Responding to Greenwashing Risk in 2024: Practical Considerations
In this article, Duncan Grieve and Jason Halper of Cadwalader, Wickersham & Taft LLP summarise recent key developments and risk mitigation strategies to help in-house counsel manage greenwashing risk within their organisations.
Claims regarding positive environmental impacts, sustainability and carbon neutrality are widespread and are made pursuant to legal requirements, investor pressure and/or consumer demand. In 2023, the European Commission reported that 53% of such claims were misleading or vague, and 40% were unsubstantiated.
“Claims regarding positive environmental impacts, sustainability and carbon neutrality are widespread.”
“Green claims” are increasingly scrutinised by regulatory authorities, shareholders and NGOs. Incoming regulation, increased enforcement and climate-linked litigation mean greenwashing is now a key concern for companies across all sectors.
UK Regulation
Financial Conduct Authority (FCA)
The FCA’s “anti-greenwashing” rule came into effect on 31 May 2024, with the aim of improving integrity in the sustainable finance market. The rule aims to ensure that sustainability-related claims made by FCA-authorised firms about their products or services are fair, clear and not misleading, and that such claims are verifiable and consistent with the characteristics of the product or service.
Accompanying guidance sets out the FCA’s expectations for authorised firms, requiring them to ensure that sustainability-related communications are:
- correct and capable of substantiation;
- clear and comprehensible;
- complete; and
- fair and meaningful (in relation to comparisons to other products or services).
The rule will allow the FCA to challenge firms that make misleading claims and take further action if necessary, including imposing financial penalties, censure and prosecution.
Competition and Markets Authority (CMA)
The CMA enforces a general prohibition against unfair commercial practices, including misleading consumers, under the Consumer Protection from Unfair Trading Regulations 2008. The new Digital Markets, Competition and Consumer Act (DMCC) grants the CMA new direct powers to sanction companies for inaccurate and/or unsubstantiated environmental claims. The DMCC:
- increases the CMA’s powers of investigation by enabling it to fine companies that fail to comply with its requests for information about a company’s green claims; and
- allows fines of up to GBP300,000 or 10% of global annual turnover (whichever is higher) for consumer protection breaches.
Although the DMCC does not specifically address greenwashing claims, its scope is sufficiently broad such that it captures corporate behaviour that would likely cause the average consumer to make a “transactional decision”.
Failure to prevent fraud
In October 2023, the Economic Crime and Corporate Transparency Act 2023 introduced a new “failure to prevent” offence related to several specified fraud offences. Large entities can be found liable for the failure to prevent fraud by failing to disclose information, false statements made by company directors and false representations, among other things. It is conceivable that companies may find themselves accused of violating this new prohibition where false statements are ESG-related. The government is set to publish accompanying guidance in 2024, following which the new provision will come into effect.
EU Regulation
Following protracted negotiations, the European Council (EC) gave final approval to the Corporate Sustainability Due Diligence Directive (CSDDD) in May 2024. The CSDDD requires large companies established or operating in the EU to comply with human rights legislation and identify, measure and report on the environmental impact of their supply chains. The CSDDD comes into effect in a phased approach beginning in 2027. Penalties for non-compliance include fines and censure.
Once approved by the EC, the new EU Green Claims Directive will compel companies that make green claims about their products or services to adhere to prescribed norms on how such claims are substantiated, communicated and verified. The draft Directive also prescribes strict rules to regulate the use of environmental labels.
“Incoming regulation will require EU operators to disclose a significant amount of sustainability-related information.”
The Green Claims Directive will work alongside a proposed directive on empowering consumers for the green transition, and proposed enhancements to the Unfair Commercial Practices Directive (UCPD) and the Consumer Rights Directive (CRD).
Incoming regulation will require EU operators to disclose a significant amount of sustainability-related information (if fully implemented). Disclosures will attract scrutiny from commercial competitors, environmental pressure groups and investigative journalists, as well as regulators. Relevant initiatives include the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS) and the Deforestation-Free Regulation (EUDFR).
Enforcement Activity
Notwithstanding incoming regulation, enforcement authorities have made clear that their existing powers are sufficiently broad to cover greenwashing. Recent notable enforcement includes the following.
- In 2023, the U.S. Securities and Exchange Commission’s (SEC) Climate and ESG Task Force (the “ESG Taskforce”) entered into financial settlements with a German asset manager and two major financial institutions for mis-statements and internal process failures in respect of ESG factors linked to investment products and services. The ESG Taskforce will continue to proactively review and identify material mis-statements and omissions.
- The CMA launched investigations into the fast-moving consumer goods sector and three major “fast fashion” brands in January 2023.
- The UK Advertising Standards Authority publicly sanctioned advertisements containing misleading sustainability-related claims from:
- three major airlines (December 2023);
- a global car manufacturer (November 2023); and
- three oil and gas companies (October 2022).
Civil Litigation and Reputational Risk
According to the UN Environment Programme, climate-related lawsuits doubled between 2017 and 2022.
A growing class of “watchdog” NGOs are scrutinising corporate green claims and exerting pressure on perceived bad actors through civil litigation, shareholder actions and publicity campaigns aiming for maximum publicity and reputational impact, with the following examples.
- The New York Attorney General filed a suit against the US subsidiary of Brazilian meat producer JBS Foods in February 2024, claiming that it was misleading the public about its environmental impact.
- A Danish court ruled in February 2024 that Europe’s largest pork producer, Danish Crown A/S, misled consumers by claiming its products are “climate controlled”.
- Swedish alternative milk manufacturer Oatly entered into a USD9.25 million settlement with an investor in February 2024 following greenwashing allegations made in a civil suit in New York.
- Several claims were filed in French courts in 2023 against financial, food and energy multinationals under the French “Duty of Vigilance Law”, seeking to scrutinise the environmental impact of their activities and products.
Risk Mitigation
In light of the above, organisations should be actively reviewing their strategies to mitigate greenwashing risk through adopting the following strategies.
- Implementing robust ESG-related governance structures – responsibility for assessing risks and opportunities associated with sustainability issues and green claims should be clearly defined, including at the board of directors and senior management levels. Suitably qualified legal, compliance and audit professionals may also be required to help navigate an increasingly complex cross-border regulatory environment.
- Designing a coherent, verifiable sustainability strategy to ensure any green claims are internally consistent and underpinned by clear and supportive data. This includes close oversight of climate-related marketing initiatives.
- Testing and verifying data (including data that is reliant on information from supply chains) – in other words, companies should ensure their sustainability-linked claims are fair, clear and not misleading, in line with current regulation and legislation.
- Adopting a cautious approach to cross‐industry alliances and voluntary frameworks – it is important to avoid any inconsistency with mandatory disclosures covering similar areas.
Cadwalader, Wickersham & Taft LLP
