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Greenwashing Litigation is Increasing
Businesses Should Be Advised On How To Defeat Them
By Gabriel Berg And Waleed Abbasi
Newspapers often expose famous actors who publicly profess to be ardent climate change activists committed to reducing their carbon footprint while traipsing across the world aboard private jets. The World Economic Forum, for example, pledges to limit “global warming to 1.5 degrees Celsius to avoid catastrophe,” while the private plane tarmac at the annual conference in Davos, Switzerland, resembles the FDR Drive at rush hour.1 Yet, the headlines criticizing actors or businesspeople for flying privately to Davos are flash-in-the-pan stories. The reason these famous actors retain their images in the face of these articles is because they are beloved or despised no matter what they do.
Business leaders tend to emerge mostly unscathed, too, but for very different reasons. For businesses, an opportunity to increase market share across virtually all industries by promoting socially responsible business policies and practices has become an unstoppable force, invading boardrooms across the world. Though too often politicized, industries such as oil and gas, media, farming, airlines, cosmetics, apparel, and investment firms have received the message — and many businesses are delivering.
Promoting environmental, social, and governance (“ESG”) investment and business practices has led businesses to publicly declare their products and services to be “eco-friendly,” “sustainable,” and “carbon-neutral,” among other socially conscious descriptors. According to Morningstar’s “proxy database,” 43 anti-ESG proposals considered by businesses in 2022 received only 7% shareholder support, compared with 30% support for all other shareholder proposals.2 Pressured by a new generation of consumers, many businesses are finding that being a good corporate citizen has become much easier — and empirical evidence shows bottom lines have been rewarded for it.
In instances where the bottom line clashes with ESG initiatives, directors, officers, and management must take caution not to fall into the trap of “greenwashing,” the practice of conveying false, misleading, incomplete, or unsubstantiated information to consumers about a business’s environmental credentials. Or, more practically, saying one thing and doing the opposite. And companies lured by the temptation find that greenwashing appears to work. According to U.K. consulting firm Behavioural Insights Team, 57% of consumers in a recent study “believed that greenwashed claims were a reliable source of information about a company’s eco-practices.”3 Further, the Morningstar proxy report asserts that the most successful anti-ESG shareholder proposals, which often pass, involve lobbying practices.4 These proposals support lobbying efforts to defeat specific “eco-friendly,” “sustainable,” and “carbon-neutral” legislation, in direct contrast to many companies’ affirmative, public statements to the contrary.
Consequently, a cottage industry of greenwashing litigation has been spawned. Typically, greenwashing claims include false advertising, deceptive trade practices, and fraud, and many of the greenwashing cases have been filed as class action lawsuits, targeting the most general of environmental claims. Shareholders, trustees, or others with beneficial interests in companies should think hard about whether their chosen ESG-focused investment lives up to the rhetoric. Likewise, directors, officers, and management overseeing ESG publicity campaigns should take care to ensure those words are not hollow.
Greenwashing cases, however, are in their infancy, and proving these claims is extremely difficult. By their nature, plaintiffs have the difficulty of discovering proof that a business is greenwashing. That burden has led many plaintiffs to rely on general studies or media reports — fodder for withering cross-examination. This evidentiary difficulty compounds the problem of defining the specific greenwashing claims on the merits. The New Climate Institute studied the plans of 25 multinational companies and found in its February 2022 “Corporate Climate Responsibility Monitor,” that it is “more difficult than ever to distinguish between real climate leadership and unsubstantiated greenwashing.”5
Missing or inconsistent regulatory standards make discerning greenwashing from model corporate behavior hard to discern. How are “sustainability,” “low emissions,” and “carbon neutrality” defined and measured? Neither the Federal Trade Commission (“FTC”) nor the Securities Exchange Commission (“SEC”) has passed or amended any regulations with the requisite specificity to create up-to-date standards and norms. Though, to be fair, the regulations are inevitable. In March of this year, the SEC proposed sweeping new rules on climate disclosures and have since conducted some “ESG quality reviews” of banks’ and investment firms’ marketing materials. This year, the FTC also is due to update its 2012 “Green Guides,” applicable to publicly promoting “the environmental attributes of a product.”6
In short, more ESG claims regulation is almost certain, though long overdue and sputtering. The SEC’s proposed new climate disclosures, for example, were expected to pass earlier this year, but they are facing critical comments from some business sectors.7 On August 5, 2022, the FTC announced it “intends to” seek comments on the updates to the Green Guides, suggesting its update is already tardy.
In the interim, law firms run leagues ahead of the regulators. Sophisticated defenses and risk mitigation strategies have been developed to counter greenwashing litigation and accusations. Even so, and critically, corporate clients should be advised only to make environmental responsibility claims that are specific — and supportable by scientifically reliable data. Proving the scientific veracity of a public assertion before anyone can credibly accuse a business of greenwashing can increase market share and blunt any greenwashing lawsuit. Armed with industry-specific methods to track and measure ESG quantitative data, even now, many businesses voluntarily publicize the data on their websites and exceed even the SEC-proposed rules. This information often is compared with historical statistics and may include forward-looking targets. The data systematically should be updated to be current.
Rewards for ESG initiatives are too important to be jeopardized by making hyperbolic or unsupportable public statements. Businesses should seek counsel before stating their environmentally friendly credentials, because the comprehensive data is available to guide the statement prior to release. Trustees and other active shareholders concerned about ESG factors should consult with legal professionals to determine if litigation is warranted if a particular company is not living up to expectations.
5 https://newclimate.org/sites/default/files/2022/02/CorporateClimateResponsibilityMonitor2022.pdf at 4
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