Greenwatch: Issue 3
05 February 2024
Ashurst's regular briefing on the evolving risk of greenwashing and how to manage it.
Welcome to the third issue of Greenwatch, where we look at the risk of greenwashing – and how companies can mitigate it.
Voluntary carbon markets have been criticised on the basis that they facilitate greenwashing by companies. A new initiative launched by the Voluntary Carbon Markets Integrity Initiative is designed to bolster confidence in these markets.
UK authorities continue to scrutinise greenwashing and misleading advertising is a particular target. In the financial services sector, new rules coming into effect during 2024 will give the Financial Conduct Authority new tools to combat greenwashing.
Greenwashing can be a type of fraud. A new failure to prevent fraud offence in the UK means UK companies must now ensure that they have reasonable procedures in place to prevent fraudulent sustainability-related claims.
What's been happening?
Global: Voluntary Carbon Markets Integrity Initiative
"Voluntary carbon markets were subject to criticism in 2023. But a new code of practice will help participants' diligence projects and mitigate the risk of greenwashing."
Eleanor Reeves, Legal
"To deliver reductions at scale there must be confidence in carbon markets. They must be trusted and recognised as valid solutions by businesses, governments and civil society." – UN Climate Change Executive Secretary, Simon Stiell
2023 was arguably a tough year for voluntary carbon markets (VCMs). Amid falling carbon prices, VCMs have been under increased scrutiny. In January, The Guardian published the results of an investigation that found some carbon offset credits are "worthless". These findings were robustly rejected by accreditation bodies. However, in November, reports surfaced of alleged human rights abuses at an offsetting project in Kenya. As 2023 drew to a close, COP 28 negotiators were unable to reach a consensus on operationalising aspects of Article 6 of the Paris Agreement, which provides the framework for international cooperation on carbon markets. A centralised mechanism for international carbon trading still appears to be some way off, and hopes are pinned on greater progress in Azerbaijan at COP29.
In the wake of these recent developments, the market has stepped up. Stakeholders on both supply and demand sides have announced they are coming together to improve the integrity of VCMs by collaborating within a joint framework – the Voluntary Carbon Markets Integrity Initiative (VCMI) Claims Code of Practice. This is aimed at synchronising the suppliers' methodologies and aligning the standards with common principles.
What does this mean for you?
Some carbon credits may seem less attractive as a result of recent reports, but these reports also highlight a pervasive issue for the VCM market: greenwashing risk. Businesses that are concerned about greenwashing risk when making statements about offsetting their carbon emissions should be putting in place robust due diligence procedures.
The joint framework should boost confidence in VCMs as a tool for meeting climate targets. They still play an important role when it comes to wider decarbonisation strategies for emissions that cannot be reduced (e.g. due to scalability constraints). Nevertheless, for businesses, their true worth will only be apparent when they are utilised at scale, thereby delivering confidence in the market's integrity.
As part of developing your due diligence procedures, the VCMI Claims Code of Practice might be a particularly helpful reference point. You can access it here.
Contributing author: Hal Donovan, Junior Associate
UK: Enforcement of green claims, and a focus on green disposal claims
"Enforcement of misleading green claims remains active in the UK, with claims in relation to green disposal of goods likely to be the next focus area."
Christopher Eberhardt, Legal
Enforcement action against misleading green claims continues apace in the UK and is led by the Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA). At least six separate enforcement actions were taken in December alone. This trend is highly likely to continue in 2024, in particular once the CMA gains its new powers to enforce consumer protection laws (see Greenwatch #1).
The ASA has continued to issue high-profile rulings, banning adverts found to include misleading green claims across a wide range of industries. In three separate rulings, it found that adverts published by three airlines, namely, Air France, Deutsche Lufthansa and Etihad, included misleading and unsubstantiated claims in relation to the airlines' environmental impact. In another ruling it found that an advert published by Equinor gave a misleading impression as to the extent of the energy company's activities in the UK involving renewable energy and carbon capture. The ASA also ruled against an advert by Charles Tyrwhitt Shirts, which it considered failed to make clear the basis of its claim to be a "carbon neutral business".
We noted in Greenwatch #1 that it is the CMA investigating green claims made in the fast-moving consumer goods (FMCG) sector. As part of this investigation, the CMA announced on 12 December 2023 that it is investigating environmental claims made by Unilever and in particular whether claims made about certain products exaggerate how "natural" or environmentally friendly that product is. The CMA will be looking to secure undertakings from Unilever to change its conduct.
What does this mean for you?
The continued ramping up of enforcement activities shows why companies must remain vigilant in ensuring that their sustainability statements are clear, accurate and substantiated. The ASA has stated that it plans to focus, in particular, on green disposal claims such as "recyclable", "biodegradable" or "compostable". The ASA recently provided guidance on making such claims and has announced that it will proactively investigate potentially problematic claims from April 2024.
UK: FCA anti-greenwashing rule
"From May 2024, all FCA regulated firms will be subject to a new anti-greenwashing rule, with further sustainability disclosure requirements and labelling rules coming into force during July and December 2024."
Anna Varga, Legal
At the end of 2023, the UK Financial Conduct Authority (FCA) published a much anticipated policy statement on its proposed framework for the UK sustainability disclosure requirements and labelling regime. These final rules do not stray far from the original proposals mooted in October 2022 and they will come into force on a phased basis during 2024. We focus on the first set of rules regarding anti-greenwashing. Further important rules about sustainability disclosure requirements and labelling rules will come into effect in July and December 2024, and should not be forgotten.
The new anti-greenwashing rule requires all FCA-regulated firms to ensure that any reference to the sustainability characteristics of a product or service is (i) consistent with the sustainability characteristics of the product or service; and (ii) clear, fair and not misleading.
The rule will apply to all regulated firms, including firms who are responsible for approving financial promotions of unauthorised firms.
The FCA also published an accompanying guidance consultation (GC23/3) on the anti-greenwashing rule, which closed at the end of January 2024. This is a must-read for relevant firms.
What does this mean for you?
Firms should plan now how they will implement these new rules before they come into force. The seven examples in the guidance consultation are intended to help firms understand the regulatory expectations and show the considerable effort that will be required to carry out a gap analysis of existing practices and the regulatory expectations.
UK: Greenwashing in investigations and failure to prevent fraud
"As customers and investors become increasingly more interested in the sustainable credentials of the companies that they buy products from or invest in, organisations should ensure that they have robust risk management frameworks in place to ensure they can support their sustainability claims."
Rachel Sexton, Risk Advisory
Greenwashing is a deceptive practice and may constitute a form of fraud. If a company asserts that a product has ecological or sustainable credentials and it does not have the substance to support those assertions, it can be accused of greenwashing. In a number of high-profile cases, companies have been fined for making false representations about the sustainability of their products or practices.
Late last year, a new failure to prevent fraud corporate criminal offence was introduced in the UK, which means that companies in scope of the law can be held liable for fraud committed by individuals or entities on their behalf. This offence was introduced in response to incidents of fraudulent financial reporting, but is also relevant to fraudulent ESG reporting. The offence will come into effect later in 2024, probably after the UK summer.
What does this mean for you?
Companies in all sectors need to ensure that they have sufficient and accurate data and information to adequately support claims of sustainability made to their customers and in their advertising and public reporting. Under the failure to prevent fraud offence, any company accused of fraud must demonstrate that it had reasonable procedures in place to prevent and detect fraud. Therefore, companies should treat greenwashing as one of their fraud risks and manage it alongside other fraud risks.
Companies should have a clear understanding of their key processes and controls in order to mitigate the fraud risks associated with greenwashing. These processes and controls should be subject to regular monitoring and testing to attest to their design and operating effectiveness. Any problems noted in the testing should be acted on to ensure the company can defend itself against a greenwashing allegation.
Read more here.
Global: ICLG greenwashing class actions
We recently contributed an article to the International Comparative Legal Guide 2024 guide to Class & Group Actions. The article discusses the prospects for class actions arising from allegations of greenwashing.
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