and therefore effectively by the Department for Business, Enterprise and Regulatory Reform—formerly the DTI) may compromise their independence, in practice this is not the case. Moreover, as competition increases other operators in the industry will be liable to contribute to the funding of Postcomm.
6.49. More generally several witnesses noted that, on occasion, the policy of a regulator and government policy might conflict. There was a feeling that whilst a degree of tension between government and regulator is healthy there needed to be clear mechanism for resolving such conflicts (p 354). This issue was raised in relation to several regulators (p 587) but was particularly raised with reference to Ofgem. Many of our witnesses felt that the economic role of the regulator was being "encroached on at the edges by non-economic considerations" (p 276). Such considerations have included issues such as affordability, fuel poverty, security of supply and the effect that energy policy could have on climate change.
6.50. Energy is now again a public policy issue and security of supply and sustainability are ever more important considerations. In this context Government will need to be careful to ensure that Ofgem is not sent mixed messages. Government must be explicit in the political decisions it makes and in the consequent guidance it issues to regulators.
6.51. In the context of inquiring into the independence of regulators we also took some evidence on the complex relationship between the ORR and the DfT. The division of responsibility for the rail industry between the two bodies is undeniably complicated. The national rail infrastructure is operated and maintained by a single provider, Network Rail, which grants access to the network in return for regulated access charges. Network Rail has members rather than equity holders, is financed by debt, currently all guaranteed by government, and is required to re-invest all profits into the railway. In effect it is a public sector asset. The passenger railway network is funded by passenger fares, government subsidy to the train operators and government grants to Network Rail.
6.52. Within this system the ORR has responsibility for regulating Network Rail's stewardship of the national rail network. The ORR also licenses the operators of railway assets, approves agreements for access by operators to track, stations, and light maintenance depots, and enforces domestic competition law. The ORR is also the health and safety regulator for the industry. The DfT is responsible for rail strategy and for franchises, both in terms of awarding franchises and monitoring and enforcing them. Regulated fare levels are also set by the DfT. To some extent, therefore, the DfT itself is a regulator in this industry.
6.53. While a monopoly supplier, such as Network Rail, is not unusual, the existence of a single dominant purchaser, the extent of government subsidy and the absence of equity finance in Network Rail all influence the way the rail industry can be regulated and make for an over dependent relationship between regulator and government department.
6.54. In evidence to us, the ORR, whilst recognising that the system is complex, defended the current arrangements—"You can describe those arrangements in a way that is understandable, it does work … Could it be different? Yes, it could, but what no one in the rail industry would want is a further period of change, let us get on and make the current structure work" (Q 128).
6.55. George Muir, from the Association of Train Operating Companies, said much the same—"The present regulatory system in the railway [industry] looks complicated and indeed is complicated but it does seem to work quite well" (Q 537), as did Paul Plummer, of Network Rail, who thought that "the regime works pretty well" (Q 537).
6.56. Complexity in the relationship between the DfT and the ORR is not necessarily undesirable if the system is working. The Minister, Tom Harris MP, put in a sensible plea for "a long-standing period of settling down into the current regulatory framework" (Q 617). We believe this would be advisable and we recognise that the early signs of a productive relationship developing are promising.
6.57. During our evidence session with Tom Harris MP, Gillian Merron MP and Ian Pearson MP (all then Ministers at the DfT, DTI and DEFRA), another important issue was raised—the nature of the relationships between sponsoring departments. It seems that the departments themselves do not talk to each other about regulatory issues. Ministers readily admitted the problem. Tom Harris MP explained that "ministers get too comfortable in their policy silos and deal directly and exclusively with the regulator in their own department". He went to say that the evidence session was in fact "the first time … where the three of [them had] got together to discuss [their] own individual regulators" (Q 643). In a later evidence session Jim Fitzpatrick MP agreed that "there [was not a] forum for ministers … to have … the opportunity to exchange views" (Q 698) and that that was a shame because "it would be appropriate for ministers to be able to get together to compare notes" (Q 699). Other witnesses also noted the problem. Sir John Bourn, for example, seemed to speak for many when he said that he thought that "especially at a time when all government departments are admonished to think about joined-up government, that there is more that they could do" (Q 717).
6.58. The only example of ministerial coordination we found was Ed Balls MP's chairing of a ministerial group on financial inclusion and financial capability, with the aim of trying to make sure that ministers communicate well and work together in those areas.
6.59. Relationships between regulators and government seem generally to be functioning well although an effective and transparent mechanism needs to be put in place for resolving potential policy conflicts so that the regulators are able to carry out their economic function without interference.
6.60. Relations between government departments on regulatory issues are in their infancy. We recommend that an inter-ministerial forum be established to require ministers to compare views and share best practice.
How will Parliament ensure the accountability of regulators?
6.61. As noted in Chapter 2, the May 2004 House of Lords Constitution Committee Report on the regulatory state recommended that "a dedicated parliamentary committee should be established to scrutinise the regulatory state." It further recommended that this "should preferably be a joint committee of both houses" and that the Committee should undertake "consistent and co-ordinated" scrutiny, focused around the regulators' annual reports and IAs.
6.62. The Government's response to the Committee's report acknowledged that these recommendations were "for the House Authorities to take forward as they deem appropriate".
6.63. The Liaison Committee of the House of Lords duly appointed this ad hoc Select Committee. As such, we are the child of the Constitution Committee's report, but not the wished child. Our existence is terminated with the publication of this Report and the subsequent debate on it to be held on the floor of the House.
6.64. It therefore remains for us to make a recommendation on how parliamentary scrutiny of regulators should develop from here.
6.65. We agree with the conclusion of many of our witnesses that "there is a crucial need for greater parliamentary oversight … over regulation bodies" (Q 359). The question of who regulates the regulators has not been answered and will not go away. There is a need for a committee to pursue cross-sector best practice and to ensure that the recommendations of this Report are followed-through. As we emphasised in paragraph 2.18 we have examined only a part of the regulatory state. We have considered only regulators, and not regulation, and we have looked at only the economic regulators. There is a need for a wider, and continuing, review. No existing committee of either House is in a position to undertake such a continuing and over-arching review as Departmental Select Committees in the House of Commons are restricted to considering the regulators within their own sector.
6.66. We therefore recommend that a Joint Committee of both Houses be set up in line with the recommendations in Chapter 10 of the Constitution Committee's Report.[56] If it proves impossible to set up such a committee we recommend that a sessional Select Committee be established in the House of Lords.
44 Concurrency Working Party Back
45 CAA, FSA, Ofcom Back
46 Ofgem, Ofwat Back
47 See Appendix 8 Back
48 Concurrency is not a relevant issue for the Pensions Regulator Back
49 Concurrency arrangements do not relate to merger investigations, which are the responsibility of the OFT and the CC, subject to any intervention by the Secretary of State on public interest grounds-currently national security and media plurality. Back
50 A statutory instrument, the Competition Act 1998 (Concurrency) Regulations (SI 2004/1077) sets out concurrency working arrangements. See also 'Concurrent application to regulated industries', OFT Guidance Note 405, December 2004. Back
51 Concurrent Competition Powers in Sectoral Regulation, May 2006. Back
52 `Concurrent Competition Powers in Sectoral Regulation', op cit, para 2.8 Back
53 A corporation created to perform a governmental function or to operate under government control Back
54 Government departments in their own right, established to deliver a specific function and not funded by a sponsor department. Back
55 A body which has a role in the process of national government, but is not a government departments or part of one, and therefore operate to an extent at arm's length from Ministers. Back
56 See Appendix 6 Back
[1] Steven Arons, ‘Deutsche Bank’s Rising Star H`s A Rapid Change of Fortune’, Bloomberg, UK, 23 November 2021. Sums are in US dollars.
[2] Ref for the $103 Trillion? PwC, Asset & Wealth Management Revolution; Embracing Exponential Change (date?)
[3] Duncan Grierson, Letter; Climate impact rating can help tackle greenwashing’, Financial Times, 8 June, 2022.
[6] Steven Poole, ‘‘Greenwashing’: the go-to solution of hedge funds and oil companies’, The Guardian, 6 December 2019.
[7] Jim Motavalli, ‘A History of Greenwashing: How Dirty Towels Impacted the Green Movement’, Daily Finance, February 2011.
[10] North Sea Transition Authority, The North Sea Transition Deal (March 2021).
[11] DWS v. Fixler; Tariq Fancy
[12] Shell, Ryan Air
[13] Mark Sweeney, ‘Ryanair accused of greenwash over carbon emission claim, The Guardian, 5 February 2020. UK ASA banned campaign because of greenwashing. See also, Arthur Neslen, ‘Ryanair is the new coal: airline enters EU’s top 10 GHG emitters list, The Guardian 1 April 2019 with 9.9 mega tonnes of greenhouse gas emissions in 2018.
[14] Edie Newsroom, 1 September 2021.
[15] ClientEarth, ‘Revealed: (9 examples of fossil fuel company greenwashing’ ClientEarth Communications, 19 April 2021.
[16] http://www.oecd.org/daf/inv/mne/48004323.pdf.
[17] Climate Action 100+, Global Investors Driving Business Transition (2022); Climate Action 100+, Net Zero Company Benchmark Second Round, 30 March, 2022.
[20] Chris Morris and Merlyn Thomas, ‘Climate change: The US state taking on an oil giant for greenwashing’, 6 November 2021.
[21] Competition and Markets Authority, ‘CMA to examine if ‘eco-friendly’ claims are misleading’, 2 November 2020 ‘ www.gov.uk.
