UK regulators are clamping down on greenwashing in response to mounting pressure from the public and investors.
The protests at COP26 last year indicate that this public pressure is not set to slow down. Consumers and investors are becoming increasingly aware of the issue, with activists such as Greta Thunberg declaring the COP26 event a "global greenwashing festival" and stating "the problem is not only the blah, blah, blah of politicians, but the bang, bang, bang of greenwashing..."
Businesses are responding to public concerns about climate change and the growing number of consumers looking to make sustainable investments by putting more "green" products and services on the market, and advertising them as such, but in doing so, they need to be mindful of greenwashing and the potential risks for disputes that this presents. In essence, greenwashing occurs when a business represents to consumers that its practices, products or services are environmentally friendly but has no concrete evidence to validate the representations.
The main litigation and regulatory risks inherent in making "green" statements are set out below, along with some practical recommendations on how businesses can avoid greenwashing litigation claims and regulatory scrutiny.
Legal and regulatory frameworks
Businesses asserting that their products or services are "green" must ensure that the statements they make to the public are accurate, to avoid the risk of potential mis–selling or greenwashing claims. Such claims are expected to increase, particularly as companies face pressure to make their products more "green" – from green bonds and home mortgages to sustainable fashion – and face the temptation to advertise them as such. Before making public statements, businesses must have regard to the below litigation risks inherent in doing so and be careful about how they market their products and services, including advertisements, product packaging and labelling.
1. Consumer Protection
While there is no specific legislation in the UK on greenwashing, businesses must consider general consumer protection law, and specifically, the Consumer Protection from Unfair Trading Regulations (2008) (the "CPRs"). The legislation generally prohibits unfair commercial practices and contains specific prohibitions against false and misleading commercial practices, and misleading omissions of material information. These may cover how a business markets its products, services or brand, and includes advertisements, product labelling and packaging. Greenwashing claims will only fall foul of these obligations if they cause, or are likely to cause, the average consumer to take a transactional decision they would not have otherwise taken. A breach of the CPRs can result in a fine or imprisonment for the infringing business.
2. Claims under the Financial Services and Markets Act 2000 ("FSMA")
Financial services firms can expect to face increasing scrutiny and challenges on the ESG-credentials of so-called "green" investments. One route for greenwashing-related litigation is potential claims brought by shareholders in listed financial services firms against the firm itself under sections 90 and 90A of FSMA. Therefore, great care must be taken when marketing investments as "green". Otherwise, there is a high risk of negative publicity, FOS action and litigation.
The FSMA provisions allow shareholders, or those with an interest in shares in listed companies, to seek financial redress for any losses suffered as a consequence of:
- any untrue or misleading statements within or omissions from prospectuses or listing particulars (Section 90 FSMA); or
- reliance on any untrue or misleading statement in, or omission from, other information published by the issuer or dishonest delay in publishing information relating to its securities (Section 90A FSMA).
Shareholders must also be able to demonstrate the following to make a claim under Sections 90 and 90A FSMA:
- they acquired, continued to hold or disposed of shares in reliance upon the published information containing the untrue or misleading statement; and
- a “person discharging managerial responsibility” must have known of or been reckless as to whether the statement was untrue or misleading; and
- the shareholder must have suffered loss as a result of the untrue or misleading statement.
These causes of action are rarely used and no such claim has gone all the way to trial, but due to the increasing statutory and regulatory disclosure requirements (see below) ESG credentials and compliance information are becoming increasingly prevalent in the publications falling within the ambit of these claims. Furthermore, the requirement that generally poses particular difficulty for claimants is that the “dealing” in the shares must have been in reliance upon the published information. In a greenwashing claim, this requirement may more easily be satisfied as an ESG-conscious investor will likely have their ESG objectives documented. Therefore, future greenwashing claims under FSMA are set to increase and may make this a popular route for litigation claims in the future.
3. The Organisation for Economic Co-operation and Development (the “OECD”)
The OECD Guidelines for Multinational Enterprises create an expectation that companies subject to the Guidelines will conduct due diligence to meet the Guidelines as a whole. The Guidelines include a chapter on the Environment (VI). Complaints can be made to the OECD for breaches of the OECD Guidelines and the process can therefore be used as a potential remedy for greenwashing claims.
Although the process is not legally binding, many National Contact Points ("NCPs") that implement the OECD Guidelines have the ability to "name and shame" multinational enterprises who refuse to participate in the process or whose conduct is deemed inconsistent with the OECD Guidelines. They can therefore have serious ramifications for a defendant’s reputation, even though they do not involve the scale and penalties that litigation or an investigation would.
In 2020, environmental law charity, ClientEarth, filed an OECD complaint against oil and gas giant, BP, alleging it misled the public in an advertising campaign that lauded its eco-efforts. The campaign focused on its low carbon energy products and ignored the fact that 96% of its annual spend was on oil and gas. BP terminated the advertising campaign before the complaint was heard, demonstrating the power that OECD complaints have in deterring companies from making untrue statements.
The UK National Contact Point for the OECD Guidelines for Multinational Enterprises accepted that the issue was "material and substantiated", setting a precedent for future complaints on misleading greenwashing campaigns, of which we can expect to see an increase.
4. UK Competition and Markets Authority ("CMA") regulatory risks
The CMA has turned its attention to the increasing number of businesses greenwashing their products and services. It published its Green Claims Code on 20 September 2021 to ensure that the statements businesses make are genuinely "green" and to reduce the risk of consumers being misled. The Green Claims Code takes into account existing consumer law and includes the following key principles:
- Claims must be truthful and accurate.
- Claims must be clear and unambiguous.
- Claims must not omit or hide important information.
- Comparisons must be fair and meaningful.
- Claims must consider the full life cycle of the product or service.
- Claims must be substantiated.
The CMA states that if businesses follow the above principles, they are "less likely to mislead consumers and fall foul of the law." If a business is found to infringe consumer protection law, the CMA (alongside other bodies) can bring litigation proceedings on the basis of the Green Claims Code. Although the Green Claims Code is not new legislation, it draws on enforcement powers derived from existing consumer protection rules under the CPRs (explained above) and the Business Protection from Misleading Marketing Regulations 2008. Any business found to be in breach of consumer law can face civil action or criminal prosecution. Breach of the CPRs can even attract criminal liability, including for directors and other officers of corporate bodies.
The CMA has further announced that it will review misleading claims at the start of 2022, so businesses must ensure that their claims stand up to regulatory scrutiny by the start of 2022.
5. Advertising Standards Agency ("ASA") regulatory risks
The ASA can also take action against misleading advertisements. The regulator announced on 23 September last year that it is set to release new guidance to ensure that advertisements do not mislead the public about the environment.
The ASA can exercise a number of enforcement powers if it considers that a business has made a greenwashing claim. Recent examples where the ASA found firms misleading customers on environmental credentials include a banned advertising campaign by Ryanair in which it claimed to have the lowest airline CO2 emissions. Meal kit company Gousto was also found to have made false claims that their packaging was "100% plastic free and recyclable" after an ASA ruling in 2020.
The ASA’s powers include requesting the withdrawal of the infringing advert and publishing its rulings online, resulting in reputational damage for the business involved. In the case of persistent breaches of its code (the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing), it can refer a business to other regulatory bodies such as Trading Standards, which has the power to bring court proceedings and impose civil sanctions.
6. Disclosure obligations
Under the global Task Force on Climate-related Financial Disclosures, companies are required to disclose information relating to environmental concerns and considerations (see ESG Reporting – If you aren’t already, why should you and how?).
Particularly in the regulated financial services sector, the trend is clearly towards increasingly onerous disclosure obligations in the future which firms must take seriously or face the risk of allegations of misleading statements or greenwashing and potentially enforcement action and complaints.
In the face of increasing public and regulatory scrutiny, businesses must carefully consider the statements they make to mitigate the risk of greenwashing claims. Having regard to the CMA's Green Claims Code, businesses must make sure that any "green" statements they make:
- are truthful and accurate - businesses must be able to substantiate the veracity of their claims with facts;
- do not omit important information - where claims are only true if caveats apply; these must be clearly stated so that consumers can understand them and make an informed decision;
- are clear and unambiguous - general or absolute claims (such as "green" or "sustainable") are more likely to mislead and should be accompanied by an explanation; and
- are considerate of the full life cycle of a product or service, rather than focusing on a specific activity.
As part of assessing the “green” statements that they make, businesses must also think carefully about ensuring that the right climate-related disclosures are made under new ESG Reporting obligations (see ESG Reporting – If you aren’t already, why should you and how?).