Greenwashing: Meet risk with action
An overview of the current greenwashing risk landscape and how to ensure that your sustainability strategy is resilient to greenwashing.
Where and How can Greenwashing arise?
Greenwashing litigation – an area set to develop
Currently there are very few processes and provisions under English law designed specifically to address greenwashing. Instead, litigants are using processes conceived to combat misleading information generally to target potential greenwashing. Some are also taking the approach of questioning whether directors are fulfilling their fiduciary duties in relation to climate change. Others are using judicial review to challenge the position of regulators, which could indirectly open up a company’s statements to further scrutiny.
In practice, although still rare, climate and greenwashing cases are increasing. Taking the UK as an example, claims can be brought in respect of an environmental or climate change-related statement or act in a number of ways, including:
- in the context of a prospectus, a claim asserting that a statement has been made negligently and caused loss to investors (s.90 of the Financial Services and Markets Act 2000 (“FSMA”));
- in the context of published information including annual reports, a claim asserting that a statement has been made dishonesty or recklessly, relied on by an investor, and caused loss (s.90A/sch 10A FSMA);
- in relation to a statement in the directors’ report, strategic report, directors’ remuneration report or any separate corporate governance statement, a company may bring a claim that a director has been dishonest or reckless in making the relevant statement or knew it dishonestly concealed a material fact (s.463 Companies Act 2006 (“CA2006”));
- the prism of directors’ duties, for example alleging a failure to act in the way most likely to promote the success of the company having regard to the impact of the company's operations on the community and the environment and/or the duty to exercise reasonable care, skill and diligence (ss.172 and 174 CA2006), as for example in the recent ClientEarth v Shell litigation;
- in the context of a contract, a claim asserting that a particular statement or representation amounts to misrepresentation and/or negligent misstatement;
- in the context of commercial agreements or M&A transactions, a claim for breach of warranty or a call on an indemnity under the relevant agreement;
- a claim alleging that the advertising materials of a business involved in the promotion, sale or supply of products and services to consumers breaches consumer protection laws; and
- in a prospectus, an indirect challenge by way of judicial review against an FCA decision to approve the prospectus, on the basis that it does not adequately describe the climate-related risks faced by the company in question.
Most cases to-date have been brought by climate activist NGOs or consumers. However, shareholders (both activist and non-activist investors), who seek to focus companies’ efforts towards reaching net zero (such as Climate Action 100+) or are concerned about risks to their financial interests and investments, may also consider backing or potentially bringing such claims.
The identity of the party bringing the claim will not necessarily determine the legal route they choose. However, it can impact how a business can accurately assess the likely end goal. Getting engagement with senior management in response to the threat of litigation, and applying strategic pressure under the glare of the media, is often as much a priority as gaining a favourable judgment in court. For NGOs, a key consideration may be how a company operates, and how society sees that industry’s social license to operate, rather than only seeking financial compensation.
Litigation remains an expensive, difficult, and slow way to effect change in corporate strategy and address perceived greenwashing. Other outlets discussed below such as bringing a complaint to a regulator or consumer protection authority are generally much faster and more cost-effective for claimants.
Regulators looking to draw a redline around greenwashing
At present, most greenwashing risk manifests through regulatory action. In the UK, between the Competition and Markets Authority (CMA), the Advertising Standards Authority (ASA), and the Financial Conduct Authority (FCA), the regulatory landscape is becoming increasingly hostile to intentional and inadvertent greenwashing.
The European Securities and Market Authority is also looking to engage with the issue, for example in its recent Sustainable Finance Roadmap 2022 – 2024. Across the Atlantic, the US Securities and Exchange Commission (SEC) has launched a Climate and ESG Task Force to develop initiatives to proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment, and is expected to publish climate disclosure rules in October 2023.
The relative inexpensiveness and speed of making a complaint to a regulator in part explains its prevalence, alongside regulators’ own initiative to look at specific sectors they see as being higher risk.
The CMA has indicated that it will investigate environmental statements made in particular sectors. The regulator is currently focusing on the fashion retail sector with three major retailers under investigation. The CMA has confirmed earlier in the year that the fast-moving consumer good (FMCG) market will be its next area of focus; the travel and transport sectors may also be in the spotlight in due course.
In their Green Claims Code, the CMA sets out the legal framework under which a misleading environmental statement could be illegal. This is either under sector- or product-specific requirements, and also general consumer protection law, in particular, the Consumer Protection from Unfair Trading Regulations 2008 (CPRs). The Business Protection from Misleading Marketing Regulations 2008 (BPRs) could also be breached by greenwashing in the context of business-to-business marketing.
The CPRs explicitly prohibit true but deceptive statements, confusing practices, false commitments, misleading omissions or misleading acts which result in the average consumer being more likely to make a different decision about a product or service than they otherwise would.
Breaches of consumer protection law as a result of misleading environmental statements can be enforced by the CMA and, as mentioned above, the courts. The CMA may also be given powers to impose fines once the Digital Markets, Competition and Consumer Bill become law.
In the CMA’s investigation into greenwashing amongst fashion brands, their key concerns were:
- whether statements and language used by the businesses may create the impression that clothing collections e.g. ASOS’s ‘Responsible Edit’, Boohoo’s ‘Ready for the Future’ and ASDA’s ‘George for Good’ are more environmentally sustainable than is in fact the case;
- whether the criteria used by these businesses to decide what is in these collections may be lower than customers might reasonably expect, or is not applied properly;
- misleading statements e.g. whether accreditations apply to particular products or to the businesses’ wider practices.
The ASA has a long history of investigating complaints about advertisements for products and activities that contain allegedly misleading environmental statements. A recent high profile case involved HSBC, which saw the ASA for the first time ban two sustainability focused adverts, reflecting a general hardening of public and regulatory attitudes about businesses making not-fully-substantiated or out-of-context statements.
The banned adverts consisted of two posters in which HSBC stated that they were: “aiming to provide up to $1 trillion in financing and investment globally to help our clients’ transition to net zero” and “helping to plant 2 million trees which will lock in 1.25 million tonnes of carbon over their lifetime.” The ASA held that the ads were misleading as, by making unqualified statements about its environmentally beneficial work, consumers would understand that HSBC was making a positive overall environmental contribution and not simultaneously continuing to finance investments in businesses and industries that emitted notable levels of carbon dioxide and greenhouse gases to a significant degree. This is a good example of how, whilst a particular sentence or assertion might appear supportable and accurate on a standalone basis, it can be viewed as misleading when the broader context of the business in question, and its various activities, is taken into account.
The ASA’s powers are limited: it cannot impose financial penalties or require that its rulings be implemented. The most obvious risk arising from an ASA investigation is reputational. It notes that one of its “most persuasive sanctions is bad publicity – an advertiser’s reputation can be badly damaged if it is seen to be ignoring the rules designed to protect consumers.” Companies may face additional legal risks in the event that the ASA refers complaints to other bodies, such as National Trading Standards (for non-broadcast advertising) or Ofcom (for broadcast advertising), or where an ASA ruling attracts the attention of other regulators looking at compliance.
In June, the ASA published updated advertising guidance on misleading environmental claims and social responsibility and confirmed that it and the CMA will continue to take “a firm but proportionate approach” against greenwashing claims.
Whilst we have yet to see enforcement action in this area, the FCA has identified tackling greenwashing as a core regulatory priority. They are currently consulting on proposals to introduce sustainable investment labels with corresponding eligibility criteria; consumer facing as well as product and entity-level disclosures on climate change; naming and marketing rules for products; and rules for distributors. Separately, HM Treasury is consulting on bringing those who provide ESG ratings within the regulatory perimeter.
The FCA proposals include a general “anti-greenwashing” rule that is intended to apply to all FCA-regulated firms. If adopted, this rule would require that any sustainability-related statements made by a firm in relation to a product or service must be: consistent with the sustainability profile of that product or service and clear, fair and not misleading. Arguably, such statements would already be within scope of existing rules. Nonetheless, the introduction of the rule would add to the FCA’s toolkit for combatting greenwashing and give them “an explicit rule on which to challenge firms that [they] consider to be potentially greenwashing their products or services, and take enforcement action against them as appropriate". The response to the consultation is now expected in Q3.
In the meantime, Listing Rules requirements (LR 9.8.6R(8) for UK premium listed companies and LR 14.3.27R for standard listed companies) oblige companies within scope to make disclosures in their annual reports on a “comply-or-explain” basis in relation to the recommendations and recommended disclosures of the Financial Stability Board's TCFD. The TCFD recommendations comprise overarching recommendations and specific recommended disclosures in relation to four main areas: governance, strategy, risk management and metrics & targets. There are also general conduct rules which would potentially cover greenwashing e.g. firms must ensure that the information they communicate to clients is clear, fair and not misleading. 
Large public and private businesses are also required to disclose against rules very similar to the TCFD framework under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2021 (CPR) on a “you must explain” basis.
A failure to disclose an accurate picture (or explain why a disclosure has not been made), could lead to accusations of greenwashing. Where a listed company is in breach of the Listing Rules, the FCA has a wide range of disciplinary and enforcement tools available to it under FSMA, with financial penalties being the most common sanction. At present, the FCA is understood to have no active investigations into allegations of greenwashing, but has warned authorised funds against poor practices in the marketing and design of products that are labelled as sustainable, as well as writing to banks about sustainability-linked loans.
Other jurisdictions have already seen enforcement action being taken by financial regulators. Most recently, Goldman Sachs Asset Management agreed to pay $4 million as a civil penalty to settle an investigation by the SEC. This was for policy and procedural shortcomings including a failure to have any written policies and procedures for ESG research in one product for a period of time, and a failure to follow up on them consistently. Similarly, one of the largest German asset managers, DWS Group, found itself under investigation by both Germany’s Federal Financial Supervisory Authority BaFIN and the SEC over allegations that ESG factors "were not taken into account at all in a large number of investments," contrary to statements in DWS fund sales prospectuses.
In Australia, the Australian Securities and Investment Commission (ASIC) (which fulfils a role similar to the UK’s FCA and US’ SEC) has undertaken broad ranging surveillance of market disclosures for potential greenwashing. This led them to intervene against listed companies 35 times in the year to March 2023. Interventions followed ASIC’s identification in prospectuses, websites and market announcements of net zero targets, decarbonisation claims, and claims of being ‘carbon neutral’, ‘clean’ or ‘green’ for example, which did not appear to have a reasonable basis, or were factually incorrect.
Reputational risks evolving
Even where an allegedly misleading statement or action does not or cannot prompt legal or regulatory action, it can have reputational impacts. And, what is voluntary at present may well become mandatory in the future, driven by legislation like the EU’s draft Corporate Sustainability Due Diligence Directive (CSDD). Managing today’s reputational risks therefore helps both to address immediate risks and to mitigate future ones.
The OECD Guidelines
The OECD Guidelines for Multinational Enterprises, for example, are recommendations addressed by governments to multinational enterprises, and come with a ‘soft law’ enforcement mechanism through a series of “National Contact Points” (NCPs). The NCP process can be used to lodge complaints concerning a wide range of issues, including the environment, human rights and corporate governance, and poses a reputational risk to businesses.
If the NCP accepts the complaint (the bar for this is generally low), it will publish an initial assessment finding that gives party names, details of the complaint, and confirms that it is “material and substantiated.” The next stage is then mediation facilitated by the NCP, or further detailed investigation if mediation fails or is refused.
Although the NCP complaints process is non-binding, businesses faced with a complaint will feel pressure to engage and manage the risks of negative publicity resulting in reputational damage and other potential knock-on consequences.
The CSDD, which will bring in hard law enforcement mechanisms, explicitly refers to the Guidelines as a model for its approach to due diligence. Addressing greenwashing risks voluntarily means a business is likely to be better placed to manage these sorts of legal risk.
At present, businesses are not required to publish transition plans, but are under increasing pressure to do so from stakeholders. As expectations around what a “good” plan looks like develop, scrutiny is likely to increase and transition plans are likely to represent another hook on which a claimant can hang a potential greenwashing allegation.
In the meantime, initiatives like the UK’s Transition Plan Taskforce (TPT), UN High Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities (UNHLEG), and Glasgow Financial Alliance for Net Zero (GFANZ), have or are all producing guidance on what a robust transition plan includes. This will help establish best practice, and should help businesses avoid inadvertent greenwashing.
Transition plans are going to become mandatory for certain businesses in the next 3 – 6 years, under the CSDD and the UK’s proposed Sustainability Disclosure Requirements regime, amongst others.