Internal Corporate Controls Can Help Tackle Greenwashing Claims

• Bass, Berry & Sims attorney assesses risk mitigation tools
• Companies should engage third-party auditors to verify ESG data

Environmental, social, and governance matters remain important to companies and shareholders despite an evolving regulatory landscape, transitioning US administration, and diverse set of stakeholder views. Companies continue to face more pressure around ESG transparency and the urgency to show progress.

At the same time, these companies face seemingly increasing risks for greenwashing claims amid a perceived ESG backlash. Companies can protect themselves from these claims by understanding the risks, then avoiding misleading claims.

Perhaps the most apparent risk is when companies can be penalized for inaccurate disclosures. Similarly, incomplete disclosures can cause stakeholders to infer sustainability goals are further along than they truly are, potentially giving rise to claims of incomplete disclosure.

Companies that don't fulfill their promises and fail to make progress on environmental pledges—such as reducing emissions or waste—are also susceptible to potential greenwashing claims. Risks can also arise when sustainability goals are changed before they're achieved without meaningful visibility as to the reason for the changes, alternative plans, and timely updates to these changes.

Additionally, customers and clients may choose products or services due to misleading labeling or advertising. Greenwashing claims in this scenario may center on inflated sustainability claims, or products or services marketed as sustainable when such a claim is questionable.

Greenwashing claims can also arise when a company is perceived to have inconsistent action behind an ESG claim. Vague transition plans and resource allocation perceived as insufficient can prompt the attention of regulators and stakeholders alike.

Companies should develop internal controls to mitigate risks related to greenwashing claims in their public disclosures.

Assign oversight accountability. It's critical to have a cross-departmental unit that oversees ESG-related claims and disclosures in connection with internal company practices, targets, and progress. Senior leadership should determine the level of priority given to various ESG-related matters, set clear plans, and be aware of progress or setbacks. It's important to provide the necessary resources and training for the ESG team to remain well-informed. Additionally, educate personnel about what constitutes greenwashing.

Engage a third-party auditor. While it comes at a cost, companies are highly encouraged to engage experienced third-party auditors to verify ESG-related data. This practice helps ensure a company's disclosures align with industry standards and helps prevent misleading environmental statements.

This practice helps encourage companies to plan around such reviews and audits. The cost associated with these services inevitably varies with the level of review, and companies may consider starting at a lower level of review and progressing to a more thorough level over time.

Review and update internal controls. Updates to internal controls should account for audit findings, evolving industry trends, and regulatory shifts. A regular review of these internal controls will help ensure such updates and adjustments are made in a timely manner. As part of regular review, benchmarking practices against industry peers and leaders with respect to ESG-related matters are helpful, as well as keeping informed of any changes to sustainability standards a company follows or is considering adopting.

Review and vet data. The quality of disclosure that goes out to the public is directly dependent upon the quality of data that goes into preparing related disclosure. Companies should work to ensure internal data collection on ESG-related matters comes from reliable documentation and sources, and claims can be readily verifiable.

Sufficient time should be provided to various departments to prepare and review data with a meaningful chance to revise draft disclosures for accuracy. Legal and compliance personnel should be involved from the start of the process to further assist in the vetting procedures.

Make accuracy a foundational principle for any ESG claim.

Establish accessible feedback and incident response procedures. Companies are encouraged to have open channels of communication with stakeholders where they can engage on questions and concerns regarding potential greenwashing claims. Companies should also have a clear response plan where they can promptly respond and investigate concerns around potential greenwashing claims.

The response plan should include steps for investigating claims, addressing the outcome, assessing potential reputational damage where applicable, and communicating with stakeholders in a transparent and timely manner.

Update disclosures as appropriate. Companies should perform regular internal audits to confirm ESG-related performance continues to align with public claims. Whether it's in response to a stakeholder concern, or by the company's own discovery, companies should also be prepared to update disclosures to reflect significant changes in ESG-related performance.

While companies are in the unenviable position of providing meaningful disclosure while facing risks for greenwashing claims, they can take steps to mitigate these claims, and the results can be rewarding. Robust disclosure controls and internal policies and happy stakeholders can provide long-term growth opportunities despite short-term costs.