Companies’ legal exposure to greenwashing claims set to rise
Source: Business Times
Article Date: 15 May 2023
Author: Michelle Quah
Absence of a unified definition of greenwashing, evolving regulatory developments and “greenwashing by association” complicate management of the threat.
Companies’ exposure to accusations of greenwashing is set to continue rising, and with it the risk of regulatory action, civil claims and reputational damage, lawyers told The Business Times.
Underpinning that trend are the growing demand for more environmentally friendly offerings from corporates, escalating competition for green financing and deepening scrutiny from stakeholders and regulators.
Complicating how companies manage this growing threat is the current lack of a unified definition of what constitutes greenwashing, still-developing rules and laws, and the growing consensus that greenwashing does not need to be intentional to be deemed as such.
“Greenwashing risk has unquestionably grown – the volume and granularity of standards and guidelines published by regulators and international bodies has increased exponentially, and these have a knock-on effect on the scope and nature of activities that come under scrutiny,” said Denise Fung, Litigation, Arbitration & Investigations partner at Linklaters.
“We have already seen greenwashing risk materialise in the rise of regulatory enforcement action, as well as claims brought by private-sector entities and non-governmental organisations (NGOs).”
Mini vandePol, head of Baker McKenzie’s Asia-Pacific investigations, compliance and ethics group, said the breadth of potential greenwashing claims – in other words, the potential scope of liability and the extent of possible legal grounds for a claim – has and will continue to increase.
“Many causes of action may be taken – for example, fraud or misrepresentation, contractual, consumer protection or market disclosure grounds. Action may be taken against directors or other fiduciaries for greenwashing-related duty breaches.
“As stakeholders of all categories place an increasing focus on sustainability, any reputational fallout from a greenwashing claim is likely to be substantial,” she added.
Antonia Croke, Hogan Lovells’ partner in Hong Kong, noted: “Litigation is now an asset class – while here in Asia, we haven’t seen the sorts of environmental, social and governance (ESG) claims that are being made in the United Kingdom, it is definitely on the horizon. Third party litigation funders are also getting involved in supporting ESG claims and, as regulations increase, the chance of follow-on litigation rises.”
Where regulators have been slow to act, stakeholders, activist shareholders and NGOs have stepped in to force change and bring action. That typically happens when they find the product, fund or issue they have invested in is not as green as they were told, said Timothy Goh, partner at Dechert in Singapore.
“For instance, investigations by non-profits, environmental groups and news agencies have resulted in companies being called out for greenwashing, and a study by Bain has found that the number of business press articles on greenwashing has soared at a 147 per cent compounded annual growth rate from 2019 to 2021,” Goh said.
Croke said regulators across the region are, however, becoming more proactive and resourceful. She cited the example of Singapore, where the Monetary Authority of Singapore (MAS) recently unveiled a “Finance for Net Zero Action Plan” meant to provide a benchmark for environmental reporting standards to protect both against greenwashing and “transition washing”. Transition washing refers to companies that mislead the public in respect of their movement towards sustainable practices.
But with the global and regional development of regulations being uneven, and a universally accepted definition of what constitutes greenwashing still lacking, it can be tricky for businesses to figure out how to guard against being accused.
vandePol said: “The uncertainty of how enforcement against greenwashing will pan out is also a major concern – it is difficult to protect against a risk where the regulatory frameworks are varied and there are no uniform standards.”
Companies need to be aware that they can be deemed guilty of greenwashing even if they did not intend to mislead; they can also be accused of “greenwashing by association”, where the problem arises out of their proximity to a party that is guilty of greenwashing.
A recent report by the Asia Investor Group on Climate Change (AIGCC) and environmental law non-profit ClientEarth listed several examples of these in the finance sector, such as: Asset managers who include companies in their green portfolios based on the portfolio company’s greenwashing; companies that have joined net-zero alliances but do not meet alliance commitments; and companies claiming to be green but funding organisations that lobby against Paris Agreement-aligned goals.
Croke said, “Most greenwashing is unintentional – companies aren’t aware they are doing it. Some companies may not have the knowledge or context to know what activities are truly sustainable and those who actually make claims on behalf of a company may not be in full possession of all the relevant context, which could be about the nature of supply chains, possible alternative and better ways of working and so on.”
Fung agreed, noting that the enforcement actions taken to date have been grounded in systems and controls issues rather than any deliberate intention to deceive or mislead. “The market’s understanding of what certain terms – like ‘green finance’ or ‘clean energy’ – should mean or denote to a reader continues to evolve, so this all needs to be kept under review.”
To help steer clear of unintentional greenwashing, vandePol said green statements should be factually clear, correct, and supported by scientific evidence.
“Descriptions that cannot be quantified, such as ‘substantial’, ‘environmentally friendly’ or ‘the best’ should be avoided. Companies must show that it had a reason to believe in the truthfulness of the statement when it was made, and keep a record of any verification undertaken on it, in case the statement later comes under scrutiny,” she said.
A way to reduce the risk of a greenwashing claim at the very outset, she added, is to set realistic sustainability targets together with concrete operational plans that can be met. “Companies that make big net-zero commitments but fail to back them up – even inadvertently – may be accused of greenwashing.”
To guard against “greenwashing by association”, Goh said, organisations should carefully vet their suppliers and partners and ensure that they are transparent about their environmental practices.
“This includes requiring portfolio companies, suppliers and partners to provide evidence to support their environmental claims, diligent monitoring and reporting, and conducting regular audits to ensure compliance. It is good practice for asset managers and corporates to develop a code of conduct for their portfolio companies, suppliers and partners that includes ESG standards and requirements, and to hold them accountable to such standards.”
Croke pointed out that social media can also be a minefield. “Marketeers who are in the business of making the company look good can all too often misinterpret or overstate what a company has done on the sustainability front.”
All four lawyers concurred that a strong culture of good governance is essential to helping companies stay on top of greenwashing risks. This would involve them having a robust ESG policy that entails constant monitoring and review of relevant processes, proper training for staff, access to good advice, and maintaining an open and transparent relationship with stakeholders.
vandePol said: “If you look at the recent greenwashing enforcement cases, you will quickly see references to companies not implementing policies, having inadequate controls to assess the evidence behind their public statements, lacking a strong ‘speak-up’ culture and failing to invest in oversight and investigation mechanisms.”
Greenwashing by association – the new threat facing corporates
YOU may be familiar with the term “guilty by association”, but how much do you know about “greenwashing by association”? The latter is a new concept, but a growing threat that companies cannot afford to ignore.
The fundamentals of both are similar. Someone “guilty by association” is thought to be guilty of a crime not because of any direct evidence against him, but because of his association with a known offender.
For a company, greenwashing by association happens when the company is seen or known to be associated with a party that is guilty of greenwashing.
Tainted by association
A new report by the Asia Investor Group on Climate Change (AIGCC) and environmental law non-profit ClientEarth, published recently, said that companies can be accused of greenwashing even if they were not the party making false or misleading green claims.
In Greenwashing and how to avoid it: An introductory guide for Asia’s finance industry, AIGCC and ClientEarth pointed out that it is now more widely accepted that greenwashing does not require intentionality. In other words, greenwashing may be deemed to be committed regardless of whether the entity intended to mislead.
This can happen with greenwashing by association. Examples include:
- Intermediaries or asset managers who include companies in their green portfolios based on the portfolio company’s greenwashing, and represent their portfolios as green;
- Companies that have joined net-zero alliances but do not meet alliance commitments; and
- Companies claiming to be green but funding organisations that lobby against Paris Agreement-aligned goals.
While the report focused on examples in the finance industry, the risk applies to companies in other sectors as well.
The threat to companies comes from regulators and rivals – and, really, from just about any quarter. Regulatory regimes in Asia seeking to police greenwashing are likely to address greenwashing by association, too. And greenwashing by association could also be the basis for, or form part of, greenwashing allegations brought against a company by its competitors or stakeholders.
So, how should companies manage such a risk?
Some might choose to pull back on disclosing their green credentials, thinking that the less they say (or brag about), the safer and less accountable they will be – a practice some have labelled “green-hushing”.
This would hardly be ideal, however. AIGCC/ClientEarth’s report pointed out that, given the immense green-market opportunities out there, companies are likely to continue wanting to showcase their green credentials.
It also said companies are increasingly under mandatory legal obligations to make climate disclosures, regardless of whether their product lines or services are specifically focused on green industries or investments. Making specific, clear and accurate disclosures relating to material climate risks and other information – including forward-looking climate risks – could therefore be safer than omitting such information entirely.
Instead, companies need to stay on top of associations that can potentially expose them to claims of greenwashing.
This means conducting due diligence before entering into relevant transactions. Companies will need to examine and verify green claims made by associated parties, ask for more data, understand how these affect one’s own green standing, and stay on top of such information.
In the case of the aforementioned example of net-zero alliances, companies need to stay abreast of the commitments required – this may mean making a decision to pull out of an alliance if one’s net-zero plan(s) start to diverge from the alliance’s requirements.
If companies run into issues or limitations with information gathered or data used to substantiate claims, they should consider being transparent about such issues as opposed to trying to mask them.
Companies should also be familiar with the regulatory requirements that affect their associations, especially if they are transacting in jurisdictions other than their own. They should also be aware of “softer” measures, such as stewardship or corporate governance codes, that may inform stakeholder expectations.
And, it is important that individuals within the company – from board directors, to executives, to employees involved in the transactions that affect the company’s green claims – are well versed when it comes to their obligations.
All this is easier said than done. Climate-related disclosures and claims of greenwashing are still relatively new developments, so much so that an exact definition of greenwashing has yet to be fully or even widely agreed upon.
This is dynamic and uncertain territory – one in which a company’s best approach is to be well advised and well prepared.
Source: Business Times © SPH Media Limited. Permission required for reproduction.