ESG disclosure – a greenwashing risk?

Public perception of greenwashing is growing and there seems to be growing distrust or scepticism of green claims. Litigation is already taking place as activists and consumer groups take on corporates who appear to be over-stating their green credentials. At the same time, EU regulations around disclosure are coming thick and fast.

A research insight earlier this year from IBM’s Institute for Business Value, The ESG Ultimatum – Profit or Perish, found that consumers are increasingly sceptical of ESG claims and consumer trust in corporate sustainability statements has plummeted. Only 20% of consumers say they trust the statements companies make about environmental sustainability, down from half just two years ago.

And there have already been examples of successful litigation against firms, such as the recent judgment against Austrian Airlines, which had advertised flights as CO2-neutral, using 100% sustainable aviation fuel, and added a surcharge of more than 50% of the ticket price as a result.

A recent survey by KPMG UK found that more than half (54%) of UK consumers would stop buying products and services from companies found to have greenwashed. It also found that almost a fifth (18%) have changed their mind about a company due to misleading green claims. A third (33%) of respondents said they were sceptical of green labels and sustainability claims.

The energy sector (58%) was seen as the most likely to engage in greenwashing, with the fashion industry closely following (57%). Transport and automotive (51%) and grocery, food and agriculture (47%) were also seen as at risk of greenwashing by a large number of consumers, said KPMG.

Richard Andrews, head of ESG at KPMG in the UK, says this is a perceived issue across all markets that needs addressing, pointing to a recent survey by Kantar showing that more than half of consumers around the world believe brands across all industries are misleading them with their sustainability claims. He says concerns about greenwashing are rapidly becoming a global concern.

Regulation is clearly having an impact on ESG disclosures. Andrews notes that in the UK, the impact of the Sustainability Disclosure Requirements (SDR), and the anti-greenwashing rules within these, is yet to be seen. “This should provide the FCA with a greater role in calling out and enforcing against misleading ESG marketing practices,” he says. “But beyond regulations, the reputational risks and the impact that will have on bottom lines as engaged customers start to vote with their feet, will also act as a deterrent for companies overstating their ESG credentials.”

Creating risk

But is there a danger of creating risk through voluntary ESG disclosures?

Andrews notes that there is a growing market for products and services linked to ESG criteria, and customers, as well as regulators, are making informed decisions about companies based on how well they are perceived to be doing. “It can be tempting to push a product’s sustainable credentials to cater to this market, but it is vital that companies and brands take a measured approach to build trust. This means they will need to put in the work to understand what greenwashing risks they are exposed to.”

He adds: “As this market continues to evolve, getting the balance right will not always be easy so firms should concentrate on what they are doing to help the transition, backed up with externally assured data and evidence. Overselling an implausible scenario of being ‘greener than green’ risks reputational damage and losing faith with their customers, derailing the progress they have already made.”

Zaneta Sedilekova, associate, Clyde & Co, says that whether ESG disclosures increase or reduce the litigation risk depends on their quality, veracity and evidentiary basis. “ESG disclosures can be a powerful tool in mitigating corporate litigation risk in both environmental and human rights litigation if they are comprehensive and honest – outlining progress but also acknowledging areas of shortfall and the need for improvement. They are also helpful if they demonstrate progress over time,” she says.

But she adds: “If, on the other hand, ESG disclosures overstate a company’s ESG credentials, exaggerate its minimal positive action and underplay or even omit its continuous negative impacts, such disclosures exponentially increase company’s litigation risk. The devil is in the detail, but doing the right thing consciously, openly, honestly with a proper account of how much more needs to be done seems to be the best way to go.”

Litigation

Litigation from consumer/activist groups around greenwashing is clearly growing. Andrews says campaigners are becoming more organised and working with legal teams to pursue claims on the grounds of deception and fraud, and brands across groceries, food and beverage, as well as airlines, are facing class action claims on greenwashing.

On the investment side, Mark Shaw, partner, Pinsent Masons, says: “The vagaries of the current EU Sustainable Finance Disclosure Regulation (SFDR) regime create legal risk because of the inherent regulatory risk – a re-classification of a fund (voluntarily or otherwise) creates a mis-selling risk. Investors may also have their own regulatory or compliance obligations, which means that breaches may be taken far more seriously than other investment breaches as they would need to be seen to be taking remedial action.”

“Since this could be an issue that investors are extremely sensitive to due to their own legal/regulatory obligations, they may be more likely to litigate in the event of a breach. We are certainly seeing interest picking up in these areas as the various re-designations show that firms haven’t got it right. There are clearly more malign examples of greenwashing that may be targets for litigation, but unless there is a clear example of breach, it’s unlikely to come to the fore unless there is a performance drawdown or other demonstrable loss. Perhaps more likely is where an investor is tied into an illiquid fund and they are looking for an earlier exit, they may rattle the sabre on ESG grounds to get their desired outcome,” says Shaw.

Regulators are also looking to clampdown in this area. “Greenwashing is in the regulatory crosshairs, and rightly so, and there remain a huge number of issues to be resolved before the EU finally has a regulatory framework that helps consumers navigate the ESG product landscape,” says Shaw.

Andrews adds that there is growing interest from regulators across multiple markets, who are taking increasingly tough action on greenwashing claims. “We have seen the SEC in the US fine US banks, and the European Securities and Markets Authority (ESMA) is looking at how it can regulate against greenwashing, while in the UK the FCA is developing its own rules to strengthen its ability to act on greenwashing,” he says.

So what can companies do to try to avoid greenwashing?

Shaw says: “Ultimately, taking a risk-averse position on categorisation and a lower commitment to disclosure is an immediate mitigator, but that may not work in all cases.”

Andrews says that understanding and defining greenwashing may seem obvious, but is a challenge all firms need to get to grips with. “As companies would approach any potential risk, the first step is to conduct a greenwashing risk assessment through a firm-wide product and client lens to understand where the greatest risks lie and where they may need mitigations, stronger controls or even remedial type action.”