Greenwashing - what are the risks?

What is greenwashing?

A competitive advantage can now be achieved by companies aligned with sustainability and eco-friendly products and services.  However, with the pursuit of that advantage comes the risk of companies overstating their sustainable credentials.  While it has no defined meaning, greenwashing is just that: companies misleading the public or investors (whether intentionally or unintentionally) about the environmental impact of their activities. 

Are there any laws that prohibit greenwashing?

Although there is currently no specific legislation prohibiting greenwashing in the UK, companies that falsely advertise their services or products as environmentally friendly or sustainable may face action under existing consumer protection laws or laws relating to misrepresentation.  For example, the UK Advertising Standards Agency (ASA) can take action against companies that produce misleading adverts.  In fact, in recent years, there have been several high-profile findings by the ASA that companies’ advertising materials were misleading to consumers.

What action can be taken against financial services firms?

For financial services firms, a number of the Financial Conduct Authority’s (FCA) existing rules could be utilised by the FCA to address greenwashing issues (for example, Principle 7 of the FCA’s Principles for Businesses, which requires that firms communicate information to clients in a manner which is clear, fair and not misleading).  However, the FCA has emphasised that greenwashing is a “core regulatory priority” and in October last year, it proposed new rules specifically to tackle greenwashing in a bid to protect consumers and improve trust in sustainable investment products. 

The package of proposed new measures includes investment product sustainability labels, restrictions on how terms like “ESG”, “green” or “sustainable” can be used, and requirements for more detailed and clear disclosures for institutional and retail investors.  In addition, the FCA has proposed a more general “anti-greenwashing” rule covering all regulated firms (including those that approve financial promotions for unauthorised persons), which is intended to come into force in June 2023.

In practice, this means that financial services firms can expect closer scrutiny on greenwashing issues. While inadvertent inaccuracies in disclosures or labels may not lead to investigation or enforcement action (provided those inaccuracies are identified and remedied promptly), where inaccuracies are intentional or deliberate, the risk of FCA investigation is likely to be significantly higher.

What are the risks of shareholder claims?

Shareholder greenwashing claims are still relatively rare in the UK, with litigation to date focusing mainly on broader climate-related issues.  However, the increased focus on greenwashing and the emerging trends in the US (which the UK often follows), may well lead to an increase in claims. 

Since April last year, larger UK listed companies have been required to disclose climate-related information as part of their annual financial reporting, including (among other matters) the impact of principal climate-related risks and opportunities on their business models and descriptions of the targets used to manage those risks and realise opportunities. This is a welcome development and encourages companies to place climate-related issues at to the top of their agendas. It does, however, open companies up to scrutiny from their shareholders and so, potentially increases the risk of claims. 

Although not regularly tested, the provisions of sections 90 and 90A of the Financial Services & Markets Act 2000 provide a route by which shareholders of listed companies can seek compensation for losses suffered as a result of untrue, misleading or incomplete statements in listing particulars or prospectuses. For section 90A, this also includes other “published information” produced by a company, such as annual reports and accounts. While these claims are not without their challenges, the potential for their pursuit remains.

Conclusion

Although the risks associated with greenwashing cannot be eliminated in their entirety, companies and financial services firms should ensure they have strong governance and controls in place to mitigate them. Crucially, this will include controls around the creation of publicly available materials.  It will be vital for companies, directors and regulated individuals to satisfy themselves of the accuracy and completeness of statements made in those documents.