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.

In the past couple of years, a wide range of regulators in many different jurisdictions, including consumer protection agencies (such as the UK’s CMA and Australian ACCC), advertising standards authorities (like the UK's ASA), financial regulators (including the UK’s FCA, the US SEC, Australia’s ASIC and Germany’s BaFin) and even police and public prosecutors have taken high profile action against potentially misleading green statements made by leading corporates and financial institutions.

This has resulted in rulings that underline how challenging it is to accurately communicate the material outputs of a sustainability strategy. Regulators are not alone in devoting more attention to potential greenwashing: many others such as non-profit organisations and climate activists are also accusing corporates of greenwashing and using novel approaches to try and catalyse change. This new landscape risks tangible legal, reputational, and financial repercussions, and it represents a marked step change from the pressure generated traditionally by environmental movements.

At the same time, a number of jurisdictions are looking to bring in new legislation to counter greenwashing with, for example, the UK’s FCA consulting on a general anti-greenwashing rule and the EU publishing proposals for a Green Claims Directive and a consumer protection-focused directive to combat unfair commercial practices that mislead consumers away from sustainable consumption choices.

Fear of being targeted for greenwashing should not put off businesses from communicating their sustainability-related goals and achievements but it can be a trigger to regularly review sustainability strategies and how they are communicated, making sure that they take into account the latest scientific thinking and responsible business market practice.

In this article we consider how to ensure that your sustainability strategy is resilient to greenwashing before providing an overview of the current greenwashing risk landscape.

Actions to mitigate greenwashing risk

One of the biggest challenges for corporates in communicating accurately about their progress on sustainability is that scientific progress, policy development and social values, all of which have an influence on how such communications are perceived, are in constant evolution. This can make a well-supported green objective from a few years ago potentially misleading today.

There is also no commonly accepted legal definition of greenwashing. It is therefore advisable to take a broad view of how corporate communications about sustainability strategies might be subject to scrutiny so that no material risks are left out. Doing so also has the potential to set a higher standard for a sustainability strategy and the ways in which it is communicated.

Here are five actions that you can implement to mitigate greenwashing risk:

1. Review your Sustainability Strategy regularly

Setting goals and targets within a sustainability strategy takes time and effort, and once established, they can keep evolving. Those organisations best placed to avoid greenwashing-related risks review their sustainability strategy whenever there has been a material change in circumstances, and in any event annually to capture changes in climate-science and responsible business market practice. They also set the goals and targets within a clear plan that includes interim goals and other relevant information, such as financial information on resource allocation. In doing so, they look to test whether goals are measurable, objective, achievable, easily tracked, and consistent with overall business strategy.

It is important that companies keep their workings to hand - even if they do not plan to disclose them publicly - so that they can have a cogent basis on which to engage with potential litigants if needed.

2. Set up a clear governance structure

The single biggest reason behind greenwashing claims and investigations against corporates and financial institutions is that operational reality does not match up to the ambitions set out in public disclosures.

Clients who do this well have a clear yet multi-layered governance structure that: sets the sustainability strategy in line with broader corporate strategy; has a laser-like focus on how that strategy and related targets (and progress in meeting those targets) is communicated publicly; and oversees operational efforts to achieve the strategy throughout the business.

In practice, this means:

  • considering carefully where responsibility for the oversight of sustainability might need to lie, whether it is with the full board or if it is delegated to a board-level sub-committee with a clear remit and explicit reporting lines - both approaches can work well depending on the company;
  • ensuring that all internal stakeholders, particularly senior management and boards but also regional or divisional management, are aligned with the sustainability strategy. Adopting a coordinated approach allows everyone to have visibility of what is being communicated, the operational developments needed to achieve targets and objectives and the evidence required to substantiate disclosures;
  • building governance structures throughout the business, not just at board or senior leadership levels, so that the business is sufficiently agile to respond to latent sustainability-related risks and opportunities; and
  • ensuring awareness of greenwashing as a material risk, and capturing this in any internal risk management policies and/or procedures. It would be beneficial to identify and meet training needs, starting with a skills audit of the board, cascaded down to those responsible for the operational management of the business. Regular ESG horizon scanning and risk planning exercises with your professional advisors will help to keep the thinking behind any greenwashing related risk on your risk register current and relevant.

As a general point of good corporate governance, periodic reviews of current governance frameworks are worthwhile, in particular to ensure that there is sufficient board level accountability and oversight of current sustainability strategy and related risks and opportunities.

To mitigate against greenwashing, this kind of review typically focuses on whether the chosen governance framework allows for appropriate visibility of accurate information from other internal stakeholders; is sufficiently open to create an environment where challenge and rigour around disclosures is facilitated; and involves the right people with the correct expertise.

When it comes to sustainability-related disclosures, these often have a governance framework, and related statement of systems and procedures, in their own right. In working out what standard to set for drafting, verifying and reviewing these kinds of disclosures, it is best practice to treat them as if they are being included in a regulatory disclosure, such as a prospectus (for which directors will have direct statutory responsibility and investors have a right to financial compensation where statements, including omissions, are misleading). In other words: by adopting a systematic, data-driven approach to verification with a clear output for the board and relevant committees to review. Including such disclosures where possible to benefit from the safe harbour provisions of s463 of the Companies Act 2006 can further help mitigate risks.

3. Use voluntary frameworks wisely

Alongside any mandatory requirements, companies may use other appropriate voluntary frameworks for their sustainability reporting. These could be the Global Reporting Initiative Standards, the UN’s Principles of Responsible Investment, or the International Sustainability Standards Board’s climate and sustainability standards (which are currently voluntary but expected to become mandatory in many jurisdictions within the next 2 – 5 years).

Care is recommended to ensure that any voluntary disclosures do not contradict or misrepresent the mandatory information or receive more prominence than mandatory disclosures. Where only certain aspects of a framework are utilised, the risk this can create can be minimised by making this clear and explaining both the approach and absences.

4. Ensure your data is of the highest quality

A key mitigant against greenwashing risk is relevant and accurate data from within the business that is updated regularly and used by those monitoring progress against targets and objectives, as well as those responsible for drafting disclosures. Sometimes the data in question, and the means for collecting it, might be new and unfamiliar.

To help with that, there are multiple metrics, targets, and methodologies that a business can use to construct and evidence sustainability statements appropriately. In our experience, this is most effective at managing greenwashing risk where they are carefully defined, transparent and relevant to the business’ strategy and risk management processes. The Task Force on Climate-related Financial Disclosures (TCFD) has guidance on metrics, targets and transition plans which is useful when designing a sustainability data strategy. The Global Reporting Initiative and the Carbon Disclosure Project amongst others offer frameworks within which to work as well.

Keeping data sources and processes under regular review is one way to ensure data is of the highest quality. This can mean considering the need to create new systems and processes to ensure that data required to support green statements is available. The quality of ESG data collected from the business and its supply chain needs to be sufficient to withstand external review, particularly in an environment of increasing assurance obligations for sustainability-related information.

A common challenge for sustainability practitioners is how to adapt the core dataset on sustainability efforts depending on where it is presented. There is a difference between, for example, disclosing CO2 emissions reductions on clothing manufacturing within an annual report and indicating that a pair of trousers has been produced sustainably on a garment’s label. The key is to have the same high-quality data to back both statements and ensure that there is consistency across all communications. A practical step to help with this could be to require that use of data outside agreed limits be approved first with whoever owns the data centrally.

5. Be consistent across all your corporate communications

In an environment where every statement has the potential to be pored over by a regulator, investor or litigant, our experience is that sustainability-related communications that are deliberate, precise, and focus on key messages whilst avoiding extraneous content, stand up to scrutiny best.

This means looking to avoid making statements in marketing materials, advertisements or any other public communication which are unverifiable or inconsistent with other statements or regulatory filings. In turn, this means ensuring that the various functions within a business which are responsible for external communication take a co-ordinated approach to all communications that touch on sustainability (including investor/public relations, reporting, finance, company secretarial / governance, and government affairs amongst others). This works best when all forms of communication are included, whether it is a billboard advert, a product label, a script for the Chair’s meeting with a top 5 shareholder, or the annual report.

Although they are by no means a way of absolving companies of responsibility entirely, the inclusion of bespoke disclaimers is also worth considering to ensure that all disclosures are accompanied by an appropriate level of detail and context.

Good practice also involves ensuring that all public-facing sustainability statements align with the business’ sustainability strategy. Corporates who do this well incorporate into their internal systems and controls a requirement to verify statements against the sustainability strategy, as well as ensuring that they are factually accurate. Applying a similarly rigorous approach to ESG statements as to financial disclosures can help with this process.

Groups can additionally benefit from monitoring and managing overseas subsidiaries, third party providers and those in their supply chain to ensure that their activities do not undermine or contradict the accuracy of statements made on a group-wide basis. This is especially true in the light of the growing risk of mass tort claims looking to hold parent companies liable for the action (or inaction) of their subsidiaries, following cases like Vedanta, Okpabi and the case being brought by Saúl Luciano Lliuya, a Perviaun farmer, against utility giant RWE.

The lack of a standard or common set of sustainability-related terminology may lead businesses to make inadvertently misleading statements and cause confusion to stakeholders. Terms, terminology and labels need to be applied consistently across all statements and commonly used ESG terms may benefit from being clearly defined internally and externally (for example, through the incorporation into disclosures of a glossary just as many companies already do when disclosing non-GAAP or non-IFRS measures).

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:

  1. 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”));
  2. 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);
  3. 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”));
  4. 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;
  1. in the context of a contract, a claim asserting that a particular statement or representation amounts to misrepresentation and/or negligent misstatement;
  2. 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;
  3. 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
  4. 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 Competition and Markets Authority

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 Advertising Standards Authority

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.

The Financial Conduct Authority

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. [1]

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.

Transition plans

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.

Key contacts
Harry Hecht
Harry Hecht Partner
George Murray
George Murray Senior PSL – Sustainability

[1] PRIN 2.1 Principle 7 and COBS 4.2.1