Introduction

1. With the rapid rise in scrutiny of corporate ESG credentials, greenwashing matters. Claims against corporates for greenwashing are rising exponentially. This article looks at greenwashing and other types of misleading behaviour which can create liability for organisations. It explains what greenwashing is, the types of liability you can face, and how to avoid it.

What is Greenwashing?

2. Greenwashing is misleading third parties or creating a false impression as to the environmental impact of an organisation, or its brands, products, services or other aspects of its business. There is increasing pressure on organisations both to disclose the environmental impacts of their business, and also to communicate information positively about their offerings. Companies have to make sure that their green claims are verifiable and accurate: if they do not, they face the risk of litigation from impacted parties, reputational damage, and also, increasingly, regulatory interest.
3. There are also risks associated with staying silent or downplaying green credentials. This is sometimes referred to as green bleaching. It is important not to consider green bleaching as a salve to the risks of greenwashing. Failure to provide accurate information can still mislead third parties and lead to a risk of claims.
4. Greenwashing risks arise whenever a business makes a statement regarding its environmental impact. This may include:
   • Sales and marketing literature & advertising campaigns. There are various legal requirements, guidance and codes of conduct which apply to these, which are discussed further below.
   • Business transactions. As supply chain due diligence work increases, companies have to be increasingly careful about liability for negligent misstatement or misrepresentation. Similar risks arise in relation to investment products.
   • Corporate reporting and disclosure obligations. Companies, particularly larger ones, face a patchwork of compulsory reporting requirements across major jurisdictions. Many companies are now obliged to make statements regarding environmental issues, such as emissions, and other companies elect to undertake voluntary reporting. The fact that a statement is voluntary does not reduce the risk of a claim. Statements in prospectuses and listing particulars also give rise to risks and need careful verification. Companies can face liability for misrepresentation (particularly where an investment decision is based on claims and loss is suffered) as well as statutory liability in certain cases.
   • Sustainable finance. The UK Financial Conduct Authority (FCA) has an ESG sourcebook which sets out rules and guidance concerning the approach of regulated firms to ESG matters. The requirements will come into effect in stages over the next two years. One of the key changes is to require all regulated firms to make sure that any naming and marketing of financial products and services is fair, clear and not misleading. These requirements come into force on 31 May this year. There are also other changes, which mainly apply to asset managers:
     • Naming and marketing rules for investment products to ensure the use of sustainability-related terms is accurate;
     • Four labels to help consumers navigate the investment product landscape and enhance consumer trust;
     • A requirement for consumer-facing information to provide consumers with better, more accessible information to help them understand the key sustainability features of a product;
     • Detailed information targeted at institutional investors and consumers seeking more information in pre-contractual, ongoing product-level, and entity-level disclosures; and
     • Requirements for distributors to ensure that product-level information (including the labels) is made available to consumers.

The EU also has a separate sustainable finance regime. This includes Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation), and Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR), which has imposed transparency and disclosure requirements on certain financial services firms.

Greenwashing Risks

5. There are a number of different ways in which liability may arise in respect of greenwashing. Given space, we focus on some of the principal ones here:
   • There are specific regimes in the UK which protect both consumers and businesses from misleading marketing and advertising. These include the Consumer Protection from Unfair Trading Regulations (SI 2008/1277) and the Business Protection from Misleading Marketing Regulations (SI 2008/1276). There are also codes such as the Green Claims Code and advertising industry self-regulatory codes. The EU has also proposed a directive regarding the substantiation and communication regarding explicit environmental claims, and a directive on empowering consumers for the green transition, which has provisions prohibiting certain greenwashing practices.
   • An organisation can be liable for misrepresentation is it makes a false statement which induces another person or company to enter a contract and suffer loss. There are different types of misrepresentation:
     • Fraudulent misrepresentation is where a false statement is made knowingly or recklessly;
     • Negligent misrepresentation is where a false statement is made carelessly or without reasonable grounds for believing its truth;
     • Innocent misrepresentation is where a false statement is made but the maker can show it had reasonable grounds for believing it was true.

In addition, if there is a false statement made but no contract arises, the other party may be able to claim negligent misstatement if the maker owes them a duty of care.

A claim for misrepresentation or misstatement will generally give rise to a claim for damages.

• A director of a company can also be liable under section 463 of the Companies Act to compensate the company for loss suffered as a result of a misstatement or omission in a company communication (such as a corporate governance statement, a directors report, a strategic report or a directors remuneration report). A director will be liable if (i) he knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading, or (ii) he knew the omission to be dishonest concealment of a material fact. Although the director’s liability under section 463 is limited to the company, an investor may be able to bring a derivative claim against the director for breach of directors’ duties.
  • There is also potential liability under section 90 of FSMA 2000 for statements in a prospectus or listing particulars. Further, under section 90A and Schedule 10A of FSMA, issuers of securities admitted to trading on a regulated market can be liable to compensate investors who suffer loss as a result of untrue or misleading statements or omissions or dishonest delays in publishing information.

Reducing the Risk

6. So how can you reduce the risk of greenwashing claims? A preliminary point is to note that it is possible to reduce the risk, but not to eliminate it entirely. Greenwashing is becoming increasingly prevalent, and a focus for the litigation funding market. Here are some suggestions:
   • Make sure you have appropriate governance procedures in place. How are the claims you are making being scrutinised to ensure that they are accurate and verifiable? Are you running them past your internal legal team, or external counsel? How are you collecting data in relation to environmental impacts such as emissions and water discharge? How are you performing supply chain due diligence, what are your contractual arrangements, and how are you verifying information provided as part of your supply chain DD process? Are you reporting accurately to your board, and in your company statements? Are you considering your mandatory reporting requirements, and considering the data you need? Are you keeping proper records to back up your disclosures?
   • What is your reporting framework? Are you reporting clearly and consistently on data, using appropriate standards, explaining methodologies and including assumptions, qualifications and limitations. Are you being clear about which statements are yours, and which are those of a third party?
   • Avoid broad generalised statements about products and services being “green”. Be specific, and use a careful review process to ensure the accuracy of claims. Make sure any qualifying information is clear and close to the principal claim, and avoid any scope for misinterpretation. If you are claiming carbon neutrality, but that is based on carbon offsetting, be clear about that. If your green claims rely on your supply chain, check your statements can be supported by your suppliers.
   • Are you training your board on ESG disclosures and directors’ potential liability?
   • Do you have adequate insurance cover for greenwashing and other ESG risks?
     
7. At Kemp IT Law, we can help you with all aspects of ESG and sustainability, including designing ESG and sustainability compliance programmes, reporting frameworks, policies, managing risks and training. Please contact tom.hine@kempitlaw.com to find out more.