2022: the year of the greenwashing investigation?
Twelve months ago, most legal commentators would have looked to their crystal balls and felt on relatively safe ground when predicting 2022 as the “Year of Covid-fraud enforcement”. While, at least in the UK, that is yet to eventuate in any meaningful way, a less expected development has been the global regulatory focus on “greenwashing” (broadly speaking, where a business misleads the public or investors as to the environmental impact and/or credentials of its products, services, processes, brands or operations).
This year has seen (to name but a few):
– in May, BNY Mellon’s investment advisor division fined $1.5 million by the US Security Exchange Commission (SEC) to settle allegations that it had misstated and omitted information about Environmental, Social and Governance (ESG) investment considerations for mutual funds that it managed; and, Deutsche Bank was raided by German authorities in connection with allegations of greenwashing by its asset management arm;
– in June, Goldman Sachs Asset Management announced that the SEC was investigating particular green claims made by some of its ESG funds;
– in July, the UK Competition and Markets Authority launched an inquiry into ASOS, Boohoo and George at Asda regarding potentially misleading green claims (see our previous articles here and here); and
– in August, the Dutch Consumer Markets Authority, Decathlon and H&M agreed to settle greenwashing issues arising from clothing sustainability claims made on their websites.
In addition to regulatory action, the risk of greenwashing civil claims has also notably crystallised. For example, in March, the environmental organisation, ClientEarth, announced it was in the initial stages of bringing a shareholder/derivative action against Shell’s Board of Directors alleging, among other things, Shell’s climate plan would not in fact meet the emission target goals that it says it would.
The impressive pace of global regulatory enforcement and similar civil action gives rise to two important, but related, questions: how might companies identify, manage, and mitigate the risk of greenwashing within their businesses; and, prior to the involvement of regulators or other parties bringing claims, how might companies go about conducting their own investigation into any greenwashing concerns of which they become aware? While risk management and internal investigations will by no means be new issues for companies, particularly novel considerations are likely to arise in the context of greenwashing.
The UK greenwashing legal landscape
A plethora of regimes in the UK might touch on the issue of greenwashing; there is no single legislation, regulation, code of practice, guidance, or regulator to which or whom businesses in the UK can look to obtain a complete understanding of the nature of their obligations in this area. Some of the regimes include:
– prohibitions and offences under the Consumer Protection from Unfair Trading Regulations 2008 and the Business Protection from Misleading Marketing Regulations 2008 with respect to misleading or unfair commercial practices, and related guidance under the Green Claims Code;
– offences under the Fraud Act 2006;
– potential civil liability, including by virtue of the Misrepresentation Act 1967 or common law negligent misstatement;
– director duties imposed under the Companies Act 2006 or common law fiduciary duties;
– corporate or limited liability partnership disclosure obligations such as those imposed under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022;
– obligations under the Financial Conduct Authority’s Listing Rules with respect to climate-related financial statement reporting for certain entities;
– obligations arising under certain exchange listing rules, including in relation to misleading acts or conduct, and reporting on the extent of compliance with the principles and matters outlined in the UK Corporate Governance Code;
– the proposed UK Sustainability Disclosure Requirements; and
– voluntary codes of practice, such as the UK Stewardship Code.
In addition to the above hard and soft law mechanisms, there may be informal triggers for scrutiny of a company’s environmental impact, green credentials or any related historical misconduct. This might arise, for example, in the context of acquisition or investment due diligence, particularly given the increasing interest that financiers are taking in this space.
The breadth of potential sources of ‘greenwashing-related’ obligations, some of which apply only to certain entities or in the context of certain relationships, mean that many organisations may need to conduct a mapping exercise to fully understand the nature and extent of their duties, as well as the most appropriate measures to address the risks to which the business is exposed.
A starter for identifying, managing, and mitigating greenwashing risk
Greenwashing incidents will typically arise in two scenarios: as a result of the conduct or omissions of third parties connected to a business, such as suppliers or other third-party representatives; or, through the actions of employees or directors (for example, mistakes made by those responsible for environmental or sustainability matters within the business, or those responsible for reporting on the same).
In the first scenario, efforts should be focused on understanding and risk-assessing potential suppliers/other third-party representatives prior to onboarding, and on a periodic basis thereafter. It will require proportionate, targeted and evidence-backed due diligence on the third party’s business model, products, services and operations to understand relevant aspects of their environmental impact and sustainability credentials. In areas of particularly high-risk or complexity, this may require the assessment of relevant environmental claims and evidence by suitably qualified or experienced experts.
Where greenwashing risks differ slightly from other areas of supplier due diligence is that incidents may arise as a result of the conduct or omissions of third parties far down the supply chain or that are otherwise a minor contributor to a much larger product or service.
In some instances, it may be appropriate for the primary company itself to conduct due diligence on these indirect or minor suppliers. In many circumstances, however, this is likely to be impractical and other measures may instead be considered to reduce the risk on the primary company from allegations of greenwashing due to the actions of others of which the primary company has had no involvement and/or knowledge. Such measures might include: appropriate representations and warranties given by direct suppliers as to the adequacy of their own third-party due diligence, and that they have in-turn obtained adequate representations and warranties from their own suppliers (and, where necessary, further down the supply chain).
On a risk-sensitive basis, other engagement terms may be deployed, such as: an obligation to report any greenwashing suspicions or concerns to the primary company; rights to inspect relevant documents or interview relevant individuals; imposing obligations on suppliers to remedy, pay damages, or indemnify; and/or ultimately providing for a right of termination in certain circumstances.
Moreover, supplier due diligence undertaken to guard against greenwashing will likely need to be more extensive than supplier due diligence efforts that have been implemented in connection with other compliance areas. For example, the measures deployed in connection with section 54 of the UK Modern Slavery Act 2015 are not required to be extensive (albeit more targeted due diligence measures may also be implemented in connection with the offences under sections 1 and 2 of that Act).
Measures aimed at securing the “adequate procedures defence” under section 7 of the UK Bribery Act 2010 need be targeted only to certain types of third-party relationships, unlike the Consumer Protection from Unfair Trading Regulations 2008, which provide for avenues of consumer redress notwithstanding the nature of the relationship from which the underlying greenwashing risk can be traced.
Another consideration in the greenwashing context is that liability will often arise at the point at which inaccurate and/or misleading matters are published (e.g. on the company’s website) or otherwise communicated outside the business (e.g. in the financial statements). As such, there is also a particularly unique gate-keeping function to be played in this space by individuals in those external facing teams acting as a “second-line of defence”. That may involve tasking individuals in those teams or other support functions with ensuring any “green-language” is used only sparingly, with all necessary accuracy or caveats, and only when it can be substantiated by clear evidence.
Some specific issues in greenwashing investigations
Even the most robust ESG compliance programme cannot entirely mitigate the risk of greenwashing incidents and, if they do occur, the following matters may need particular consideration. For example, the fact that greenwashing incidents typically arise from false or misleading statements or omissions that have been communicated broadly and to a geographically widespread audience, will vastly increase the scope of potential jurisdictions within which legal liability and related obligations (such as regulatory reporting) may need to be considered.
Similarly, given the relevant underlying conduct or omission may have originated from suppliers or other third parties far down a company’s supply chain, investigations may need to be conducted in other jurisdictions, which would in turn require consideration of local laws on ancillary matters such as blocking statutes, legal professional privilege, data protection, and in relation to the interviewing of witnesses.
In terms of more practical considerations, on the ground investigation may very well be necessary to identify and assess the accuracy or otherwise of particular green claims, and experts may need to be engaged at an early stage to assess complex, nuanced or scientific factual issues.
The extent of overlapping relevant legal regimes (and therefore regulators), in combination with the potential for multiple jurisdictions to be engaged in greenwashing incidents, would require a sophisticated framework for domestic cross-agency and international enforcement co-operation, which is not yet readily apparent in the nascent greenwashing legal landscape.
Contrast this, for example, with the (now) generally well-established domestic and international regulatory and enforcement co-operation in the context of bribery and corruption that increasingly sees multi-jurisdictional investigations, joint taskforces, and mechanisms through which recovered funds may be repatriated to victims wherever they may be located. This will necessarily need to be factored into any strategic decisions in the context of greenwashing internal investigations, including whether to self-report any actual or suspected misconduct to the authorities and, if so, to whom.
A key lesson arising from the recent string of global greenwashing enforcement and civil claims is that organisations have been quick to embrace the commercial opportunities offered by increasingly green-conscious consumers and investors, but many of those organisations may be unprepared for identifying, managing and mitigating their greenwashing risks. While there are clear parallels with other compliance and due diligence regimes, the nature of greenwashing means that many existing programmes will be inadequate and will need careful and potentially extensive recalibration.