a powerful agent for progress

Legal risk is the biggest sustainability-related concern for both executives and investors, and many are concerned about compliance costs. However, regulation has played a role in creating many of the opportunities that sustainability offers. First, if we are to look to the legal risk element, the ongoing deluge of sustainability regulation is accompanied by a wave of ESG-related litigation, notably on climate change. There were 2,180 open cases, filed in 65 jurisdictions, related to the climate in 2022, according to research for the UN by the Sabin Center for Climate Change Law at Columbia University, more than double the number in 2017.12

Legal risk weighs heavily on executives’ minds: 53% name penalties or litigation for breaching sustainability rules as their foremost worry (Fig. 7). Investors agree, citing this as the chief concern for their portfolio companies.

Advice on avoiding regulatory investigations and litigation linked to sustainability is in high demand right now, says Emily Blower, managing associate in our disputes and investigations practice. She also notes a “dramatic uptick” of interest in how sustainability-related cases progress through the courts and investigations are approached by regulators.

“A number of activist organisations are bringing innovative litigation at the moment, targeting different sectors,” Blower explains. These include ClientEarth, an environmental law charity that sued the directors of oil and gas giant Shell over the company's climate strategy.13

“These groups are willing to make examples of organisations, to set precedents and garner public support, even where the hurdles to success are significant, and that is causing this concern to be so high.”

Three in five survey respondents (59%) agree that the reputational damage caused by litigation or regulatory censure is a bigger concern than the penalties involved. This means even unsuccessful action can inflict harm. “They might not have success, but they do the damage,” says Robert Allen, partner in our disputes and investigations practice.

Confidence in compliance

Despite these worries, 83% of executives say they are ‘very’ or ‘somewhat’ confident in their compliance with climate adaptation rules, while 80% say the same of sustainability reporting regulation (Fig. 8).

There is significantly less confidence in their ability to comply with regulation on ‘greenwashing’ or ‘sustainability washing’, with only 60% of respondents expressing faith in their ability to comply, and less than 20% feeling very confident.

This is an understandable concern. Firstly, there is a lack of clarity over what exactly constitutes greenwashing, with definitions varying across jurisdictions.

Secondly, there have been a high number of regulatory investigations and litigation related to greenwashing. Relatively speaking, it’s an easier action to pursue, Blower explains, as greenwashing cases and investigations are based on the tried-and-tested grounds of misrepresentation.

Allen therefore advises companies to be certain of the accuracy of any sustainability-related claims. “You need to be clear that what you say is accurate, both in terms of statements and omissions, and then be confident that you’re doing what you say you’re doing.”

Uncertainty around greenwashing may discourage sustainability investment. Anecdotal reports suggest it has given rise to ‘greenhushing’, in which companies hold back on publicising their sustainability practices to avoid the scrutiny of regulators or activists.

Alex Blomfield, a partner in our energy, natural resources and infrastructure practice, believes criticism for greenwashing and resulting greenhushing by corporates are issues for carbon markets, which allow companies to offset their emissions by purchasing carbon credits.

Campaigners have accused businesses of using carbon offset schemes to defer investing in decarbonising their operations. “There’s been a lot of negative press around carbon markets, which has had a chilling effect on corporate appetite to buy offsets,” Blomfield explains.

But a study of over 7,000 companies by Ecosystem Marketplace found that participants in voluntary carbon markets spend three times more on reducing their emissions than those that do not.14

“Far from being greenwashers, this study shows that these companies are doing more, not less,” says Blomfield.

Competition concerns and sustainability-driven M&A

Another area of low confidence is competition. It is an area of growing relevance to sustainability, as many companies are considering M&A to bolster their sustainability credentials – 42% of executives say this is a priority, including 49% from the Middle East.

M&A can be used to bolster sustainability credentials at every level of an organisation, from product and service offerings to the talent and skills of a workforce.

ESG is increasingly becoming a key driver in transactions and can impact the whole process from target selection to post-merger integration. Robust ESG due diligence and valuations in the deal process help to ensure that these transactions can open up new pathways to value. Ania Rontaler, partner and head of private markets in our corporate practice team, is of the view that “ESG should be a feature of all M&A transactions, whether as a driver for the transaction or as part of the due diligence process.”

Simmons is increasingly seeing companies acquire businesses that have already established a circular economy offering. “It’s an example of how they’re transitioning into the new economy to meet demands for decarbonisation and to build capacity,” explains Ignacio Dominguez, partner specialising in M&A and private equity.

While the competition watchdogs in some jurisdictions have issued guidance confirming that they will take a holistic approach to assessing agreements to enable market cooperation on sustainability, others have been far more nuanced. The position is even more unclear in relation to merger control where ESG benefits are very seldom considered sufficient to clear deals outright. When this is coupled with a surge in merger control and foreign direct investment intervention generally, this leaves businesses unsure of where they stand, with some deals being prohibited or abandoned.

“As more industries seek to collaborate and support decarbonisation efforts, striking the right balance between these green aspirations and the enforcement of antitrust and consumer protection mandates remains a formidable task in the absence of a global consensus,” says Mark Jephcott, partner in our competition practice.

How regulation unlocks opportunity in sustainability

Despite the widespread belief that sustainability offers opportunity, many survey respondents see the current type of regulation as a hindrance, not a catalyst. Almost three in five (58%) surveyed executives, and 50% of investors, agree that the ‘cost of complying with sustainability regulation prevents businesses from pursuing opportunities in sustainability’.

“It is a fair concern,” says Penny Miller, partner in our financial services regulatory practice. “I completely empathise with market practitioners tasked with implementing the vast array of ESG regulations, and the related resource requirements can be both costly and at times a distraction from value creation. However, getting the foundations of confident compliance in place can create real progress and advantage.”

Sustainability regulation is still evolving, which adds to the burden. The Sustainable Finance Disclosures Regulation (SFDR) is a case in point: investment funds have spent time and effort on complying with the regulation, with new requirements coming into effect as recently as January 2023, yet the European Commission is already consulting on a potential overhaul. “When implementing the SFDR, the market actually used the classification under the regulation as a quasi-labelling regime and to promote ESG-products,” says Harald Glander, partner in our financial services regulatory practice, he adds “that the official and real labelling regime might be implemented within the SFDR 2.0.”

But opportunities in sustainability are often created, not stifled, by regulation. “Despite the challenges that come with compliance needs, smart regulation has the power to unlock opportunities, add value and level the playing field,” Sonali Siriwardena, partner and our global head of ESG explains.

She points to research which found that, despite its drawbacks, SFDR unlocked true sustainable investment in Europe by imposing stricter criteria for what funds can market as sustainable.15

The impact can also be seen in real estate, says Ali Crosthwaite, partner in our real estate practice. Institutional investors’ disclosure obligations under the SFDR mean a pivot towards more sustainable assets, particularly those where good data is available, she says.

That means sustainability is now fundamental to every real-estate developer’s business plan, she adds. “Real estate is a significant contributor to global emissions. But the flipside is it is also an asset class where meaningful improvements can be implemented.”

“SFDR and similar regimes have escalated decarbonisation as a C-suite issue, and we only see that trend continuing, as improved sustainability leads to higher asset valuations.”