Hogan Lovells - Impact financing and greenwashing-related risks

Considering the growing sensitivity to sustainability, companies seeking capital are increasingly eager to address ESG issues and enhance their reputation by improving their sustainability credentials. Awareness of the risks involved is thus critical. Making inaccurate or misleading statements regarding green or environmental credentials of an impact financing product may result in misselling allegations and claims from investors and shareholders.

While there is yet no Greenwashing-related financial litigation in Italy to date, an increasing volume of lawsuits may be expected in the near future and prospective claimants might pursue several paths to bring claims.

Under art. 94 of Legislative Decree 58/98, investors might seek to claim damages vis-à-vis the financial product issuer when the prospectus contains false or misleading information. This provision could be invoked in Greenwashing scenarios. Possibly qualified as a form of precontractual liability, it implies that the burden of proof of the issuer’s harmful behaviour, of the suffered damages, the issuer’s fraud or negligence, and causation, all lie on the claimant.

Investors might also claim breach of contract under article 1218 of the Italian Civil Code when a statement or representation made in an agreement turns out to be untrue. The investor’s burden of proof would be limited to filing the executed contract incorporating the untrue statements and substantiating the damages incurred.

Issuers, intermediaries and other sellers should thus be aware of the above when making any statement about a financial product.

Companies’ economic performance may also entail litigation risks, especially when it comes to environmental reporting. Shareholders might potentially seek to sue for damages ensuing from irregularities or omissions in the information reported in the ‘Non-Financial Declaration’ (amounting to a ‘Sustainability Report’ and reporting on the company’s environmental and social performances and results) which certain large companies must draft under Legislative Decree 254/16.

In assessing the significance of these risks, legal uncertainty is being progressively superseded in light of recent European regulations. The Disclosure Regulation 2019/2088/EU intends to provide harmonized disclosure requirements for investment products promoting environmental or social objectives. The Taxonomy Regulation 2020/852/EU sets out a classification system for environmentally-sustainable economic activities with the aim to create a common language to be used when assessing if economic activities have positive impact on the environment.

The Final Report on draft Regulatory Technical Standards, adopted in early 2021, offers further details. The general requirements of the Disclosure Regulation are substantiated by concrete contents and methodologies of sustainability-related disclosures for ultimate implementation.

Various organisations have sought to bring further clarity into this area. The International Capital Market Association (ICMA) has published Green Bond Principles (“GBP”), Green Loan Principles and Sustainability Linked Loan Principles, aiming to implement disclosure transparency.

The above rules and guidelines can help European companies to identify sustainable business activities and correctly provide information to investors to minimise the risk of accidental Greenwashing and, where needed, to overcome Greenwashing allegations.

In consideration of the foregoing, the following practices might be adopted to mitigate legal risks in the area of impact financing: (1) be accurate in providing information to investors at all stages of a financing transaction; (2) follow all available rules and guidelines on what constitutes a ‘green’ product before indicating it as such; (3) seek opinions from qualified independent experts; (4) effectively assess legal risk and seek legal advice where needed.

It is the sole responsibility of the Sustainable Finance Partner to check the truthfulness, accuracy and completeness of the data and information entered on this web page, when within its competence and provided by the Partner. Borsa Italiana S.p.A. is not responsible for the contents developed by third parties and in particular by the Sustainable Finance Partners contained in this web page.