![European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources](https://eaccny.com/wp-content/uploads/2020/06/eaccny-logo.png){kind=logo}
What is greenwashing and why does it matter?
The generally understood meaning of greenwashing is the practice of making a green claim – that is a claim relating to the environmental or sustainability credentials of a company or its products or services – which is not adequately supported by evidence or is misleading, whether through exaggeration, being drafted in an unclear manner or omitting material information which will enable others to understand the nature and scope of the claim made.
A focus on green claims, however, covers more than just environmental claims made in traditional advertisements. It includes, for example, claims made on corporate websites and statements made in company reports and other similar financial, regulatory or disclosure documents, including sustainability reports.
A green claim which leads to greenwashing can manifest in various ways, but some of the more common types or tactics include:
Greenlabelling, for example:
- Making outright false claims or claims that cannot be substantiated.
- Claiming a product is sustainable based on a narrow set of attributes without considering other important environmental factors. For instance, a product might be marketed as coming from a sustainably harvested forest, but the production process may be highly energy-intensive.
- Using imprecise terms that sound environmentally friendly but lack clear definition. Terms like “all-natural,” “eco-friendly,” or “green” have no clear meaning and so are likely to mislead unless a business is clear about what it means by the reference.
- Using labels or visuals that give the impression of third-party environmental endorsement where none exists.
- Using terms in ways that are technically true but differ from their generally accepted meaning. For example, calling something “recyclable” where the infrastructure to recycle that item is rare or non-existent.
Greenlighting, for example:
- Making an environmental claim that might be truthful but is unimportant or unhelpful for consumers seeking environmentally beneficial products. An example might be highlighting the absence of a certain chemical which was banned decades previously.
- Highlighting a minor green initiative by a company, while its primary activities are highly damaging to the environment. This can create a disproportionate perception of environmental responsibility.
- Promoting past green actions without acknowledging current environmentally damaging actions or vice versa (for example, a company that once made great strides in an environmental area but has since regressed or abandoned those efforts).
Other new terms connected with greenwashing that are becoming more commonly used are:
- Greenhushing: The act of corporate management teams under-reporting or hiding their sustainability credentials in order to evade scrutiny, for example because of political controversy around ESG-driven investment activities or conversely to avoid attracting activist attention.
- Greenrinsing: A company regularly changing its ESG targets before they are achieved in order to hide that it has not achieved an ambitious target which had previously been set with great publicity.
- Greencrowding: Where a company join industry sustainability groups or alliances to hide its lack of action.
- Greenshifting: When a company uses language in its marketing implying that the burden of change is on its customers or consumers.
Green claims can leave the company open to regulatory action or at risk of litigation from third parties. We look at these legal risks in the next section. Making an inadequately supported green claim may also cause reputational damage to a business.
Green claims: the law and the regulators
UK regulation of green claims
In the UK, green claims in advertising and marketing are subject to a network of business to consumer and business to business unfair commercial practice laws and advertising codes of practice that have been in place for a number of years. These include the Consumer Protection from Unfair Trading Regulations 2008, the Business Protection from Misleading Marketing Regulations 2008, the CAP Code and the BCAP Code (which are advertising industry self-regulation codes enforced by the Advertising Standards Authority).
Businesses that fall foul of these are subject to regulatory action by UK Trading Standards, the UK Advertising Standards Authority (ASA) or the Competition and Markets Authority (CMA) depending on the potential level of harm that could arise from the claims and the media in which the claims appeared. Regulatory action can take the form of proactive investigations instigated by the regulator itself or investigations prompted by complaints from competitors, consumers or environmental/consumer groups.
The ASA and CMA have both focused on greenwashing in recent years. The CMA’s September 2021 guidance on “Making environmental claims on goods and services”, more commonly referred to as the Green Claims Code sets out the principles that companies should follow in order to comply with the law relating to unfair commercial practices. The principles are:
- claims must be truthful and accurate;
- claims must be clear and unambiguous;
- claims must not omit or hide important relevant information;
- comparisons must be fair and meaningful;
- claims must consider the full life cycle of the product or service; and
- claims must be substantiated.
Businesses were given a very short grace period (which has now expired) to bring their claims into compliance. The guidance emphasised the requirement to take a holistic life-cycle approach to substantiating environmental claims and encouraged businesses to make this information public. The expectation is that the substantiation will need to be detailed, rigorous and, where possible, use independent third-party data.
In parallel, the ASA updated the CAP and BCAP Codes and subsequently added new sections on claims about initiatives designed to reduce environmental impact and, most recently, on green disposal claims (such as “recyclable”, “biodegradable, “compostable”).
The ASA has ruled against advertisers in a number of cases in which they were found to have breached the CAP or the BCAP Codes because they exaggerated the business’s overall environmental credentials in a way that was likely to mislead consumers.
EU regulation of green claims
At EU level, green claims are subject to the general prohibition on unfair commercial practices under the Unfair Commercial Practices Directive and the Consumer Rights Directive.
These Directives are in the process of being updated by the “Directive to empower consumers for the green transition” which has almost completed its legislative process and is expected to come into effect some time in 2026. This Directive will ban:
- generic environmental claims such as “environmentally friendly”, “natural”, “biodegradeable”, “climate neutral” or “eco” without appropriate substantiation;
- claims based on emissions offsetting schemes; and
- the use of sustainability labels not based on an approved certification scheme.
More substantially, in March 2023, the European Commission published a proposal for a new Green Claims Directive, which we consider in further detail below.
In addition, many individual jurisdictions in the EU have taken their own steps to tackle greenwashing.
For example, French law specifically bans misleading environmental claims, prohibits the use of particular terms such as “environmentally friendly” and only allows other claims such as “carbon neutral” when certain conditions are met. Whereas, unlike France, Belgium has not adopted specific legislation on green claims but the regulator has issued guidelines for companies and it also conducted a communication campaign in 2023 and published an online tool for consumers to find out more about how to interpret green claims.
In addition, many individual jurisdictions in the EU have taken their own steps to tackle greenwashing.
Green litigation
As well as facing regulatory action, companies can find themselves the subject of third party litigation and arbitration. According to the “Global trends in climate change litigation: 2023 snapshot” published by the Grantham Research Institute on Climate Change and the Environment (June 2023), there were over 2,300 instances of climate change litigation worldwide by May 2023.
The identities and aims of litigants have developed. Green claims used to be limited to actions for compensation for environmental damage with the goal of the action to seek monetary awards for the litigants. However, claimants have become more sophisticated and recently there have been claims ostensibly brought for the purpose of attempting to force a company to change course and/or to prevent or penalise misleading activities by companies and directors. It is these latter types of claims that particularly target greenwashing. Rather than seeking damages, the goals of these types of claims are often to try to force actions to prevent or limit climate change, to achieve cultural change, or to alter a company’s strategic direction.
Claims against UK companies and directors
An inadequately supported green claim could give rise to a variety of claims against UK companies and directors. However, there are a number of difficulties in bringing these claims and at the time of writing we are not aware of a successful civil litigation claim in the UK based on an allegation of greenwashing.
Breach of contract
Where a company has entered into a contractual commitment that it breaches by making a false green claim, at its simplest the company could be liable to pay damages for a breach of contract claim. ESG and sustainability commitments are being incorporated into a variety of contracts, such as service level agreements between customers and suppliers and investment agreements between funders and companies. These may give rise to actionable claims for breach of contract depending on their terms.
Misrepresentation
Where a company makes an untrue green statement that induces the recipient to enter into a contract and causes them loss, the company may be liable for misrepresentation. If a company makes a false green statement negligently but there is no contractual relationship, the recipient may be able to claim negligent misstatement if the company owes them a duty of care. A duty of care can be difficult to establish but it is based on whether the loss to the recipient of the statement was reasonably foreseeable; the proximity of the relationship between the company and the claimant; and whether it is fair, just and reasonable to impose a duty of care.
Claims against directors
A claim may be brought against directors personally for breach of their statutory duty to promote the success of the company having regard to (among other matters) the impact of the company’s operations on the environment and the community. The duty is owed to the company and so the claim must be brought by the company or in its name.
It is possible for the members/shareholders of a company to bring an action against the directors in the name of the company using a process known as a “derivative claim”. To date, we are not aware of the court granting permission for a derivative claim related to an environmental statement. In a recent case where permission was refused, the Court of Appeal judge noted that a derivative action can only be brought to benefit the company and to remedy a harm caused to the company: “A derivative action is not an opportunity for someone to pursue their own grievances or claims or to further their own particular interest in the name of the company”.
Misleading statements
A director may be liable to compensate the company for any loss it suffers as a result of any untrue or misleading statement in, or omission from, the directors’ report, if the director knew or was reckless as to the truth of the statement. Directors of certain companies must report annually on environmental matters as part of their non-financial reporting in their annual corporate reports. This can include energy use, greenhouse gas emissions and climate-related financial disclosures. Again, the right of action rests with the company and the claim must be brought in its name.
Another potential category of litigant is an investor in a publicly listed company. Investors who have suffered a loss as a result of untrue or misleading statements or certain omissions in published information are able to bring a claim against the company. The requirement for the investor to have suffered a loss and linking a false green statement to that loss means that this category of claim may be unlikely to succeed. As with the claims described above, however, for some claimants the value will be in the publicity created.
Claims in the EU
Each jurisdiction in the EU has its own bases on which third parties may bring claims for or related to greenwashing and it is beyond the scope of this paper to detail specific jurisdictional rights. However, there have been successful challenges to greenwashing based on EU law. For example, in 2023:
- Dutch airline KLM was sued in Amsterdam for its campaign telling customers to ‘Fly Responsibly’. The claim has been brought by Dutch campaigners on the basis that the campaign is unlawful under the EU Unfair Consumer Practices Directive as implemented in the Netherlands.
- TotalEnergies was successfully sued in Germany for advertising oil heating as “CO2 compensated” by carbon offsets. The lawsuit was brought by a German environmental NGO and was based on the EU Unfair Consumer Practices Directive as implemented in Germany.
- Arla Foods, a multinational dairy producer promotion of dairy was successfully sued in Sweden for advertising its products as having a “net zero carbon footprint.” According to Arla, this result was achieved through offset credits from forest-based offset projects. However, the court found the claim to be misleading. The claim had been brought by a Swedish consumer ombudsman and was based on the EU Unfair Consumer Practices Directive as implemented in Sweden.
Greenwashing: horizon scanning and the future
In the next few years, businesses will be under increasing levels of legal, regulatory and socially-driven obligation to make statements about and prove the sustainability performance and goals of the company itself as well as about their products or services. And so those increasing levels of disclosure obligation will in turn increase levels of greenwashing and green claims risk.
The risk profile of green claims is also likely to increase. For example, the UK Digital Markets, Competition and Consumer Bill currently going through the legislative process will give the CMA the ability to directly impose fines of up to 10 percent of turnover for firms that breach consumer protection law, including breaches in respect of green claims.
In addition, three significant directives will have an impact on businesses with an EU presence:
- Corporate Sustainability Reporting Directive (CSRD) – This comes into effect in stages starting from 1 January 2024. The CSRD updates the provisions of the existing Non-Financial Reporting Directive (NFRD), which currently applies to large EU-listed companies, banks and insurance companies. Compared to the NFRD, the CSRD extends the scope of the reporting obligation to all large EU undertakings and imposes wide-ranging ESG disclosures on them for the first time. It requires the audit (assurance) of reported information, introduces more detailed reporting requirements to mandatory EU sustainability reporting standards, and amends the format for the reported information.
- Corporate Sustainability Due Diligence Directive (CSDDD) – This has nearly completed the EU legislative process and will be implemented over the next few years. The CSDDD introduces a sustainability due diligence duty on EU companies and non-EU companies that generate significant turnover in the EU to identify, prevent, mitigate, bring to an end and account for specific adverse human rights and environmental impacts in their own operations, their subsidiaries and their value chains.
- Green Claims Directive (more properly called the “Directive on substantiation and communication of explicit environmental claims”) – This directive has just begun its legislative journey, but the original proposals would substantially change the basis on which businesses will be able to make environmental claims in the EU. Traders will need to undertake a life-cycle analysis of their product which will need to be independently verified and made publicly available, certain types of environmental claim will be expressly prohibited, a new regime of green claims verification will be created and independent certification schemes will be regulated. The Directive proposes fines of up to 4 percent of turnover for breach and some novel sanctions, including a ban on participating in public procurement and accessing public funding for 12 months.
Companies should seek advice where appropriate to ensure that they are aware of new developments, how multiple ESG reporting requirements overlap and to ensure that they have the processes and policies in place to mitigate the risks that may arise out of green claims.
For more information, please contact the authors.
Compliments of Osborne Clarke – a Premium Member of the EACCNY.