Fuelled by the global spread of ESG and climate-related disclosure obligations and coupled with pressures from increasingly ESG-driven stakeholders, businesses are saying more than ever about their environmental and social performance. These statements might be product-specific, relate to investment strategy or corporate governance. Such statements might be seen as good marketing, positive for a company's reputation and may well reflect a laudable transparency or ambition. But what are the potential legal consequences if these statements are attacked as inaccurate, unsubstantiated, misleading or false (ie, "greenwashing")? In this article, we explore the increasing risks for a business in making environmental or social claims, focusing on the UK, Australia and the US.
The regulatory regime
As set out in our previous post, there are a number of regimes that require UK businesses to report in relation to social and/or environmental matters. Many of these derive from the EU's European Green Deal, such as the Corporate Sustainability Reporting Directive, the Sustainable Finance Disclosure Regulation or the anticipated Corporate Sustainability Due Diligence Directive. Many of the EU regimes apply (or may apply) to entities accessing the single market and so apply directly to UK based companies. Others include references to "value chains" that will likely impact UK-based companies indirectly as the expectations of their EU business partners align with these new regimes.
There are also UK-specific reporting regimes, such as the UK Modern Slavery Act, the Task Force on Climate-related Financial Disclosures (the widely adopted voluntary standard that is now mandatory for all UK listed entities), the Task Force on Nature-related Disclosures and the International Sustainability Standards Board's standards.
Other regulatory steps are being taken to ensure that what companies say accurately reflects what they do. In particular:
- The EU Taxonomy Regulation establishes benchmarks for determining whether an economic activity is "sustainable".
- The EU Commission published a proposal for a Directive on Green Claims in March 2023.
- The UK Competition and Markets Authority (CMA) has adopted a Green Claims Code that seeks to help businesses comply with the existing consumer protection regimes in the UK when making environmental claims. The CMA is working with the International Consumer Protection and Enforcement Network, with a view to aligning standards globally.
Investigations and litigation
There are five emerging categories of potential actions we would highlight:
- Complaints to the EU Commission and/or CMA: In June 2023, a group of European national consumer protection organisations, supported by Client Earth, filed a complaint with the EU Commission in relation to what they describe as misleading climate-related claims by 17 European airlines. The complainants are calling for a Europe-wide investigation. In January 2023, the CMA opened an investigation into three "fast fashion" brands to scrutinise their green claims, noting particular concerns about the way the firms' products are marketed to customers as “eco-friendly”.
- Complaints to the UK Advertising Standards Agency (ASA): Complaints can be made to the ASA that green claims in adverts are misleading. If the claim is upheld, the company will be ordered to remove the advert. Recent complaints have been made to, and upheld by, the ASA in relation to green marketing claims made by Ryanair (that it was the "lowest emissions airline" with "low CO₂ emissions") and Repsol (where an advert relating to "renewable hydrogen" omitted material information.
- Shareholder claims under the Financial Services and Markets Act: Section 90 and Section 90A of the Financial Services and Markets Act 2000 provide potential routes to redress for shareholders in a listed company that makes false or misleading claims about their response to climate change. While shareholder actions under FSMA are not new, ESG-related claims are a more recent area of focus for potential claimants. We explain these potential claims in more detail here and consider the issue of reliance under Section 90A here.
- Shareholder derivative actions: Derivative actions under Section 261(1) of the Companies Act 2006 allow minority shareholders to bring a claim on a company's behalf and for its benefit, typically with a view to challenging the conduct or decisions of the company's directors. The highest profile example of such an action in relation to ESG issues was the unsuccessful action brought by the environmental charity ClientEarth against the directors of Shell, which we discuss in more detail here.
- Consumer class actions: While we are yet to see a big rise in greenwashing class actions in the UK, claimant firms may seek to allege that misrepresentations by a business have induced consumers to make purchases that would not otherwise have been made, causing loss. These claims could be brought in the UK High Court on an "opt-in" basis (potentially following the example of the group litigation currently being pursued against vehicle manufacturers in relation to allegations concerning NOx emissions from certain diesel engines). Alternatively, claimants might seek to bring consumer claims based on alleged abuses of competition law in the Competition Appeal Tribunal, so as to take advantage of the "opt-out" regime (ie, where each member of the class is automatically enrolled as a claimant unless they take active steps to opt out). Notably, claimant firms have already sought to bring environmental claims via that route, in particular, against water companies.
The regulatory regime
Greenwashing in Australia is largely dealt with under existing legislative provisions in relation to false, misleading, deceptive or dishonest conduct, and in relation to corporate disclosure obligations and representations without reasonable grounds. Some of those provisions may be relied upon by private persons and entities, and many are also enforced by national regulators, including the Australian Securities and Investments Commission (ASIC), the Australian Competition and Consumer Commission (ACCC) and Ad Standards.
In August 2022, ASIC identified greenwashing as an enforcement priority for 2023. In November 2023, it then confirmed its focus on greenwashing will remain a priority in 2024 and indicated that focus would widen to give attention to “net zero” statements and targets and the use of such terms as “carbon neutral", “clean” and “green”.
In its March 2023 “internet sweep” of environmental claims, the ACCC noted concerns that a significant portion of statements made by businesses may be false, misleading or have no reasonable basis, including “vague” terms including “green”, “eco-friendly”, “sustainable”, “recycled”, “carbon neutral” and “zero emissions”. In July 2023, the ACCC released draft guidance on environmental and sustainability claims.
Ad Standards, Australia's advertising regulator, independently administers industry codes such as the Environmental Claims Code. The Code requires environmental claims to be presented truthfully and factually, not to be misleading or deceptive, and must be substantiated and verifiable. Ad Standards' Community Panel handles complaints concerning breaches of the Code.
In relation to private actions:
- in August 2021, a shareholder environmental activist organisation filed proceedings against an oil and gas producer alleging that its market disclosures amounted to misleading or deceptive conduct in relation to: its 2030 and 2040 emissions reduction targets; its use of the word “clean” to describe its business and the production of natural gas; and it describing the use of hydrogen as “zero emissions” or “clean”; and
- in August 2023, Australian Parents for Climate Action (AP4CA) filed proceedings against EnergyAustralia, challenging claims made on its website that its “Go Neutral” electricity and gas products are “carbon neutral”; emissions created by “Go Neutral” products are “cancelled out” or “negated”; and that by opting into its “Go Neutral” products, consumers “have a positive impact on the environment”.
In relation to regulator actions:
- in February 2023, ASIC commenced its first greenwashing proceedings against Mercer Superannuation (Australia) Ltd (Mercer), alleging that Mercer engaged in greenwashing in relation to its ”Sustainable Plus” investment options because those options relevantly included investments in companies involved in the extraction or sale of fossil fuels, despite marketing statements made by Mercer to the contrary;
- in January 2023, Ad Standards' Community Panel upheld a complaint in relation to a flyer produced by ATCO which included the words, “Natural gas not only saves you money on hot water, cooking and heating, it's also better for the environment” and under the subheading “Benefits” included a dot point with the words “Produce 70% less greenhouse gas”. The Panel held that this claim was misleading as there are other energy sources which produce less greenhouse gas than natural gas;
- in July 2023, ASIC commenced proceedings against Vanguard Investments Australia Ltd (Vanguard) alleging that Vanguard had engaged in misleading and deceptive conduct because it represented that all securities in its “Ethically Conscious” fund were screened according to ESG criteria to exclude issuers with significant business activities in a range of industries, including fossil fuels, when it is alleged that Vanguard largely did not undertake that screening;
- in August 2023, ASIC commenced proceedings against Active Super, alleging greenwashing in relation to claims that it eliminated investments from its superannuation fund that posed too great a risk to the environment and community (including tobacco, oil and gambling-related investments) in circumstances where the fund was allegedly exposed to securities in gambling, tobacco, oil and coal mining; and;
- in March 2023, the ACCC announced it had researched 247 business and/or brands across Australia and had found that some of those businesses were: using vague or unclear environmental claims; not providing sufficient evidence for their claims; setting environmental goals without clear plans for how these will be achieved; and using third-party certifications and symbols in a confusing way.
The regulatory regime
US regulatory action with respect to greenwashing claims remains fairly passive. For the first time in more than a decade, the US Federal Trade Commission (FTC), which enforces federal antitrust and consumer protection laws, plans to release updated Green Guides for environmental marketing communications. The Green Guides, first issued in 1992 and last updated in 2012, are intended to help marketers avoid making unfair or deceptive environmental marketing claims in violation of Section 5 of the FTC Act. The revised Green Guides are expected to address current gaps in guidance with respect to claims that form the basis for modern greenwashing actions, such as claims that products are “sustainable” or “carbon neutral,” claims of achieving (or being on target to achieve) “net zero” carbon emissions, and claimed or implied endorsements from third-party organisations with strong ESG credentials. The revised guidance is expected to include examples of problematic statements and marketing, as well as the type and degree of substantiation required to defend against claims that given marketing statements are false or misleading.
Even as the FTC works to better define the contours of false or misleading environmental claims, private class action litigation, rather than agency action, remains the principal means of regulating greenwashing in the US. For decades, plaintiffs' firms have brought consumer fraud class actions premised on allegedly false or misleading claims that products are, for example, “healthy” or “all natural”. Applying that same template, consumer fraud class actions have now begun to target statements that products are carbon neutral, fully recyclable, or made of recycled content, and other green or sustainable marketing claims.
Recent examples include Dorris v. Danone Waters of America, challenging Danone's labelling Evian-brand bottled water as “carbon neutral”; Lizama v. H&M Hennes & Mauritz, challenging H&M's use of “conscious choice” branding to market clothing made with 50% or more “sustainable materials”; and Ellis v. Nike USA Inc, similarly challenging Nike's “Sustainability” product line. In these and other greenwashing class actions, plaintiffs allege (i) the marketer's claim is false or misleading and (ii) the misleading statement inflated the purchase price of the product by a certain amount, as reflected in sales data and analyses by economic experts.
Like other US class actions, greenwashing class actions generally are brought by plaintiffs' firms as “opt-out” class actions (as above, where each member of the class is automatically enrolled as a plaintiff in the action and must take steps if they wish to opt out of the class, which few people do), as consumers do not have the financial incentive to pursue these claims on an individual basis. If successful, plaintiffs' firms can recoup a large contingent fee percentage (eg, 30% to 40%) of the class recovery, with damages calculated based upon the number of products sold with false or misleading claims multiplied by the amount by which the challenged statement inflated the purchase price.
Greenwashing class actions have seen mixed success in US courts. Some consumer fraud class actions have survived motions to dismiss because questions of fact remained as to whether the challenged statements were false or misleading and/or improperly substantiated. In other cases, courts have dismissed greenwashing claims because the challenged statements were held not to be false or misleading on their face (eg, in the Lizama case, the court granted H&M's motion to dismiss because the only reasonable reading of H&M's “conscious choice” marketing was that the products at issue used more sustainable materials than H&M's other clothing, which was not in question).
Nonetheless, greenwashing class actions (and similar claims brought under state consumer protection laws by governments) are expected to continue in the US given the growing importance consumers place on ESG considerations and, as a consequence, marketers' increased efforts to promote their brands and products based on those considerations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.