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November 16, 2022

‘We are at the bottom of the wave’: greenwashing litigation just gearing up

As regulators worldwide sharpen their focus on greenwashing, companies and financial services should brace for sustainability claims to be contested in court, litigation experts warn.

Increasing regulatory scrutiny, non-governmental organisations engaging in litigation, and heightened concerns over consumer protection are all casting doubt on the validity of many sustainability claims.

The US Securities and Exchange Commission’s fine against BNY Mellon for false ESG statements; environmental campaigners winning a court case against the UK government’s net zero strategy; and consumer class actions against retailers advertising green products are just some of the greenwashing disputes to have grabbed headlines in recent months. 

While research points to consumers’ growing interest in purchasing sustainable products – even at a premium – concerns persist that some companies have been exaggerating how sustainable these products actually are, says Paul Gair, partner in the banking and financial services litigation team at UK law firm TLT. This has led to accusations of greenwashing in the public sphere, and subsequently picked up by regulators and challenged in court rooms.

“I firmly believe at the moment we are at the bottom of the wave when it comes to greenwashing litigation,” says Felicity Ewing, partner in the UK litigation and arbitration practice at law firm Dentons. “It is hard to think of another area where the interests of so many converge, and we are just starting to see the spectrum of claims emerge.” 

Regulation: a cry for help

Thus far, the EU has led the way, with the aim of introducing legislation to standardise sustainable finance reporting and combat greenwashing. The Sustainable Finance Disclosure Regulation alongside the EU taxonomy and the Corporate Sustainability Reporting Directive require companies to substantiate and improve their ESG track records in order to better align their corporate practices with the overall climate goal of reducing carbon emissions.

The SEC’s proposed climate disclosure rules and the UK Financial Conduct Authority’s recent consultation paper on anti-greenwashing rules are going in the same direction. The introduction of rules setting out the regulatory expectations for ESG claims in products and services will benefit both firms and their customers by providing clarity on the behaviour and standards needed, says Ewing.

Currently, firms face significant risks due to the potential for different interpretations over the terms used in promotional materials and their inconsistent use, says Gair. He adds that standardised labelling should help with the presentation of products, and their classification as green or sustainable.

However, Ewing warns that when it comes to litigation, the same rules will make it easier to identify failings: “Given the documentation that firms will need to produce in order to demonstrate compliance, this will also provide a body of evidence to highlight non-compliance.”

Proving loss in litigation

Though litigation is expected to rise significantly while new regulations are put in place, the nature of lawsuits is likely to differ depending on claimants’ interests.

Andrew Denny, a partner in Allen & Overy’s litigation department in London, says it’s unclear if potential claimants might be reluctant to go to court since it might be difficult to prove loss. “Will the fact that a product was not as green as it was made out to be really cause a drop in its value, and therefore loss to the investor?” he says.

Ewing at Dentons agrees that under English law, in most circumstances, a claimant must be able to show financial loss in order to have a valid claim – therefore “if an investment has delivered a positive return, even if its ESG credentials have been missold, it may be difficult to bring a claim”.

Denny says that even where there has been loss to consumers, their individual loss is likely to be relatively small and the lack of an ‘opt out’ class action regime in the UK for such claims might therefore make them uneconomical. Securing the participation of as many potential claimants as possible would maximise the value of the action as a whole.

Under an opt-in system, every claimant has to take steps to bring a claim, whereas under an opt-out procedure a party is permitted to bring a claim on behalf of an entire class, without the express mandate or even knowledge of each member of that class. In the latter, individual members of the class still have the right to opt out if they so wish, but they have to take proactive steps to do so. Things are however beginning to change as the UK’s Competition Appeal Tribunal, a specialist tribunal, saw the introduction of an opt-out procedure in 2015.

Still, firms should be cautious about relying on the ‘financial loss’ argument. Ewing warns that the reputational costs related to greenwashing should not be underestimated, and that regulators will not allow firms to take advantage of consumers – even if they haven’t lost out financially.

Moreover, experts agree that not all claimants are engaging in litigation for financial reasons. Much current ESG-related litigation across jurisdictions has been brought by NGOs in order to force change in corporate behaviour, rather than recover losses.

Gair at TLT says: “It may be that some claimants are driven more by a desire to have their investment released from a product that is not delivering on the sustainability claims made in the promotional material, or alternatively to generate publicity to highlight failings as part of the wider agenda to combat climate change and meet the Paris Agreement targets.”

Jurisdictional differences

Though UK regulators have been lagging behind their US and EU counterparts when it comes to high-profile greenwashing interventions, Gair says there is potential in the UK for an increase in greenwashing litigation next year with its darkening economic outlook. He refers to both the FCA and the Competition and Markets Authority having signalled they will closely monitor activity and take action where appropriate.

Aside from the FCA’s recently announced proposals, in September 2021 the CMA also issued a ‘green claims code’ to provide guidance on environmental claims. Similarly, the UK Advertising Standards Authority has also been clamping down on misleading advertising claims.

When making green statements, companies should consider the whole life cycle and production process of their services and be wary of absolute claims, said Anna Williams, partner in Osborne Clarke’s UK media team, during a recent webinar. “From an advertising perspective, mission statements still need documentary support and should not be formulated as just an aim,” she added. “These need to include a clear explanation of steps to be taken, a timetable, KPIs [key performance indicators] and the provision of regular assessments to achieve their aim over time.”

When looking at different regulatory frameworks, firms must carry out careful mapping exercises to ensure in each case they meet the highest or most granular standard, says Ewing. Although there are no obvious inconsistencies between, for example, the UK and EU regimes, there are differences in focus and level of detail required, she says.  

A major difference to the European position is that the UK is still waiting for its green taxonomy to be developed following Brexit, says Gair. The FCA has said it will consider how to include disclosures related to the taxonomy in the future.

Meanwhile, Ewing highlights the emergence of anti-ESG litigation in the US. Although the SEC has been eager to impose climate disclosure rules on public companies, some state actors are also sanctioning asset managers that provide ESG funds that exclude oil and gas stocks or firearms from their portfolio.

She believes, however, this development is unlikely to be replicated in the UK or Europe, where greenwashing litigation is likely to rise. “The wave of litigation will continue to build until ESG compliance has bedded in, and grounds for litigation are harder to find. If that happens, it will be good news for us all, given it would signal wide societal change – but at the moment that scale of change is likely many years away,” she adds.

While regulators continue to consult on how best to reach international alignment on regulatory frameworks for greenwashing, companies would be wise to prepare their risk management strategy, in case their sustainability credentials are challenged.

 

A service from the Financial Times