How to Address the Risk of Greenwashing Claims

Rashmi Dubé 


April 25, 2023

Greenwashing Claims

As part of a growing focus on ESG issues, regulators around the world have been focusing on  exaggerated or unsubstantiated claims regarding sustainability, also known as “greenwashing.” While the emphasis has mostly been on tackling environmental messaging that misleads consumers, there are other issues for risk professionals and boards of directors (including non-executive directors) to consider with respect to their stakeholders. For organizations, the consequences of flawed strategies and misleading statements is no longer just a reputational threat. They should be planning for increased scrutiny and litigation from a wide set of stakeholders across a diverse set of issues, including potential action from competitors, consumers, investors and pressure groups relating to working conditions, human rights, inclusion and diversity, living wages, financial practices and many other concerns.

Stakeholders Taking Action

Over the past few years, we have seen the identification, sanctioning and prevention of “greenwashing” move up the priority list of regulators globally. In December 2022, the U.S. Federal Trade Commission (FTC) began a review to strengthen its guidelines and standards for environmental claims—legislation that is already used to levy fines worth millions of dollars.

In March, the European Union proposed a new law in that would require companies to substantiate green claims about their products using a standard methodology to assess their impact on the environment. In the United Kingdom, the Competition and Markets Authority (CMA) has also significantly stepped-up efforts in this area, working in collaboration with the International Consumer Protection Enforcement Network (ICPEN) which represents consumer protection authorities from 70 countries.

Meanwhile, as regulatory responses take shape, businesses, citizens and special interest groups are using existing legal frameworks to challenge ESG credentials. Companies have begun taking out injunctions against competitors, including a recent case in Italy that considered whether “false green claims” constituted misleading advertising and therefore an act of unfair competition. The court in the case ruled that the statements in question were vague, generic and non-verifiable and needed to be immediately removed from all sales and marketing channels.

At an individual and special interest group level there is also a high-profile claim being considered against a German utility bought by a Peruvian farmer with the support of a non-governmental organization (NGO). The suit alleges that the business knowingly contributed to climate change by emitting substantial volumes of greenhouse gases, and therefore must bear some responsibility to mitigate the flood risk now posed by a melting mountain glacier near the farmer’s town. This test case is being watched closely as it has progressed surprisingly far in the courts and because over 90 international legal jurisdictions share the same basic nuisance provision that is central to the case.

Addressing the Risk

It is clear that not responding to foreseeable risk or claiming unsubstantiated ESG credentials will have the potential to create significant reputational and financial damage to a business through either regulatory action or civil litigation. It is also likely to become a growing threat to management teams, with increased risk of stakeholders pursuing board directors for past decisions where they can legitimately claim they should have known that the companies’ activities would mislead or cause damage.

The solution to this growing backdrop of compliance and legal challenges is to ensure you can demonstrate a level of ESG best practice that demonstrates that your business is genuinely considerate, transparent and committed to making a positive impact. The following are key areas to consider: 

  • Review and assess ESG statements. It is vital to gain a full understanding of what your organization is claiming related to ESG matters, how and where this information is presented, and what evidence it is based on. This review needs to be conducted across key stakeholder touch points, including marketing and HR. Ensure that all communication related to ESG is reviewed by individuals trained in risk and compliance and that any forward-looking statements that may be open to conjecture are caveated appropriately. Extend this appraisal to your supply chain or delivery partners and audit their claims too.
  • Set standards. Far too often ESG is managed as a compliance concern rather than as central to a business’ values, purpose and strategy. Engage employees at all levels to see if this is the case and identify any ESG-related issues that may not have been considered. If ESG is not yet fully embedded, develop plans to better integrate it into the operations and culture of your business and establish mechanisms to continuously evaluate the success of this initiative. Where there are gaps in skills and knowledge, address them quickly and regularly review awareness and education efforts to ensure they remain aligned to the dynamic ESG landscape.
  • Formally report and monitor. In ESG governance the burden of proof lies with the business. Make sure you maintain an active policy, ideally under the stewardship of an ESG committee. Establish a formal system that ensures ESG problems are identified and escalated quickly. Document your focus and actions, including ensuring ESG is both discussed at board meetings and noted within the minutes. Encourage concerns and risks to be aired openly and ensure mitigating plans are formulated and updated at subsequent meetings.

ESG best practice is not just about avoiding regulatory punishment, litigation or reputational damage. Directors and risk managers need to ensure they embed and maintain an approach that is true to the spirit of ESG and flexible enough to adapt to rapidly changing social, political, economic and environmental landscapes.

Rashmi Dubé is an ESG litigation and business advisor at international law firm gunnercooke LLP and the U.K.’s Institute of Directors’ National Spokesperson Ambassador for Policy & Governance.