Hello and welcome back to The Pinsent Masons Podcast, a fortnightly dose of easy-to-digest business law news and analysis designed to help keep you up to date with the latest developments from all around the world every second Tuesday.
My name is Matthew Magee and I’m a journalist here at Pinsent Masons, and this week we find out about the concerns that companies have about maybe having over disclosed on climate and sustainability in the newest wave of reports that are obliged to publish. Have they opened themselves up to unnecessary risk?
But first, here is some business law news from around the world:
Supermarket wins farmer protest injunction
EU drops standard essential patent reform plans and
South Africa anti-corruption reform pause disappointing development
A supermarket in the UK has won an injunction to prohibit farmers from protecting at its distribution centres and from blocking nearby access roads. Morrison's applied to the High Court of England and Wales for an interim injunction to restrain unlawful agricultural protests at its distribution centres and on surrounding access roads following protests in January where tractors were strategically placed to block access to and from those centres. The action was over changes to UK inheritance tax rules, which are due to come into effect in April next year, as well as publication of the UK government's 25 year farming road map and the pricing of food. Tom Cottrell of Pinsent Masons said that “these anti protest injunctions was an area of law which had evolved significantly over recent years.”
Plans to reform European rules governing the use of standard essential patents or SEPs have been withdrawn by the European Commission after EU lawmakers failed to reach consensus on the changes it had proposed. The Commission said that there is no foreseeable agreement on the reforms and that's why it was withdrawing the regulation, adding that it will assess whether another proposal should be tabled or another type of approach should be chosen. Patent experts at Pinsent Masons said the development has surprised industry, but would be welcomed by many. SEPs are patents that protect technology, believed to be essential to implementing a technical standard. In other words, you can't operate a standard compliant device without using the patented invention. With the draft new SEP regulation published in spring 2023, the Commission sought to improve transparency and predictability in SEP licencing, improve fairness and efficiency in the licencing process and limit costs that can arise from disputes. IP expert Mark Marfé said “the withdrawal of the SCP regulation would be welcomed as bringing greater certainty to the sector.”
The rejection of anti corruption legislation in South Africa is a disappointing development for an area in much need of reform, an expert has said. A law was to establish an anti corruption commission to investigate and prosecute high-level corruption cases, a move seen as crucial in a country grappling with significant corruption. However, the bill now faces substantial opposition and has not been endorsed by important bodies, including the Department of Justice and Constitutional Development and the National Prosecuting Authority. Edward James, an anti-corruption and bribery expert, said “in a country crippled by corruption, the ACC was viewed as a welcome development. However, it seems that barriers are impacting much needed reform.” The Department of Justice and Constitutional Development has said that extensive public policy work has been performed to decide the best way to structure the organisation responsible for fighting corruption. It has indicated that the current process is for the national Anti-Corruption Advisory Council to consider this and make recommendations to the president.
Companies are being asked to be ever more transparent and responsible about their impact on the world. Reporting and accountability was stepped up a notch by two EU directives, the Corporate Sustainability Reporting Directive, or CSRD, and the Corporate Sustainability Due Diligence Directive or CSDDD. Companies are just now publishing their first reports based on these requirements, and some are wondering if they've disclosed too much, according to James Hay, a London-based sustainability reporting expert at Pinsent Masons. But first, he told me what the overall reporting landscape now looks like for the biggest companies in the EU, or those from outside of the EU but doing business there.
James Hay: These days the big Sustainability Reporting Framework that we're looking at is the EU’s Corporate Sustainability Reporting Directive, or CSRD for short. CSRD is not just about environmental disclosures. It's much more across the board. It looks at environment, it looks at social issues, human rights issues, it looks at governance issues. So it's much broader and actually this represents a bit of a change in the way regulators are approaching sustainability disclosures. Historically, regulators focused on particular issues like climate or modern slavery, or, for example, gender pay gap disclosures that we've also seen in the UK. Whereas CSRD takes a different approach. Rather than saying these are issues that we consider to be important, we want you to disclose about, we're going to pass the ball across to you and say, you figure out what is relevant to you as a company, what your relevant sustainability risks or impacts may be, and then you're going to disclose all the information you have about those risks or impacts that you've identified.
Matthew Magee: Reporting under the CSRD is staggered. The biggest companies go first and others begin in the coming years. So the first reports for those biggest companies are just being published now, and they include material demanded by the regulations about double materiality. These are contained in double materiality assessments or DMAs. James explains that this all hangs on risks, meaning financial risk to the company and impacts meaning the effect the company's activity has on the environment or on people.
James: CSRD introduced a new way to think about sustainability matters in what is referred to as double materiality. Double materiality asks companies to identify what material sustainability risks are there to you as a business and it also asks what material sustainability impacts may you have on the environment or society, or essentially, you know, outside of your organisation. That is different to previous reporting. And so this extension of not just thinking about your risks that impact the business, but now these impacts that you may have on the environment society is greatly expanding the scope of reporting and this is where some of these issues arise.
Matthew: So that's what the reporting regime looks like and of course, it all stems from government's commitments to reduce global warming, as agreed in 2015 in Paris and in the UN’s Sustainable Development Goals. Now companies will have been well prepared for it, it's been trailed for some time. But now that reports are actually becoming public, some organisations are wondering if there is more of a balancing act between disclosure and risk to be done then they might have appreciated.
James: We've got reporting regulations and now these due diligence regulations and as a result, companies are having to dramatically increase the disclosures they are publishing as well as implementing new policies and procedures for managing these sustainability related risks and impacts. And this I think is where we're starting to see some of these emerging legal risks that perhaps have not been fully considered by companies when they have initially embarked on putting in place procedures for these for these regulations. We've been talking to our clients, a number of whom have already published their CSRD reports or are shortly about to, about their experience with CSRD and the DMA process, and generally we have found that they are quite concerned by the level and extent of disclosures they have in their reports. They feel that to a certain extent they are reporting for reporting's sake rather than, you know, managing the disclosures they are making to the public and their shareholders. Potentially, you know, at risk of losing their strategic messaging around their sustainability profile. And so they have, somewhat I suppose, criticised the extent of the regulatory disclosure requirements and are feeling somewhat uncertain about the potential legal risks associated with some of these disclosure requirements. It's not just the identification of new issues, but you're now then disclosing these issues to your shareholders or your other stakeholders, for example. These reports may be read by your capital providers, your bankers, it could also be read by your employees or your business partners and you're saying we have identified a whole new series of sustainability related risks or impacts and this causes them to think, well, actually, you know, why are these things material to you? Are these new risks that you weren't previously aware of or weren't previously managing? Or are you just reporting on them for the first time? And I think the risk is that companies have tried to figure out this DMA process in accordance with guidance published by regulators and I think it's been a process that has very much been led by financial reporting teams without sufficient input from lawyers who are advising on what are the potential legal risks associated with actually now making these disclosures public. They also haven't considered, for example, what litigation, their risks there may be as a result of this, you know, or even potentially reputational risks. These disclosures are going to be read by pressure groups, by potential activists, by shareholders who may bring lawsuits and I think this is presents a new set of risks that has not previously been considered by companies.
Matthew: Now you may not be aware, but we also publish a second podcast here at Pinsent Masons, a very occasional series looking at the biggest issues that all companies face. It's called Brain Food for General Counsel and the last programme we published just about a month ago was a detailed look at the ins and outs of climate litigation risk, featuring, amongst others, Oxford University Academic Thom Wetzer. It's a fascinating, illuminating and in depth look at this issue, and you can find a link to that in this show's programme notes. But I asked James just to briefly outline what kind of litigation risks some of this disclosure and some of this reporting might open companies up to.
James: Well one example is really around some of these new climate lawsuits that are being brought in courts where companies are saying we have certain policies and procedures to decarbonise our operations, to select suppliers on the basis of their environmental performance. And so pressure groups may say, well, actually, that's not enough. Or you say that you are selecting suppliers on the basis of their environmental performance, but actually in practise you're not doing so or the statements that you are making publicly don't align with your practise. And lawsuits can be brought as a result of that alleging possible damage or saying that you have misled investors by making statements that are in conflict with your actual practise.
Matthew: So what can companies do? Should they suddenly cut back what they're reporting on? James says that one of the issues is that all companies had to go on before was EU Commission guidance about what should be in the reports. But once everybody sees that first generation of reports, some consensus might emerge about what is appropriate for companies that do the same kind of business to put in them.
James: Well, I think we have to face the reality that it's going to be very difficult for a company to say last year we identified all of these issues as material for our business and now this year we no longer consider that they are material. That could naturally raise questions and you can certainly, you know imagine pressure groups asking those questions and querying why companies were no longer providing disclosures to the market on certain sustainability matters. However, to a certain extent, we have to realise that this is a new regulatory reporting regime and there will be an evolution in the maturity of reporting practises over time. Companies have had to figure out a lot of this themselves and you may find that companies, even within the same industry, who consider themselves to be close peers, may be identifying different material sustainability related risks and impacts. So, I certainly expect that over the first few years of CSRD implementation, we will see industries tend to organise around a common set of material sustainability matters to report on. So, it'll be challenging to walk back some of these previous reports. But I also think that companies have a bit of leeway to be transparent with shareholders and stakeholders and say, look, we are figuring this out. This is a process that we followed to identify these material issues and we are going to seek to improve on it in future years and learn from the market as this maturity evolves over time.
Well, thank you for listening again. We really appreciate your time and your attention. Please do share with anyone else that you think might be interested in news analysis, opinion and updates from the world of business law from every corner of the globe. Remember, you can keep up with the constant stream of written news and analysis from our journalist team at Pinsent Masons on pinsentmasons.com or if you want a personalised weekly digest about just the issues you care about, you can sign up for that and express your preferences at pinsentmasons.com/newsletter. Thanks for listening and until next time, goodbye.
The Pinsent Masons Podcast was produced and presented by Matthew Magee for International Professional Services firm Pinsent Masons.
