Are Transition Plans at risk of greenwashing claims?

Introduction

Greenwashing has become a key area of focus for regulators, investors and consumers around the world in recent years. This has led to an uptick in regulatory enforcement action and climate litigation concerning green claims. 

Another recent development is the emergence of climate transition plans (TPs) as a way for companies to explain how they will meet the net zero targets they have set and divert their operations, assets and general business model away from a high carbon emissions trajectory to one that is aligned with the Paris Agreement 1.5 degrees target. It is anticipated that TPs will become mandatory in the UK for large public and private companies for accounting periods beginning on or after January 2025. As consumers and investors become increasingly concerned with companies' environmental impacts, their reliance on TPs and companies' wider sustainability strategies as a basis on which to invest or purchase is likely to increase. This in turn increases the risk of greenwashing claims.

This article explores the interaction of these developments and considers whether features of TPs including their long-term horizon and the difficulty of obtaining reliable data to support them increases the risks for companies of regulatory or other action for greenwashing. It also considers the strategies that companies can adopt to mitigate the risk of greenwashing claims.

What is a Transition Plan?

The UK Transition Plan Taskforce (TPT) adopts the definition of TPs in the International Sustainability Standards Board (ISSB) sustainability disclosure standard on climate-related disclosures (IFRS S2). Appendix A of IFRS S2 defines a TP as "an aspect of an entity’s overall strategy that lays out the entity’s targets, actions or resources for its transition towards a lower-carbon economy, including actions such as reducing its greenhouse gas (GHG) emissions". 

The TPT's Disclosure Framework builds on this definition and states that "a good practice transition plan clearly articulates the entity’s strategic ambition. This comprises its objectives and priorities for responding and contributing to the transition towards a low GHG-emissions, climate-resilient economy. It also sets out whether and how the entity is pursuing these objectives and priorities in a manner that captures opportunities, avoids adverse impacts for stakeholders and society, and safeguards the natural environment".

The TPT recommends that companies integrate material information about their TP into their financial reports and also prepare standalone TPs that sit alongside their financial reports and that are periodically updated. The TPT states that the standalone TP can include additional information that, while not considered material to primary users of financial reports, may be helpful for other stakeholders to more clearly understand a company's climate strategy. (For more information on the Disclosure Framework, see Transition Plan Taskforce issues Disclosure Framework and consults on sector guidance and The basics of transition planning).

While TPs are not radically different to other forms of corporate disclosure, they do have some features that may result in an increased risk of their preparers facing greenwashing claims. The first of these is the difficulty of obtaining reliable data with which to assess the climate-related risks and opportunities that the company faces and with which to develop a transition strategy. Another significant feature is the long time-horizon considered in a TP and the inherent uncertainty caused by assessing climate scenarios and planning that far into the future. 

Regulatory action for greenwashing in TPs

Where information in a TP is inaccurate or misleading, a company may face regulatory enforcement by the Competition and Markets Authority (CMA) or Trading Standards for greenwashing under the Consumer Protection from Unfair Trading Regulations 2008 (SI 2008/1277) (CPUT) and the Business Protection from Misleading Marketing Regulations 2008 (SI 2008/1276) (BPRs).

CPUT covers unfair trading practices, both before and after a contract is made, including claims made in, and information omitted from, advertising and marketing material for products that are available to consumers. Companies that publish TPs usually make them available on their website so it is arguable that they are intended to be read by consumers as key stakeholders, and the degree to which companies are seen to pursue and achieve sustainability objectives is increasingly an important driver of consumer choice.

The BPR regime covers B2B advertising that misleads traders. Regulatory action could occur under the BPR regime where TPs contain information that could mislead a commercial customer (e.g. in the context of supply chain due diligence). The CMA currently has a number of active consumer protection investigations into potentially misleading green claims. However, the enforcement of consumer protection law in the UK is expected to ramp up significantly under the forthcoming Digital Markets, Competition and Consumers Act. The Act, which is expected to enter into force in 2024, will make significant changes to the enforcement of consumer protection in the UK (including CPUT and the BPRs). In particular, it will increase the CMA's consumer enforcement powers by enabling it to take action directly (without going to court), to fine businesses breaching consumer protection law (with fines of up to 10% of a business' global turnover) and to award compensation to consumers. As a result, when preparing TPs, companies should be mindful of these increased powers, which are likely to result in the CMA becoming more active in enforcing breaches of consumer protection law and large fines being imposed for infringements.

The CMA's Green Claims Code is designed to help businesses comply with their obligations under consumer protection law when making environmental claims. The Code states that environmental claims "can appear in advertisements, marketing material, on packaging or in other information provided to consumers.... Misleading environmental claims occur where a business makes claims about its products, services, processes, brands or its operations as a whole, or omits or hides information, to give the impression they are less harmful or more beneficial to the environment than they really are" [our emphasis]. This indicates that the CMA takes a broad view of what amounts to a green claim and that the information in TPs could amount to a green claim and, therefore, be subject to enforcement action under the CPUT or BPR regimes. While it is not legally binding, following the Code can help companies to defend enforcement action by the CMA under the CPUT or BPRs. In drafting TPs, companies should be mindful of the principles in the CMA's Green Claims Code as failing to do so could risk enforcement action. 

When publicising TPs including on their own websites or through social media, companies should be mindful of the provisions in the Advertising Standards Authority (ASA) Code of Non-Broadcast Advertising, Sales Promotion and Direct Marketing (CAP Code) and Code of Broadcast Advertising (BCAP Code). The ASA's Advertising Guidance on misleading environmental claims and social responsibility published in June 2023 recommends that claims about being carbon neutral or net zero should not be unqualified and claims based on future goals to reach net zero or achieve carbon neutrality should be based on a verifiable strategy to deliver them. While the ASA cannot impose legally binding penalties on companies that it finds have breached the Codes, it publicises its findings, which has consequences for reputation and brand and can ultimately lead to enforcement action by the CMA or Trading Standards under the CPUT regime.

UK regulators are increasingly focusing on greenwashing with a number of high-profile actions being brought against large corporates. Some of these include the CMA's ongoing investigation into ASOS, Boohoo and ASDA, and in the green heating and insulation sector, as well as the ASA's banning of advertisements from three energy companies earlier this year on the basis of misleading consumers. As the UK government takes steps to make publication of TPs mandatory, it is likely that the content of those TPs will be carefully scrutinised by regulators in the context of their drive to increase transparency of green claims.

How might greenwashing actions by investors arise?

There are several ways in which companies publishing TPs may be exposed to greenwashing claims by investors. One such route is section 90 of the Financial Services and Markets Act 2000 (FSMA), which provides a claim for compensation where an investor has suffered loss on its shares as a result of any untrue or misleading statement in, or omission of necessary information from, the prospectus (or listing particulars) relating to those shares. The existing prospectus regime imposes a negligence standard of liability. If information from a TP is included as part of a prospectus, and an investor suffers a loss on that investment as a result of, for example, the inaccuracy of that information, that investor may be entitled to bring a claim against the company under section 90 FSMA for what could be considered greenwashing. 

As TPs are likely to be published as part of, or alongside, financial reports, another route to a greenwashing claim by an investor lies in section 90A FSMA. This section allows any person to bring a claim where they have suffered loss as a result of a company's misleading statement or dishonest omission relating to that company's shares (or as a result of a dishonest delay in publishing such information). Liability will only arise under section 90A if a person discharging managerial responsibilities (PDMR) within the issuer knew the statement to be untrue or misleading or was reckless as to that fact. As regards the omission of information, liability arises where the PDMR knew the omission to be a dishonest concealment of a material fact. This establishes a "dishonest" or "recklessness" standard of liability. Although each case will turn on its facts, claimants will need to prove loss and, crucially, reliance on a disclosure or omission. The most credible way to prove loss is by identifying a drop in share price. To date, few claims have succeeded under this section in the English courts.

The Grantham Research Institute on Climate Change and Environment noted in their May 2023 report on the Impacts of climate litigation on firm value, that negative press relating to sustainability can have a significant impact on share prices. Regulatory action for greenwashing and investors' claims for the same may interact. For example, where a regulator publicly sanctions a company for greenwashing, causing a drop in share price this may enable investors to bring claims under either section 90 or section 90A of FSMA. ESG-related investor claims arising from financial crime issues have already been brought against companies on the basis of these FSMA provisions.

Directors can take comfort that section 463 provides shelter against a direct course of action against them individually for what is written in directors' reports, the strategic report, the directors' remuneration report or any separate corporate governance statement. However, companies are not barred from making claims where the company suffers loss as a result of untrue or misleading statements or omissions that the director knew or was reckless as to whether the statement was untrue or misleading, or knew the omission was a dishonest concealment of a material fact.

Directors should also be mindful of potential claims against them arising out of TPs. In 2023 the environmental law organisation, ClientEarth, brought proceedings against the directors of Shell plc.  ClientEarth alleged that the directors had breached their statutory directors' duties in relation to Shell's climate change risk management strategy, as described in corporate documentation published by the company (see Climate change and directors duties ClientEarth v the directors of Shell plc and Ashurst Governance & Compliance Update Issue 41). Although the claim failed, it is likely that there will be further climate litigation against directors. What is said, or not said, by the company in TPs may be front and centre in such claims.

Help for businesses?

The FCA has recognised that many companies are apprehensive about publishing detailed sustainability-related information owing to the difficulty of ensuring the accuracy of long-term information (such as the impact of climate-related risks on a business) and the risk of legal action by investors that suffer loss. 

The near-final version of the Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023, which establishes a new regulatory framework for public offers and admissions to trading on UK public markets, creates a concept of “protected forward-looking statements” (PFLS) for prospectuses for which the standard for liability would be increased from negligence to recklessness or dishonesty. The revised liability standard is designed to encourage companies to include forward-looking statements in their prospectuses. In its Engagement Paper, the FCA sets out its initial considerations in relation to the rules it will make to specify the types of information that can be considered PFLS, any conditions as to how such information is prepared and its presentation within a prospectus. If these proposals are implemented, companies would be given some protection when making forward-looking statements in a prospectus relating to descriptions of future sustainability-related risks and opportunities, projections of the financial effects of such risks and opportunities, the analysis of the resilience of the company's strategy to different climate scenarios, and planned actions to mitigate those risks and capitalise on opportunities.

What action can companies take when preparing a TP to avoid greenwashing? 

There are several actions that companies can take to ensure that the disclosures in their TPs do not trigger greenwashing claims.

A key issue is to ensure that all claims in a TP are substantiated by accurate and verifiable data. For companies with substantial or complex supply chains, this will present a challenge when assessing scope 3 emissions. Companies should also be transparent about the data they have and where there are gaps in their data. The TPT Disclosure Framework recommends that companies disclose what controls and procedures they use to ensure the reliability of the information in the TP. The TPT also suggest disclosing which aspects of the TP are subject to external assurance or verification and the nature of that oversight.

The TP should be very clear about the action the company is taking today to reduce their GHG emissions and what they are investigating as new technology that may provide future GHG mitigation solutions. The TP should also be clear on assumptions that are made for example, where assumptions are made about government action or policies that the company is relying on.

Company directors should consider the latest scientific developments and thinking when developing their TPs in the same way they would take account of such developments when making commercial decisions so that they comply with their Companies Act directors' duties. This means a TP should be periodically reviewed and updated (where needed) to ensure that it remains accurate. Failure to regularly consider relevant developments in climate science and update a TP accordingly could lead to liability under section 90A of FSMA for a dishonest delay in publishing information relating to that company's shares. The TPT Disclosure Framework recommends that companies update their standalone TPs periodically, either when there are significant changes to the plan or, at the latest, every three years.

Another key issue is consistency. TPs should clearly explain the reporting standards and methodologies used to assess the climate-related impacts and climate-related risks and opportunities that the company is subject to. The TP should also explain the metrics and methodology used to set GHG targets, the processes for reviewing those targets and the metrics for monitoring progress towards them. The TP should also not overstate or exaggerate achievements or progress on reducing GHGs.

Companies should also ensure that directors are familiar with the TPT's Disclosure Framework and understand their duties¹ in relation to preparation of TPs and their potential liability where disclosures in the TP are false or misleading.

Conclusion

The issues to consider when preparing a TP are not radically different to those that are relevant when drafting other forms of corporate disclosure. However, there are some factors which are unique to TPs that add to the challenges of their preparation. 

TPs consider long time-horizons. As a result, this introduces uncertainty into the targets, strategy and measures to achieve the targets. Even with good intentions, businesses may get things wrong. The best way to mitigate this risk is to keep TPs under regular review and update or correct elements of the TP as needed.

However, by acknowledging these challenges, being clear about their strategy and keeping them under review, businesses should be able to produce TPs that are informative, substantiated and avoid greenwashing claims.

_____________

1. The TPT published an assessment in October 2023 of whether the Disclosure Framework modifies the underlying statutory director’s duty or prioritises certain matters that a director is to have regard to (such as the environment) in a manner that does not fit with the overriding statutory duty (see TPT-Legal-considerations-for-transition-plan-preparers.pdf (transitiontaskforce.net)).