ESG - Legal Perspective

What areas of organization activity in the ESG field can legal advice cover?

Compliance with laws and regulations: Global ESG regulations are becoming increasingly stringent and complex. Modern organizations must engage in the analysis, interpretation, and implementation of these regulations to ensure that the company operates in accordance with the law.

Legal and financial risk management: Violating ESG principles can lead to legal and financial risks for organizations. It is important to identify and manage these risks to avoid potential financial losses and legal consequences.

Sustainable development strategy development: by developing an action plan in line with ESG principles that incorporates applicable regulations and organizational goals.

ESG reporting and corporate communication: The legal department can play a key role in developing ESG reports and corporate communications. The above should be preceded by a thorough and comprehensive compliance analysis to minimize the risks of non-compliance and greenwashing.

Adaptation to cultural and social changes: Culture and society are constantly evolving, and so are the expectations of companies. Adapting the company to the expectations of a new generation of customers is a value that can impact the perception of the organization - it is a kind of reputation safeguarding.

Comprehensive legal support in the ESG realm

The current state of the debt financing market indicates a growing demand for instruments aligning with ESG criteria (Environmental, Social, Governance). This trend is observed both among entities seeking financing and financial institutions providing it.
Securing financing through ESG-linked structures (such as having the margin tied to ESG rating) or green bonds (meeting criteria like the Green Bond Principles) sends a clear message to clients and the market that the entity prioritizes sustainable development, conducting its business in accordance with adopted ESG rules. These instruments also allow for expanding the creditor base to entities exclusively offering such products.

For banks and investment funds, the type of financed investments and the formula for provided financing are also crucial. Some banks aim to achieve a certain level of "green" loans or bonds in their portfolio, prompting entities seeking debt financing to ensure their projects align with such standards.

Deloitte Legal lawyers have provided counsel on pioneering ESG financings, such as the first ESG-linked loan in Central Eastern Europe (including Poland) and the first green bond issuance in Poland within the renewable energy sector. We also possess substantial experience in financing wind and solar farm projects that qualify as "green" financing.

Our support includes:

1. Project analysis for ESG financing possibilities.
2. Assistance in structuring the project to meet ESG requirements.
3. Preparation of legal components and support in negotiating term sheets.
4. Assistance in defining financial indicators and determining margin mechanisms tied to ESG criteria.
5. Coordinating with environmental auditors/ESG rating agencies to meet financial institution expectations.
6. Preparing and participating in ESG financing documentation negotiations (loans, green bonds, and other instruments), assisting in meeting suspensive and subsequent conditions, and supporting the financing launch.

Greenwashing: Legal requirements for green products (ESG)

What is greenwashing and what legal requirements does it entail for products, activities, and the sales process?

The offering of so-called "green products" (e.g., "eco-friendly clothing," "biodegradable packaging," "green loans," "sustainable investments") requires compliance with relevant regulations. Due to broadly formulated laws and the continuous evolution of ESG standards, formulating marketing content and labeling products can be challenging for entrepreneurs, exposing them to reputational risks and potential fines imposed by regulatory authorities.

In recent years, it has become evident that marketing claims addressed to consumers regarding the impact of products or a company's ESG activities may not always fully correspond to reality, making their verification difficult. This has sparked regulatory interest in preventing consumer deception and potential penalties for businesses.

Legal requirements for products, activities, and the sales process
There are some regulations which already require products, services, or entity activities to address sustainable development factors. Some entities take this step voluntarily to shape a positive ESG image (a process commonly referred to as “greening products”).

Currently, as regulations are still evolving, claims made by entities regarding ESG may not always find confirmation in objective data. Communication to consumers must be precise, grounded in credible sources, and explicitly tied to verifiable data or evidence. When assessing the acceptability of such claims, it is crucial to consider not only regulations but also market standards, including an objective understanding of the concept of “greenness”.

For certain types of activities, additional frameworks influence both business operations and offered products.

In the financial market, the Taxonomy determines the catalog of economic activities that can be assessed for their environmental sustainability, crucial for granting "green" loans. SFDR defines frameworks for green investment products and mandatory disclosure requirements associated with them. Various guidelines, such as the EBA Guidelines on loan origination and monitoring, are also relevant. In this context, the European Commission's document on the definition and possible supporting tools for green loans and mortgages to retail and SME borrowers is particularly important.

The EU also has a multi-sectoral "EU Ecolabel" that defines requirements for eco-friendly products, based on Regulation No 66/2010 of the European Parliament and of the Council of 25 November 2009 on the EU Ecolabel. Ecolabels may apply to products or services in 23 product groups, including furniture, mattresses, textiles, detergents, cosmetics, and paints.

What is Greenwashing?
The term greenwashing has gained popularity with the increasing trend of offering "green products." Also known as "green lies" or "eco-hype," greenwashing is essentially the act of misleading consumers by creating an impression regarding business activities or offered products in terms of environmental and sustainable development aspects. Although not legally defined, greenwashing falls under the category of deceptive market practices.

Greenwashing can be linked to various sales aspects and occur in both product characteristics, such as its design (misleading greening of the product), and further in the sales process, involving the creation of marketing claims (intentional deception about the product features, exaggeration of a positive environmental impact, using unclear, general language). In financial markets, greenwashing can also be linked to the phenomenon of "misselling."

Although the understanding of greenwashing described above is widely accepted, there is no single legal definition of "greenwashing" applied to the entire market in Poland and Europe.

European Financial Market Supervisory Authorities (ESMA, EBA, and EIOPA) emphasize that "greenwashing" is a practice where claims, declarations, actions, or communications related to sustainable development do not clearly and honestly reflect the sustainable development profile of the entity (institution), financial product, or financial services. This practice can mislead consumers, investors, or other market participants. Misleading claims related to sustainable development can occur intentionally or unintentionally and apply to entities and products within or outside the scope of EU regulatory competence.

The issue of greenwashing may also be subject to consumer protection regulations, including, among others:

• consumer protection laws, including European and national regulations on combating unfair market practices,
• guidelines from the European Commission on the interpretation and application of Directive 2005/29/EC,
• Competition and Consumer Protection Act.

The European Union is currently working on a comprehensive set of legal changes to regulate "greenwashing" issues. The proposed regulations include:

• Directive empowering consumers for the green transition through better protection against unfair practices and better information,
• Directive on substantiation and communication of explicit environmental claims (Green Claims Directive).

The upcoming regulations will necessitate, among other requirements, third-party confirmation to validate that the claims intended for consumer communication are substantiated by reliable and comprehensive research. Entities engaged in “green” marketing will be obligated to meet various new responsibilities, and non-compliance may lead to substantial financial penalties.
 

Marketing Claims in the Sustainable Development Area and Consumer Protection

What type of communication might indicate greenwashing?

Vague: Not accurately indicating the ecological benefits of products.

Overly general: Generalizing claims attributing features of one product to all products, not necessarily possessing a significant feature.

Containing false claims about product properties: Falsely suggesting the "eco-friendliness" of a product without justification.

Claims regarding “environmental friendliness” must be true and adequately justified.
 

Claims regarding ecological aspects encompass all practices that may suggest that:

• products have a positive impact on the environment,
• products have no impact on the environment,
• products have a less harmful impact on the environment compared to competing products.
   

Claims can relate to:

• offered products,
• the overall activities of the entity.

Supervision and Sanctions
The issue of “greenwashing” remains a significant regulatory concern, given the multitude of existing and forthcoming ESG regulations and ongoing market trends. European regulators such as ESMA, EBA, and EIOPA along with national authorities, such as the Financial Supervision Authority and the President of the Office of Competition and Consumer Protection (“President of UOKiK”), ensure appropriate supervision on the following matter. This is evident in their planned strategies and visible actions, including those taken by the President of UOKiK in the market.

In cases where actions against consumers are taken, improper or intentionally misleading communication can result in imposing substantial financial penalties, amounting to up to 10% of the enterprise's turnover. Individuals responsible for managing the entity may also face penalties, with financial entities subject to fines of up to 5,000,000 PLN, and other industries facing penalties of up to 2,000,000 PLN.

In the financial sector, breaches of legal provisions, particularly those related to ESG, and violations against customer interests may result in sanctions imposed by the Financial Supervision Authority. This could impact the supervisory assessment or prompt relevant recommendations from these authorities. Nevertheless, the Financial Supervision Authority has newly defined competencies outlined in the law on financial market supervision, which can be exercised in cases of non-compliance with obligations specified in regulations concerning the disclosure of information related to sustainable development in the financial services sector.
 

How do we assist in meeting legal requirements for ESG products to minimize the risk of greenwashing?

1. Legal advisory in building and auditing products, including the analysis and construction of the sales process, considering customer preferences. This also includes building and auditing marketing claims, promotional campaigns, and advertisements for their compliance with legal requirements, regulatory expectations, and best market practices in the ESG area.
2. Support in proceedings initiated by supervisory authorities (Financial Supervision Authority, UOKiK) against clients in the context of "greenwashing."
3. Conducting trainings for clients to build awareness, understanding of the "greenwashing", and risk management associated with this phenomenon.

ESG Due Diligence, analysis of regulatory gaps, and ESG monitoring

Comprehensive preparation of the organization to meet the requirements arising from both European Union and national regulations in the field of ESG.

Challenge

The complex ESG regulatory environment requires a significant commitment of internal resources for compliance. This commitment is driven by factors such as:

• Importance of regulations (accountability to regulators as well as reputational risk) and
• Multidisciplinary nature of ESG impacting various areas of the company's operations (e.g., legal, compliance, governance, operational, reporting, and risk management issues).
  ESG affects practically every industry. An increasing number of companies are mandated to report on sustainable development, especially with upcoming changes from CSRD. Moreover, every entity is obligated to adhere to consumer regulations regarding statements, declarations, actions, or communications associated with sustainable development.
   

The main regulatory framework includes:

• Financial sector regulations,
• Consumer protection regulations,
• Circular economy regulations.

For example, depending on the nature of their business, financial market entities should monitor, among others:

• CSR Directive (CSRD) and European Sustainability Reporting Standards (ESRS),
• Taxonomy,
• Sustainable Finance Disclosure Regulation (SFDR),
• Capital Requirements Regulation (CRR), Pillar III,
• European Parliament and Council Regulation on European Green Bonds,
• Delegated acts regarding capital market and insurance (including MiFID regime),
• Delegated acts in the field of insurance (IBIP and IDD regimes).

The above does not exclude dozens of communications, guidelines, and Q&As from ESAs (EBA, ESMA, EIOPA), ECB, or EFRAG. Additionally, legal regulations in the ESG realm, along with market practices, are subject to continuous evolution.

Ongoing mapping, regulatory gap analysis, and monitoring are essential for achieving compliance with ESG regulations and mitigating a wide range of risks, including the risk of “greenwashing”.

How do we assist in managing compliance risk with ESG regulations?

• Conducting ESG Due Diligence
• Monitoring ESG regulations
• Providing regulatory advisory on ESG regulations
• Conducting compliance analysis, including (gap analysis)

Effective regulatory support facilitates the management of compliance risk in accordance with market standards, as well as mitigates reputational risk.

Regulatory support also enables the proper positioning of the client's image in the context of ESG, allowing for the leveraging of business opportunities arising from ESG.

Comprehensive Legal Services for Green Leases

In the face of growing environmental awareness and the increasing importance of sustainable development aspects in the real estate sector, there is a crucial need for effective and competent legal support in the domain of ESG (Environmental, Social, Governance) policies, including so-called green leases. Green lease agreements are innovative legal instruments designed to promote and support sustainable practices in the real estate sector. They encompass issues related to energy efficiency, water management, waste management, information exchange, and other aspects of green investments. Their aim is to assist property owners and tenants in achieving common environmental protection goals.

Deloitte Legal is ready to provide you with comprehensive legal support, covering the following aspects:

Analysis and drafting of green lease agreements:
Our experts assist in crafting lease agreements that address key issues related to sustainable development, such as energy efficiency requirements and other areas, and analyze existing agreements for updates.

Negotiation of agreements:
Support in the negotiation process between property owners and tenants.

Implementing modifications to properties during lease:
Legal support for investment modifications or changes in property infrastructure aimed at improving its sustainable nature.

ESG certification advisory:
Support in the certification process to confirm investment compliance with ESG guidelines and new CSRD directive regulations.

Riska analysis and ESG Due Diligence:
Conducting detailed legal analyses and due diligence, identifying potential risks associated with environmental, social, and governance aspects in properties.

Monitoring and legal updates:
Tracking changes in regulations and market practices related to green leases and ESG policies, providing current information and recommendations.
We believe that our experience and specialized knowledge in these fields will enable you to fully leverage the potential of sustainable investments, contributing to both environmental goals and the increased value of your investment portfolio.

We invite you to contact us to discuss the details of our services and tailor them to your individual needs.

ESG in the pharma and medtech sector

ESG reporting among pharmaceutical and medical device companies
The pharmaceutical and medical device industry has its unique characteristics that need to be considered when designing and implementing ESG reporting policies. To fully comply with new obligations as either their direct obligator or a contracted party, awareness of the sector's specificities is essential. Similarly, for fully leveraging the potential of building a positive brand image through conscious disclosure of actions, specialized knowledge is necessary. There is no room for generic solutions originating from other industries.

Pharmaceutical and medical device companies are grappling with and will continue to face the dilemma of how to seize the opportunities presented by ESG reporting and fulfill new obligations. Below, we present several areas that can serve as inspiration and, on the other hand, as areas that will require closer analysis in terms of reporting.

"E" - Environmental protection

• Low emissions of products, particularly the development of reusable medical devices instead of disposable ones,
• Minimization of industrial waste generated during the production and use of products, particularly minimizing hospital waste subject to incineration,
• Shortening supply chains,
• Optimizing the distribution routes of drugs and products,
• Designing and constructing manufacturing buildings, R&D centers, and warehouses with minimized energy consumption.

"S" - Social impact

• Increasing patient access to products through donations and a thoughtful pricing policy,
• Incorporating in the research and production portfolio products that combat diseases prevalent in developing countries,
• Research and development of products in areas of orphan diseases,
• Ensuring diversity in clinical trials,
• Intellectual property sharing.

"G" - Corporate governance

• Combatting corrupt practices,
• Preventing conflicts of interest among scientists and medical professionals,
• Transparency and oversight of benefits provided to medical professionals,
• Transparency in relationships with decision-makers and market regulators,
• Commitment from suppliers to adhere to ESG standards and assistance in gaining necessary knowledge in this area.

How we can assist:

• Navigation - ensuring understanding of new rules, opportunities, and requirements in the organization - training and support on a hotline basis.
• Audits - determining the scope of obligations and their level of fulfillment - verification, opinion on existing and planned initiatives in terms of their impact on ESG reporting.
• Implementation - developing policies and documents to meet requirements and capitalize on opportunities arising from the ESG reporting system.