India just became the one of the latest jurisdictions to propose legislation outlawing the practice of greenwashing, or the act of engaging in false or misleading advertising of the environmental merits of certain products or services. With the proposal, it joins the European Union (EU), the United States (US), UK and Australia – along with a growing chorus of individual US states and EU member states, including Belgium, California, New York, Washington and New Hampshire – in developing regulatory standards to keep companies from over-inflating their environmentally friendly credentials.
Prosecutors and class action attorneys have taken note.
Green Claims Put to the Test
Already, with the ink barely dry on the EU’s Green Claims Directive and US Federal Trade Commission (FTC) still taking public comment on its latest update to the Green Guides, which govern green labeling standards, litigators have seized on large corporations’ green claims as an opportunity to make an example – and some money – when companies cannot support their “eco-friendly,” “green,” “non-toxic” or “sustainable” marketing and advertising positions. Prosecutors in New York have filed a lawsuit against a major global food producer; a consortium of environmental groups led a case against a European airline; and a class action suit against a California beverage company recently resulted in a $10 million settlement, among dozens of other examples.
These costly lawsuits are coming on top of the threat of multimillion dollar fines from regulators for companies that violate these laws. In the EU, for example, greenwashing fines can potentially attract a penalty of a minimum of 4% of the company’s total annual revenue, and in Australia, that amount swells to 30% of total revenue, or a maximum of AU$ 50 million. In the U.S., even though the SEC has recently been forced to pause its climate reporting rules, its Enforcement Task Force Focused on Climate and ESG Issues has been bringing action against firms that use fund names that are likely to mislead investors about a fund’s investments and risks. Recently, the task force announced a $19 million penalty for a major investment advisor for making false claims about an investment fund’s green credentials.
Moreover, the broad definitions these regulators use to describe a green claim are wide enough to capture all sorts of potential misrepresentations, including those made in reference to both products and services. The UK, for example, defines green claims as “claims that show how a product, service, brand or business provides a benefit or is less harmful to the environment.” Australia uses similar language, defining greenwashing as: “any claim that makes a product or service seem better or less harmful for the environment than it really is.”
This is a big issue for large corporations. According to a recent study from McKinsey and NielsenIQ, products making sustainability-related claims averaged 28% cumulative growth over the past five years, while products that made no such claims grew at a rate of 20%. In fact, today, products marketed as “sustainable” products account for nearly half of all retail sales. In a separate study, McKinsey found that 60% of consumers said they’d pay more for a product with sustainable packaging.
Together, the runaway growth of the sustainable goods marketplace, the increased consumer demand for environmentally friendly products and the tightening of regulations designed to stop false claims of sustainability has created a high-risk environment for businesses that market their goods under the eco imprimatur. The issue has become so prevalent that attorneys from the law firm Mintz recently described greenwashing as an emerging risk for large corporations, explaining in The National Law Review, that the growing number of class action lawsuits, “may have uncertain outcomes, be expensive to litigate, and can result in costly settlements for companies as well as significant reputational harm.” The law firm Cadwalader Wickersham & Taft LLP put some teeth behind this thesis by providing a detailed list of many recent greenwashing cases brought against large corporations.
Growing Importance of Quantifiable Sustainability Data
So, what should companies do? Is the brand halo that comes along with an image of sustainability worth the risk of scrutiny and potential brand damage if that image is found to be lacking credibility? And what about brands that have been falsely marketing themselves as sustainable for many years? Could they suffer losses if they suddenly dropped their veneers of environmental virtue?
The only way companies can successfully navigate this increasingly fraught environment is to build a rock-solid foundation beneath their green claims. The businesses that are going to survive the current wave of green scrutiny are going to be those that can deliver verifiable data, in many cases signed off by third-party assurance providers, to substantiate every claim they make. Many companies have already successfully defended themselves in greenwashing lawsuits, and many more have started publishing details of their sustainability data including their disclosure reporting associated materiality assessments. This information will go a long way to helping them defend their green claims in the future.
Ultimately, the only viable response to the rising risk of greenwashing litigation is to take a page from the finance and accounting departments and start treating sustainability reporting like financial reporting. Only by focusing on the quantifiable aspects of sustainability – the specific impacts of business activities on things like carbon emissions, biodiversity loss and human rights – can businesses ensure that they are living up to their own hype.
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