External risk, greenwashing, and how to manage it

Nursing deep bruises from the seemingly endless bombardment of external curveballs which have battered businesses in recent years, most organisations will have given up some time ago in planning for any return to normality.

Indeed, rather than hankering for a more familiar, stable and predictable political and economic outlook, in the age of ‘permacrisis’, savvy organisations have instead adapted to view external risk as a constant. Rather than simply focussing on how to respond to present crises, smart companies are looking to the horizon and assessing where the next risks (and indeed, opportunities) may spring from.

One crisis which is now firmly lodged in the minds of business as immediate, pressing, and here to stay though, is the climate emergency. Despite a lull in media attention since its peak around COP-26 last November, businesses know that action needs to be taken and, with few exceptions, are now pedalling fast to deliver.

However, the sheer scale of the climate emergency and the level of response required from organisations to meaningfully play their part in addressing it, makes the task both daunting and fraught with risk of its own.

With new mandatory climate reporting requirements introduced earlier this year for certain large organisations, and more in the post which will impact a much wider portion of the business world, companies must ready themselves with urgency.

Layered upon this compliance risk is that of perception and reputation. Customers are rightly placing high expectations on the business world to step-up and lead on the drive to Net Zero. In turn, businesses are keen to communicate the action they are taking (which in many regards is actually outpacing the work of government) and evidence their commitment to the ESG agenda.

Here internal organisational structures, and questions of where the ‘ownership’ of external risks lie, become critical.

While once it may have been adequate to compartmentalise the E (environmental) and S (social) components of ESG within a sub-team of an organisation’s communications or corporate affairs division – often referred to as Corporate Sustainabilty or before that Corporate Social Responsibility – the urgency of the sustainability agenda within businesses now goes far beyond one of ensuring brand defence or seeking reputational advantage.

Indeed, the impact and immediacy of ESG has spread with such pace in recent years and months that an ‘all organisation’ approach is now not only desirable, but essential.

Be it an incursion into the traditional domain of the COO through the need to audit supply chains in order to measure Scope 3 emissions, or TCFD reporting requirements invading CFO fiefdoms, most if not all of the organisation will have a material role to play as businesses step-up to the Herculean climate challenge.

In part a legacy from where ESG was first housed in its nascent state back in the early-to-mid 2000’s, corporate communications teams will still, in many cases, be the ‘home’ of environmental and social matters in large organisations. However, the role of the GC in this space is coming into ever-sharper focus, reflected in an increasing number of chief legal officers who are either overseeing or located closely alongside corporate and public affairs functions in organisational structures.

Greenwashing is a case in point as to why this close alignment with corporate communications and policy colleagues makes sense.

Rewind the clock just a few short years and sustainability reporting was, to all intents and purposes, a communications and marketing exercise, and a largely discretionary one at that.

Beyond limited environmental impact data (which was generally a niche interest and therefore under-read interest before the climate crisis took hold of the public consciousness), companies would be largely free to cherry-pick the initiatives they focussed on. Unsurprisingly these generally were designed to resonate with positive media, political and community agendas and oftentimes were built, bought or borrowed to offset or ‘answer’ more reputationally-challenging impacts of what the organisation did operationally.

This ‘communicating-out’ approach to sustainability still pervades in many quarters, but now as we enter the jaws of the climate crisis, it is no longer just insufficient, but also awash with peril.

As the consumer world has awoken to the climate crisis, such has been the subsequent volume of sustainability-related corporate marketing that by the time of COP-26 last November, environmental messaging had become less of a differentiator and more a hygiene factor for big business.

This prevalence of sustainability-focused marketing, coupled with the advent of mandatory reporting, exposes organisations to accusations of ‘greenwashing’ if they are judged, or perceived, to be over-reaching in their claims about the impact or depth of their climate action.

Greenwashing allegations can cause great harm to an organisation. While stemming from a global crisis, the damage they do is highly targeted and local to the organisation in question. Of course this should not be cause for paralysis or a lack of ambition, but rather a trigger for businesses who are rightly scanning the horizon for the next external risk, to also invest effort internally, so as to ensure future crises do not emerge from within.

Much attention is afforded to the reputational and brand damage that greenwashing allegations can inflict on an organisation – on a sliding scale from ‘light’, isolated online criticism, to the ‘severe’ – such as the humiliation of company executives by grandstanding MPs at excoriating parliamentary committee hearings, all the way to crippling large-scale customer boycotts.

Given such reputational stakes, it is understandable why sustainability matters have traditionally been ‘owned’ by comms teams and why corporate affairs executives will continue to play a leading role in their management. However, the regulatory sphere has been playing catch-up, and we can expect to see wave after wave of mandatory ESG-related disclosure requirements hitting business over the coming months and years. Failure to comply with such regulation will cost organisations more than ‘just’ reputational damage.

Here the GC comes into their own and the role of in-house legal teams in defending their organisations against greenwashing is one which will only grow as regulatory interventions become increasingly widespread.

Greenwashing can occur through deceptive practices (knowingly making a claim which is untrue or exaggerated), through negligence (making a statement about ESG credentials without checking the facts) or by a business ‘green-wishing’ (actually thinking a product has certain environment credentials when it does not).

Examples of this include making pledges about becoming carbon neutral by a set future date. Here, investors and members of the public may be critical of progress in meeting those targets if the business continues to fund or undertake projects which do not appear to support its aim in becoming carbon neutral, such as high carbon emitting projects. Others include producing advertising which promotes a company’s green initiatives or a particular ‘green’ investment fund while excluding information about funding businesses which generate substantial emissions.

While a lack of clarity pervades in many jurisdictions over how regulators can and should tackle the issue, a wide variety of measures are currently being created at UK, European, member state and international level to counter greenwashing. Indeed, some are already in place.

For example, in the EU the planned EU Ecolabel for financial products is to be expanded to include both the creation of a label for ESG benchmarks and the establishment of minimum sustainability criteria for financial products that advertise environmental or social characteristics, while the French legislature passing a law in April that sanctions the advertising of products as ‘sustainable’ without them meeting the necessary requirements.

Meanwhile, in the UK the Financial Services and Markets Act 2000 (FSMA) offers a potential cause of action if an investor has suffered loss as a result of greenwashing – such as buying shares in a company where the green credentials of the company have been overstated, or where a financial product is marketed as ‘green’ and therefore achieved a premium (the ‘greenium’). Under section 90, investors who bought shares under an IPO or rights issue could sue a public company that publishes any untrue or misleading statement in listing particulars or the prospectus; or under section 90A publishes a misleading statement or dishonest omission relating to the securities (for example, in an annual report), or dishonestly delays in publishing. Although there are currently no ‘live’ greenwashing claims under FSMA, it is easy to see how claims could increasingly arise when companies are seeking to promote green credentials, and investors are keen to buy such products. A fund manager or other investor, faced with a drop in the value or of their investment as a result of the true ‘green’ position being revealed, could seek compensation.

This patchwork approach to tackling greenwashing – significantly differing approaches are being taken across different jurisdictions – demonstrates the need to look at regulation across multiple countries, both when an organisation plans to operate there in the future, and also as an indication of what law may be adapted and enacted in an organisation’s ‘home’ country.

If managed poorly, this agenda of mounting regulatory policy around ESG risks colliding head-on with businesses which may inadvertently over-sell their green credentials in a bid to achieve competitive advantage.

So where can a solution be found? Good governance is unquestionably key to managing the risks associated with allegations of greenwashing. Some actions to consider include providing comprehensive training to all members of staff regarding greenwashing and how it applies to your sector; issuing clear guidance to ensure that risk is managed and to create a culture of compliance; and ensuring that there is a procedure to follow prior to signing off on any environmental or ESG claims that are made about the business or its products and services. Here, there should be a robust analysis of the claim, and an understanding of whether the business holds objective up to date evidence to support it. A written record of the process which has been followed to support a particular claim is important and each claim that is made should have a written set of materials to support it.

Regular monitoring of market developments should also take place including understanding what regulators are saying and greenwashing examples across all industries should be reviewed to ascertain the ‘lessons learnt’. Positive engagement with supply chains is also key as they often hold key information and third party independent data to support claims should also be utlilised where it is verifiable. Showing that a claim has been subjected to independent scrutiny can be particularly important where a matter is complex or controversial.

Any team tasked with assessing the validity and legality of green claims would need a team of individuals who understand the full regulatory landscape, have an in-depth understanding of the product or services, know the claims being made, and understand what is required in terms of evidence and processes to ensure that any claims can be substantiated and remain up-to-date. In the UK alone, multiple regulators are engaged in this space. An exercise of ‘join the dots’ must therefore being an ongoing endeavour. For example, the Competition and Markets Authority (CMA) has published a checklist for companies to assess their compliance with greenwashing while the FCA has also published a number of principles that authorised ESG and sustainable investment funds should follow. There is a general theme for companies to ensure accuracy in terms of the information they are providing, and to ensure that any statements made are not misleading to consumers, but the guidance differs in terms of what is required. The Advertising Standards Authority is another body interested in misleading advertising claims in the greenwashing space operating under a different regulatory framework.

A multi-disciplinary approach is also essential to ensure that a company is supported from compliance to managing and mitigating risks if there is a complaint or regulatory investigation. With proposals for the CMA to be able to impose fines up to 10% of turnover for breach of the rules, putting in place robust compliance teams and processes is essential.

Here, perhaps most importantly in order to get on top and head of this agenda, GC’s should work closely with their communications, marketing and corporate affairs colleagues to provide a seamless and integrated ‘one voice’ approach to their business on ESG, and indeed all external risks. Doing so will not only minimise the number of stable doors needing to be closed after the horse has bolted, but will also help organisations to create meaningful, robust and campaignable narratives which are both of far greater interest and value than rushed-out claims or unachievable targets, and far less likely to store problems up for the future.

Andrew Henderson is director of public policy and strategic communications and Tom Nener is an intellectual property partner at Pinsent Masons.