As mentioned in our previous article How can compliance officers help their companies tackle ESG?, there is an increasing focus globally by companies, consumers, investors, governments and NGOs on Environmental, Social, and Governance (ESG), especially in the light of climate change and environmental concerns.
In the rush to jump on the bandwagon there is a temptation for companies to make bold public statements about their sustainable credentials and what efforts they are making to address environmental concerns. Even with good intentions, this rush to capitalise on the current marketing cachet of environmentally friendly products and services poses a real risk of companies being accused of “greenwashing”.
Greenwashing refers to the act of making false or misleading claims about the environmental benefits of a product, service, or company to gain a competitive advantage or increase consumer trust and loyalty.
Greenwashing can occur in any number of ways. For example, a company may claim to have a responsible supply chain but in fact, may be using child or forced labour in their factories. Such occurrences could have been accidentally swept under the rug because the company does not have full visibility on their supply chain due to imperfect oversight or controls. Alternatively, a company may publicly emphasise the recycled packaging used for their products while under-emphasising the non-sustainable way in which the product itself is manufactured.
Companies need to be aware of the risks associated with greenwashing. Whether intentional or unintentional, providing inaccurate or misleading data to the public may lead to fines, penalties or litigation and can result in reputational damage for the company.
Recently, we have seen more and more action being taken against firms in the financial industry. In May 2022, the German authorities raided the offices of DWS. This action by the authorities was the result of a whistleblower who came forward to voice concerns over the misleading nature of the company’s claims that their investment portfolio was invested using ESG criteria and stating that although DWS had statements in fund prospectuses about ESG, ESG factors were generally not considered1 . The investigation expanded to other jurisdictions and in July 2023 DWS announced a provision of €21 million predominantly designated for fines anticipated from the US SEC in connection with their investigation of the greenwashing issues. This new provision is in addition to the €39 million in legal costs DWS has already disclosed it has incurred in dealing with the matter.
In May 2022, the U.S. SEC charged BNY Mellon Investment Adviser, Inc.2 for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that it managed and later in November 2022 charged Goldman Sachs Asset Management, L.P.3 (GSAM) for policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as ESG investments.
Interestingly, it is not just the financial watchdogs pursuing actions against companies for greenwashing but in many cases, it is the advertising authorities that act against potential cases of greenwashing. Recent cases include Shell, Petronas and Repsol who had their advertisements banned by the UK Advertising Standards Authority4 for misleading the public on the climate and environmental benefits of the groups’ products overall. In the U.S., record fines have been paid recently by two large retailers charged by the Federal Trade Commission5 for making deceptive environmental claims.
The trend of increasing litigation was recently studied and quantified by The Grantham Research Institute on Climate Change in their ‘Global trends in climate change litigation: 2023 snapshot’ report6 which shows that in 2022, 26 litigation cases challenging the accuracy of green claims and the implementation of climate commitments were filed, compared with fewer than 10 in 2020.
Additionally, the Australian Competition and Consumer Commission (the ACCC)7 recently undertook a review of the information available online for 247 businesses. It found that more than half (57%) of the businesses reviewed had made concerning claims about their environmental or sustainability practices. The ACCC has promised further scrutiny and enforcement action where appropriate.
In the U.S., the FTC is reviewing their Guides for the Use of Environmental Marketing Claims (“Green Guides”) for the first time in over a decade and in the EU, a new proposed law on green claims8 requires companies to substantiate claims they make about environmental aspects or performance of their products and organisations using robust, science based and verifiable methods.
In Switzerland, which as elsewhere has seen a rise in the demand for sustainable financial products, the Swiss Financial Markets Authority published guidance on preventing and combating greenwashing in the fund segment9 and in December 2022 the Federal Council announced its’ position on the prevention of greenwashing and set out a timeline for defining a plan for putting its’ position into place10. In response, in October 2023, the Federal Department of Finance announced their plans to draft a proposal for implementing the Federal Council’s position on greenwashing and to make the proposal available for consultation by August 202411 .
Additionally, the updated Swiss Code of Obligations now includes an obligation to report on non-financial (Article 964a) matters such as environmental matters, CO2 goals, social issues, employee-related issues, respect for human rights and combating corruption. To prevent greenwashing, a new article (325ter) has been added to the Swiss Criminal Code which not only penalises the responsible directors within the company with fines for making false statements but also includes fines (of up to CHF 100’000) for not reporting or for failing to keep or document the reports.
As regulatory scrutiny increases, and trends point to increased non-financial disclosures being required or expected, companies need to be on high alert to the risk of greenwashing. One way to tackle the risk is to understand the underlying motivations and incentives which may lead to false or misleading claims being made, whether intentionally or not. Comparisons can be drawn between fraud typologies and greenwashing which may help companies to think about how best to avoid the risks.
Preventive measures against greenwashing allegations are akin to strategies for preventing, detecting and dealing with fraud cases – for example:
Another important factor in mitigating the risk with respect to climate related disclosure is to ensure that such disclosures are supported by data – data which is reliable, sufficient, and verifiable – a topic we will address in depth in our next article.
Embedding greenwashing as a fraud risk within your wider fraud risk assessment is the first step to ensuring your compliance management framework adequately addresses the risks. Once appropriately assessed, measures such as policies, learnings, controls and responding to noncompliance can be deployed to manage this new risk. And don’t forget, when it comes to avoiding claims of greenwashing or greenhushing, what you do not clearly disclose may be just as important as what you do disclose.
We regularly advise clients on fraud risk assessments and support clients investigating fraud allegations and would be happy to further discuss with you how greenwashing risk can be mitigated.
If you have any questions or would like to discuss this topic, please do not hesitate to reach out to one of our experts below.
1 German police raid DWS and Deutsche Bank over greenwashing allegations | Financial Times (ft.com)
2 https://www.sec.gov/news/press-release/2022-86
3 https://www.sec.gov/news/press-release/2022-209
4 https://www.asa.org.uk/codes-and-rulings/rulings.html
5 https://www.ftc.gov/news-events/news/press-releases/2022/04/ftc-uses-penalty-offense-authority-seek-largest-ever-civil-penalty-bogus-bamboo-marketing-kohls
6 https://www.lse.ac.uk/granthaminstitute/news/new-figures-show-rise-in-climate-washing-litigation-against-companies/
7 https://www.accc.gov.au/system/files/Greenwashing%20by%20businesses%20in%20Australia.pdf
8 https://environment.ec.europa.eu/topics/circular-economy/green-claims_en
9 FINMA publishes guidance on preventing and combating greenwashing | FINMA
10 https://www.admin.ch/gov/en/start/documentation/media-releases.msg-id-92279.html
11 Further efforts to prevent greenwashing (admin.ch)