Responding to Greenwashing Risk in 2024: Practical Considerations

Claims regarding positive environmental impacts, sustainability and carbon neutrality are widespread and are made pursuant to legal requirements, investor pressure and/or consumer demand. In 2023, the European Commission reported that 53% of such claims were misleading or vague, and 40% were unsubstantiated.

“Green claims” are increasingly scrutinised by regulatory authorities, shareholders and NGOs. Incoming regulation, increased enforcement and climate-linked litigation mean greenwashing is now a key concern for companies across all sectors.

The FCA’s “anti-greenwashing” rule came into effect on 31 May 2024, with the aim of improving integrity in the sustainable finance market. The rule aims to ensure that sustainability-related claims made by FCA-authorised firms about their products or services are fair, clear and not misleading, and that such claims are verifiable and consistent with the characteristics of the product or service.

Accompanying guidance sets out the FCA’s expectations for authorised firms, requiring them to ensure that sustainability-related communications are:

The rule will allow the FCA to challenge firms that make misleading claims and take further action if necessary, including imposing financial penalties, censure and prosecution.

The CMA enforces a general prohibition against unfair commercial practices, including misleading consumers, under the Consumer Protection from Unfair Trading Regulations 2008. The new Digital Markets, Competition and Consumer Act (DMCC) grants the CMA new direct powers to sanction companies for inaccurate and/or unsubstantiated environmental claims. The DMCC:

Although the DMCC does not specifically address greenwashing claims, its scope is sufficiently broad such that it captures corporate behaviour that would likely cause the average consumer to make a “transactional decision”.

In October 2023, the Economic Crime and Corporate Transparency Act 2023 introduced a new “failure to prevent” offence related to several specified fraud offences. Large entities can be found liable for the failure to prevent fraud by failing to disclose information, false statements made by company directors and false representations, among other things. It is conceivable that companies may find themselves accused of violating this new prohibition where false statements are ESG-related. The government is set to publish accompanying guidance in 2024, following which the new provision will come into effect.

Following protracted negotiations, the European Council (EC) gave final approval to the Corporate Sustainability Due Diligence Directive (CSDDD) in May 2024. The CSDDD requires large companies established or operating in the EU to comply with human rights legislation and identify, measure and report on the environmental impact of their supply chains. The CSDDD comes into effect in a phased approach beginning in 2027. Penalties for non-compliance include fines and censure.

Once approved by the EC, the new EU Green Claims Directive will compel companies that make green claims about their products or services to adhere to prescribed norms on how such claims are substantiated, communicated and verified. The draft Directive also prescribes strict rules to regulate the use of environmental labels.

The Green Claims Directive will work alongside a proposed directive on empowering consumers for the green transition, and proposed enhancements to the Unfair Commercial Practices Directive (UCPD) and the Consumer Rights Directive (CRD).

Incoming regulation will require EU operators to disclose a significant amount of sustainability-related information (if fully implemented). Disclosures will attract scrutiny from commercial competitors, environmental pressure groups and investigative journalists, as well as regulators. Relevant initiatives include the Corporate Sustainability Reporting Directive (CSRD), the European Sustainability Reporting Standards (ESRS) and the Deforestation-Free Regulation (EUDFR).

Notwithstanding incoming regulation, enforcement authorities have made clear that their existing powers are sufficiently broad to cover greenwashing. Recent notable enforcement includes the following.

According to the UN Environment Programme, climate-related lawsuits doubled between 2017 and 2022.

A growing class of “watchdog” NGOs are scrutinising corporate green claims and exerting pressure on perceived bad actors through civil litigation, shareholder actions and publicity campaigns aiming for maximum publicity and reputational impact, with the following examples.

In light of the above, organisations should be actively reviewing their strategies to mitigate greenwashing risk through adopting the following strategies.