Greenwatch: Issue 4
09 May 2024
Ashurst's regular briefing on the evolving risk of greenwashing and how to manage it.
Welcome to the fourth issue of Greenwatch, where we look at the risk of greenwashing – and how companies can mitigate it.
The increasing role of law and regulation in holding companies to account for greenwashing is illustrated in this issue of Greenwatch.
In the UK, the consumer rights regulator has obtained undertakings from three UK fashion retailers, requiring them to take action in relation to their green claims. In the Netherlands, a Dutch environmental campaigner has succeeded in establishing that green claims by one of the country's most high profile companies – KLM – were unlawful. And in Australia, the securities regulator has obtained its first greenwashing success in court against an investment company.
New regulation is likely to lead to further scrutiny of companies' environmental information and disclosure, with the long-awaited US SEC's rule on climate-related disclosures published last month and the UK FCA's finalised guidance on its anti-greenwashing rule coming into effect this month.
What's been happening?
UK: CMA turning point for enforcement action against misleading green claims
"The first example of enforcement action against misleading green claims by the CMA under consumer law reminds all businesses of the importance of ensuring that their green or sustainability claims are accurate and not misleading."
Christopher Eberhardt, Legal
The UK Competition and Markets Authority (CMA) has concluded its first investigations into alleged misleading green claims and has accepted undertakings from three fashion retailers (Boohoo, ASOS and George at Asda). These undertakings reflect and build on existing principles developed under the CMA's Green Claims Code, and the guidance and rulings published by the Advertising Standards Authority. The CMA considers them a benchmark for assessing green claims within the fashion industry and more broadly.
As well as taking action in relation to their own claims and compliance processes, the retailers are required to conduct due diligence on the information provided by their suppliers, to ensure that claims being made within the supply chain are also accurate and clear. They must ensure they have appropriate processes in place to do this.
The CMA has also warned businesses in all industries that, once its new enforcement powers enter into force later this year (see Issue 1), firms found to have made misleading claims face substantial fines.
In a key development outside the UK, the new EU Directive on empowering consumers for the green transition formally entered into force at the end of March. Once the directive has been implemented into national law by member states, the new rules will significantly enhance existing protections against misleading green claims under consumer law in the EU and will strengthen regulators' ability to bring enforcement action.
What does this mean for you?
- Regulatory enforcement against misleading green claims is ramping up and this trend will only increase.
- Review all of your environmental and sustainability claims to ensure they are not misleading.
- Ensure that you have appropriate compliance training processes and frameworks in place, so that your staff understand when green claims might be considered misleading.
- Consider whether you have sufficient assurance from your supply chain that the information they provide about their products is accurate.
EU: KLM class action in the Netherlands
"Dutch court finds environmental claims of KLM Royal Dutch Airlines to be misleading in greenwashing class action case."
Rob Heslenfeld, Risk Advisory
On 20 March 2024, the Dutch District Court of Amsterdam provided its judgment in a case against KLM Royal Dutch Airlines (KLM), brought by Fossielvrij NL, a Dutch environmental campaigner.
As part of its 'Fly Responsibly' marketing campaign, KLM claimed that consumers are, together with KLM, on their way to create a more sustainable future and that KLM's contribution to reforestation projects would reduce the environmental impact of flying. Moreover, the advertisements referred to "CO2ZERO", KLM's commitment to the Paris Agreement targets, and to sustainable aviation fuel reducing CO2 emissions by "at least 75%" compared with fossil fuels.
According to the court, the claims contained vague and generalised statements about environmental benefits and were unsupported. Moreover, the court found KLM overemphasised the positive environmental impacts of reforestation and sustainable aviation fuel. Consequently, the court ruled that the claims were unlawful and that KLM had acted in violation of Dutch consumer protection law.
As KLM had already stopped publishing the disputed claims and given the media attention the case would generate, the court did not require KLM to rectify the claims. However, any future communications by KLM about its greenhouse gas reduction ambitions must be truthful, substantiated and accurate to avoid further allegations of greenwashing.
What does this mean for you?
- As the first greenwashing judgment against an airline, this case sets a precedent for environmental messaging in the airline industry, but it is also relevant for other hard-to-abate industries (eg cement, steel, oil and gas).
- The impact of any deforestation/offsetting project must be clearly and accurately articulated to avoid potential greenwashing allegations.
- Commitments made in pursuit of net zero or the targets of the Paris Agreement which are not corroborated are open to accusations of greenwashing.
Australia: Climate litigation momentum and ASIC greenwashing proceedings
"Australian regulators have identified greenwashing as a priority area for enforcement action, and ASIC's first court-based regulatory outcome highlights the importance of companies' exercising great care in making any ESG-related public statements."
James Clarke, Legal
The Australian Securities & Investments Commission's (ASIC) first court-based regulatory outcome against Vanguard Investments has confirmed that the law on misleading or deceptive conduct applies to greenwashing where an investment fund makes false or misleading representations to investors. In this case, Vanguard claimed that a fund offered an ethically conscious investment opportunity and that securities were researched and screened against applicable ESG criteria before being included in the fund.
This decision provides guidance on the types of representations to the market that the regulator considers to be greenwashing and sets a minimum standard of conduct in terms of what the regulator expects.
We await clarification on the types of greenwashing misconduct and the range of civil penalties a court is likely to impose given the deterrence objective and any relevant mitigating factors. The Vanguard penalty hearing will be in August this year and the outcome of two other ongoing ASIC civil penalty cases (Mercer Super and Active Super) will also be relevant.
What does this mean for you?
- Ensure that (i) you have reasonable grounds for making all ESG-related representations and (ii) such representations accurately reflect your screening practices and any exclusions.
- Regularly review and monitor statements in product disclosure statements, press releases, published reports and on websites to maintain accurate information on the nature of the entity's business and the financial products and financial services it offers to investors.
- The need for accuracy and reliability of information is even more important in view of the recent exposure draft of the Treasury Laws Amendment Bill on the proposed new standards for sustainability and climate-related financial disclosures. The bill contemplates assurance requirements similar to the annual statutory financial reporting requirements under the Corporations Act.
You can read more about this here.
US: SEC rule for ESG disclosure update
"Despite facing legal challenges, the SEC rule on climate-related disclosures is coming."
Elena Lambros, Risk Advisory
Last month, the United States' Securities and Exchange Commission (SEC) adopted rules aimed at enhancing and standardising climate-related disclosures by public companies and in public offerings. However, following judicial challenges brought by numerous parties, the SEC agreed earlier this month to postpone the rule's effective date pending judicial review.
The rule applies to both domestic entities registered with the SEC and foreign private issuers and includes a phase-in period for the various types of entities and disclosure requirements related to assurance and scope 1 and 2 greenhouse gas (GHG) emissions.
In-scope entities must make disclosures in registration statements and periodic reports about climate-related risks and opportunities, material financial impacts and GHG emissions in line with Task Force on Climate-Related Financial Disclosures (TCFD) principles, and about the mitigation and adaption measures (including expenditure) taken to address the risks.
What does this mean for you?
In-scope registrants will have to report under the SEC rule and must start to take steps to collect, assess and report on the information they are required to disclose under the rule. As climate-related risks are multifaceted and impact several parts of a business, the first step is to map the types of climate risks (ie physical and transition-related) and the economic channels which transform these climate risks into financial risks (eg operational, credit, underwriting, liquidity, market).
Understanding what the SEC requires will also benefit an entity that is not directly subject to the SEC rule, because:
- regulators around the world are aligning their efforts to ensure standardisation of climate-related financial disclosure regulations; and
- any of the entity's stakeholders (eg investors, financiers, suppliers, customers) may be subject to the SEC rule and require information from that entity to comply with their obligations under the rule.
UK: Finalised guidance on anti-greenwashing rule
"Tackling greenwashing is a priority and by introducing the new anti-greenwashing rule it enables action to be taken against firms that make misleading sustainability-related claims across their products and services."
Lorraine Johnston, Legal
The Financial Conduct Authority (FCA) has published its finalised guidance on the anti-greenwashing rule. The rule applies in relation to financial products and services which FCA-authorised firms make available for clients in the UK.
You can read more here.
What does this mean for you?
- All firms and in particular marketing teams/financial promotion approvers should now incorporate the finalised guidance as part of their marketing / financial promotions processes.
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