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With the COP-27 currently taking place in Sharm-El-Sheik and the UK government committing to achieve net zero greenhouse gas emissions by 2050, companies and financial institutions are increasingly implementing - and signalling that they are implementing - practices and sustainable policies to comply with (or exceed) climate and environmentally friendly regulations.
However, overpromising and / or exaggerating green achievements may invite accusations of greenwashing and trigger disputes against companies and financial institutions regarding the soundness of their ESG credentials. In this Insight, we address the E in the ESG and the risks that companies and financial institutions may face regarding greenwashing disputes in the UK.
What is greenwashing?
Greenwashing occurs when a business or organisation exaggerates their "green" credentials or "eco-friendly" products, services or investments, whether unintentionally or as a deliberate marketing strategy.
What is the UK greenwashing legislative framework?
Currently, there is no specific anti-greenwashing legislation in the UK. However, there are different situations where greenwashing claims may arise.
What are the financial and business statutory obligations in the UK?
Publicly traded companies in the UK may be held accountable to their shareholders for misleading statements in their published information under s90 and Schedule 10A of the Financial Services and Markets Act 2000. Although this avenue has not yet resulted in a claim being brought to trial for greenwashing, it is possible for a UK publicly traded company which has published misleading information regarding its green credentials, causing a fall in its share price, to be held liable for compensation under it.
As a general matter, companies may claim losses caused by misleading statements or omissions in certain reports against directors personally. For example, under s463 of the Companies Act 2006, individual directors may be held accountable for publishing misleading statements in company reports, including misleading environmental statements.
Shareholders may also bring claims against directors for failure to comply with green commitments. Recently, ClientEarth brought a claim against Shell's board of directors challenging its net zero strategy based on alleged breaches of fiduciary duties.
Consumer protection
The Consumer Protection from Unfair Trading Regulations 2008 governs advertising and commercial practices in the UK and applies to any act, omission or other commercial practice by a business involved in the promotion, sale or supply of products to consumers. Beside this “traditional” consumer protection regulation, recent greenwashing cases have emerged in the context of consumer watchdogs in the UK.
On 20 September 2021, the Competition Markets Authority (‘CMA’) published its Green Claims Code, containing six principles to help businesses comply with consumer protection law. The CMA intended to determine whether businesses are compliant with the Green Claims Code (and consumer protection laws more generally) by identifying companies it considers to be deficient in this respect and asking them to make changes. If not followed, non-compliant companies could be investigated.
The UK’s competition watchdog recently launched investigations into eco-friendly statements made by Asos, Boohoo and Asda’s George brand. The CMA is concerned by the eco-friendly language used by the retailers potentially creating the impression that certain clothing collections are more environmentally sustainable than they actually are¹.
In December 2021, the UK advertising watchdog, Advertising Standards Authority ('ASA') also published guidance, intended to be consistent with the Green Claims Code, to help advertisers apply existing rules on misleading environmental claims and social responsibility. The guidance includes practical examples of claims in advertisements that may be problematic. For example, HSBC recently received a ban of poster adverts placed at bus stops in London and Birmingham. The ASA ruled that the adverts on HSBC's investments in tree planting and other environmental schemes were misleading because they failed to mention the bank's links to fossil fuels projects and deforestation².
Finally, the UK’s financial regulator is also proposing to clamp down on greenwashing. The Financial Control Authority (the ‘FCA’) is looking to introduce new rules including restrictions on how investment managers use terms such as ESG, green and sustainable. Rules set out by the FCA include using a set of three fund labels to distinguish types of “green” investing and imposing a higher burden on firms to back up marketing with evidence.
What companies should do to mitigate the risk of greenwashing disputes?
Companies and financial institutions should take steps to avoid the risks of potential greenwashing claims.
A valuable tool for measuring ESG impact is the framework provided by the United Nations Sustainable Development Goals. In the UK, the government has committed to imposing a “green taxonomy” on companies by the end of 2023. Similar to the EU green taxonomy, this will set out the criteria that activities will need to meet to be considered environmentally friendly³.
If you would like to discuss what the consequences of greenwashing or alleged greenwashing may mean for your business, you may get in touch with Hussein Haeri and Camilla Gambarini.
