Greenwashing: What risk managers need to know

As demand for sustainable products and investments increase, and companies publicly announce their net-zero commitments, the risk of ‘greenwashing’– conveying a false impression or providing misleading information about the environmental credentials of a product, service, fund, a disclosure or even a company or entity itself– intensifies.

The risks associated with greenwashing are significant, and it is all too easy for companies to inadvertently be on the receiving end of such allegations. For example, you should take considerable care when using phrases such as ‘circular,’ ‘sustainable’, ‘clean’, ‘green’, ‘100 per cent recyclable’, ‘net zero’, making comparative claims or even using ‘green’ images, as any such claim runs the risk of exposing the business to greenwashing allegations.

Any investigation into alleged greenwashing is both costly and time consuming for the business. Aside from the need to co-operate with inspections, attend interviews and deal with the disruption and revenue loss following the potential seizure of, for example, documentation and records, the business could also face fines, civil action, or be tasked with setting up a consumer redress scheme.

While penalties vary by jurisdiction, in the U.K., reforms announced this year will give new powers to the Competition and Markets Authority (CMA) to tackle businesses that breach consumer rights law, enabling the CMA to issue fines of up to 10% of global turnover in light of greenwashing, and other consumer protection breaches. This further increases the powers to impose sanctions already held by the CMA, which at present include criminal prosecution, including custodial sentences for company officers.

(Re)insurers are increasingly scrutinizing not only the potential exposures to greenwashing allegations at policyholder level, but also the extent to which they too could be on the receiving end of such allegations in respect of their own net-zero commitments.

This insight looks at the approach to greenwashing in different jurisdictions, the sectors most under scrutiny, and the steps you can take to protect your business.

How are greenwashing allegations treated in different jurisdictions?

Greenwashing is a global concern, with different jurisdictions adopting similar yet not identical approaches to combatting the challenge. Whilst the EU’s Green Claims Directive introduces new criteria to stop companies from making misleading claims about the environmental merits of products and services, France has set its own criminal and civil sanctions to curb greenwashing.

France has also banned fossil fuel advertising (subject to certain caveats) and other sectors are prohibited from using certain phrases, including ‘biodegradable’ and ‘environmentally friendly.’ In addition, claiming a product or service is ‘carbon neutral’ or similar requires the company to make public specified information to back up the claim or face a fine.

In the U.K., as well as consumer protection regulations and the CMA’s existing guidance on green claims, the Advertising Standards Authority (ASA) has issued guidance on misleading environmental claims and social responsibility, while the Financial Conduct Authority (FCA) has proposed a package of measures including investment product sustainability labels, and restrictions on how institutions can use terms, including ‘ESG’, ‘green’ and ‘sustainable.’

What sectors are at risk of greenwashing allegations?

A wide range of sectors can be impacted by alleged greenwashing allegations. This year alone we have seen:

• A class action focused on the labelling and advertising of single serving coffee pods as ‘recyclable’
• An ASA clampdown on alleged greenwashing in advertisements for a range of businesses
• An airline sued over an advertising campaign
• Asset managers facing investigation for making misleading claims on ESG climate funds.

Regulators have been transparent on those sectors most under focus. In early 2023, the CMA announced it would look at the accuracy of green claims in the fast-moving consumer goods sector (FMCG), while the fashion industry has also been under scrutiny in a number of jurisdictions, with the CMA opening investigations into three fashion brands in early 2023.

The role of net zero in greenwashing

A future area of focus is likely to be on corporate transition plans, not only to reduce the risk of greenwashing, but also to ensure the transparency and credibility of the net-zero commitments made by organizations across the globe.

The 2022 Integrity Matters: Net Zero Commitments by Businesses, Financing Institutions, Cities and Regions report was published by the UN High Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities. It sets out recommendations on setting stronger, clearer and more targeted net-zero pledges.

The report is consistent with action taking place at local jurisdictional level, as a number of countries work to ensure credible transition plans with both long and short-term emissions reduction targets, board-level oversight, robust scenario analysis and financial planning for a low-carbon business, and science-based targets to meet the required decarbonisation goals. The U.K.’s Transition Plan Taskforce, for example, is looking to develop a ‘gold standard for transition plans’ with ‘rigorous and credible short-term actions.’

2023 has seen an increased focus on the transition plans of (re)insurers after the United Nations-convened Net Zero Insurance Alliance (NZIA) published its first target-setting protocol. Both the protocol, and the PCAF methodology referenced in the protocol, are open-source, such that both members and other (re)insurers can take advantage of the guidance in the documentation on setting transition plans for both insurance and reinsurance underwriting portfolios in line with a net-zero transition pathway.

As with any company, but particularly so with underwriting portfolios, there are challenges around assessing and calculating Scope 3 emissions (those not produced by the company itself, and not the result of activities from assets it owns or controls, but by those it is indirectly responsible for, up and down its value chain). Risk managers will increasingly see questions at renewal on corporate transition plans, and emissions. Insurers will require this information to understand progress against their own net zero commitments, whilst also being mindful of the ‘just’ transition, namely ensuring the transition is guided by principles of sustainability and climate justice.

How can you protect your organization from greenwashing claims?

Fundamentally, greenwashing arises when statements made are at odds with what organizations can prove. It is therefore vital for your organization to ensure any statement it makes which puts forward an environmental stance – whether a commitment, promise or advertisement – is based on sound, credible facts, and has been subject to rigorous vetting and governance.

Amidst the increase in legislation and regulation on ‘green claims’, it is crucial you understand the requirements of the relevant jurisdiction. When advertising products, this may require undertaking a product life cycle analysis, or full due diligence across the product supply chain.

These efforts, when undertaken in line with the array of codes, frameworks, scientific measures, taxonomies and classification regimes, should not only protect your business against greenwashing claims, but also deliver the wider advantages which accompany a drive towards a more sustainable business.

For expert support in protecting your business from greenwashing claims and managing your broader ESG risks, get in touch.