UK regulators have recently been taking aim at environmental, social and governance (ESG) issues, namely ways to approach “greenwashing,” practices where false, misleading, overstated or unsubstantiated environmental material is advertised and marketed to consumers. The Competition Markets Authority (CMA), Advertising Standards Agency (ASA) and Financial Conduct Authority (FCA) are among the regulators that made efforts to tackle greenwashing in 2023, with more regulation on the horizon expected for 2024.

Businesses and regulators around the world continue to grapple with ESG issues and, in that context, how information can be fairly presented in a way that should not be regarded as “greenwashing.”

In this Lawflash we outline how UK regulators, including the CMA, ASA and FCA, have taken steps to confront greenwashing. We consider the scope of ESG and greenwashing and how UK regulators have provided clarity on the types of environmental claims that may be considered to constitute greenwashing and provide detail about the types of greenwashing investigations that have been brought by the UK regulators in 2023–2024.

ESG AND ITS PLACE TODAY

ESG matters appear on many corporate boardroom agendas. While no legal definition of the term exists presently, ESG includes environmental, social and governance and relates to non-financial factors, including environmental and social issues, as well as broader corporate governance matters that companies are becoming highly conscious of, and acting upon, to improve the sustainability of their businesses.

Many companies are taking steps to boost their “eco-friendliness” and incorporating new sustainable environmental practices into their business operations. For example, Amazon announced 39 new renewable energy projects across Europe in 2023, and its investment in solar and wind projects has seen Amazon become the world’s largest corporate purchaser of renewable energy.

Microsoft is on its own journey to become carbon negative by 2030, and recently Pandora, the world’s largest jewellery brand, announced a change to its precious metal supply chain and will now only source recycled silver and gold for its jewellery. These examples serve to illustrate the concerted efforts that some companies are taking towards combatting environmental issues and the ways in which they are communicating their environmental strategy to the market and to consumers.

WHAT DOES ESG COVER?

What constitutes an ESG-related issue is elastic, far-reaching and seemingly all-encompassing. Hot topics routinely covered in the press include, under E, the reduction in greenhouses gasses and fossil fuel emissions, resource depletion, minimising pollution, adopting sustainable business practices, and climate change.

The S includes matters concerning diversity and inclusion in the workplace, human rights issues, modern slavery concerns, wage equality, LGBTQ+ rights and mental health.

Matters under G concern how companies interact with competitors, suppliers, governments and shareholders, and whether a company has a robust governance framework, including internal policies and practices, which allows it to create value and generate profit while simultaneously fostering a culture of trust between the company and its diverse range of stakeholders.

These ESG issues are highly complex, often have multijurisdictional components and can overlap with each other. Moreover, they can trigger highly sensitive political and personal issues, and as such can attract a wide and diverse audience.

ESG stakeholders can include the government, advocacy groups, academics, industry experts, policymakers and other regulatory bodies, activist organisations, charity organisations, NGOs and, importantly, the everyday consumer of goods and services.

GREENWASHING

One topic that has generated discussion and garnered attention in the ESG sphere is “greenwashing,” which is generally understood to mean practices where false, misleading, overstated or unsubstantiated environmental material is advertised and marketed to consumers of goods and services.

Greenwashing and the Regulatory Framework in the UK

In the United Kingdom, no one regulator is chiefly responsible for the enforcement of ESG matters. Instead, the regulatory framework around ESG is fragmented and the responsibility to regulate ESG matters is shared by several agencies/regulators.

The regulator (or regulators) responsible for initiating a greenwashing-related investigation against a company or commencing enforcement action will be determined based on the underlying conduct and the breaches in question. The ASA, CMA, and FCA each have the power to investigate greenwashing, with the latter two having the ability to take enforcement action where necessary.

CMA: GREEN CLAIMS CODE

In September 2021, in a positive step towards ensuring that companies can understand how to comply with consumer protection law when making environmental claims, the CMA published a Green Claims Code (the Code), which flows from UK Consumer Protection Laws.

The Code applies to all businesses that make environmental claims, including those involved in operational supply chains (e.g., manufacturers, distributors, retailers). These claims may be made in relation to goods or services, or specific aspects of them, or broader claims relating to a brand or business as a whole, for example about its environmental friendliness or environmentally sustainable practices.

The CMA’s guidance was issued following a coordinated global review of randomly selected websites. The study found that 40% of green claims made online could be misleading consumers. The CMA’s Code guidance states that the CMA hopes the guidance “will give confidence to those businesses who are genuinely ‘green’ to provide consumers with the information they need to make informed decisions.”

The CMA defines “environmental claims” as

claims which suggest that a product, service, process, brand or business is better for the environment. They include claims that suggest or create the impression that a product or service:

• has a positive environmental impact or no impact on the environment;
• is less damaging to the environment than a previous version of the same goods or service; or
• is less damaging to the environment than competing goods or services. [1]

The six principles for the Code are that environmental claims must be

• truthful and accurate;
• clear and unambiguous;
• not omit or hide important information;
• only make fair and meaningful comparisons;
• consider the full lifecycle of the product or their services; and
• be substantiated.

Business stakeholders, particularly those in legal and compliance teams, should read this guidance carefully and ensure that their businesses are acting in accordance with the Code and communicating their green credentials lawfully. The guidance sets out a useful framework for how businesses can stay on the right side of the line when it comes to making environmental claims.

Breaching the Code has the potential to be financially damaging for businesses. This risk is particularly significant in the context of a new bill that is in the process of being passed in the UK, The Digital, Markets, Competition and Consumer Bill (DMCC). Heralded as a “flagship bill” by the CMA’s CEO, the bill once enacted will greatly expand the CMA’s consumer law enforcement powers. You can find more information on this extension of powers in our previous LawFlash on the DMCC.

From an enforcement perspective, the introduction of the DMCC would see that large companies in breach of consumer laws could face the civil penalties up to 10% of global turnover for breaches of consumer law, which could involve breaches of the Code for greenwashing claims. The bill is still moving through the relevant stages of the parliamentary process and is expected to come into force in autumn 2024.

REGULATORS AND GREENWASHING INVESTIGATIONS

CMA: The Fashion Sector

The CMA has brought a number of high-profile investigations in the last few years. In July 2023, the CMA launched an investigation into environmental claims made by ASOS, Boohoo and George at ASDA about their fashion products. At that time, the CMA’s interim Chief Executive stated that “[s]hould we find these companies are using misleading eco claims, we won’t hesitate to take enforcement action—through the courts if necessary.”

The investigation is still in progress and will consider whether any of the environmental claims made by these companies have breached consumer protection law and, if they have, whether enforcement action should follow. Some of the aspects of the investigation will focus on the language being used and whether that language makes out that the products are more environmentally sustainable than they are in reality.

ASA: Aviation Sector

The ASA is also keeping an eye on matters on the climate change and environmental front. In December 2023, adverts from Air France, Lufthansa and Etihad were banned by the ASA on the basis that these airlines misled customers about the environmental impact of air travel. The environmental claims made by these airlines came under scrutiny because it was felt that the claims could not be corroborated, and the ASA’s ad code requires absolute claims to be “supported by a high level of substantiation.” [2]

Together, these examples demonstrate a sharpened regulatory focus on tackling greenwashing and a shared and active interest by the regulatory authorities to bring investigations against those companies that may be engaged in greenwashing practices so as to protect the market and consumers.

FCA: New Sustainability Disclosure Requirements and Investments Labels Regime

The FCA has taken steps to combat greenwashing in the financial services sector and has introduced a substantial package of measures to improve the trust and transparency of sustainable investment products and minimise greenwashing.

The FCA view combating greenwashing as a priority, stating that it “want[s] to protect consumers from greenwashing so they can make informed decisions that are aligned with their sustainability preferences.” [3] One of the new measures that the FCA has implemented includes an anti-greenwashing rule that will apply to all FCA-authorised firms that make sustainability-related claims about products and services. The rules and guidance were published on 23 November 2023 and the anti-greenwashing rules will come into force 31 May 2024.

The anti-greenwashing rule applies to all of a firm’s communications about financial products or services where it refers to environmental and/or social characteristics of those products or services. These references might be found in assertions, strategies, targets, policies, information and images, for example, promoting a mortgage or savings account is “green” or that an investment fund or pension fund is “sustainable.” [4]

The new rule in the FCA’s Handbook will require that firms ensure their sustainability references are fair, clear and not misleading and are proportionate to the sustainability profile of the product or service.

Sustainability references should be

• correct and capable of being substantiated;
• clear and presented in a way that can be understood;
• complete – they should not omit or hide important information and should consider the full lifecycle of the product or services; and
• fair and meaningful in relation to any comparisons to other products or services.

RISK OF PRIVATE LITIGATION

Private litigation over greenwashing is on the rise, including due to the following:

• An increasingly more sophisticated ESG-related regulatory landscape, combined with increased recognition of the fact that false, misleading, overstated or unsubstantiated environmental advertising is largely prohibited under existing consumer protection and advertising law, has provided more avenues for potential litigants to hold organisations to account.
• The increased availability of litigation funding, and the ability of not-for-profit organisations to gain access to grants and donations from philanthropic foundations, has deepened the pockets of claimant and plaintiff litigants.
• A broader range of stakeholders (see above) in ESG-related matters than in “traditional” litigation has led to a wider pool of prospective litigants.
• There exists a “winning isn’t everything” nature of some strategic litigants whose aim is not always to necessarily “win” the litigation but to create negative publicity to deter consumers and investors from purchasing the products and services of, or investing in, alleged “greenwashers.” [5]

Companies should be alert to the risk of private litigation being brought by claimants, including their shareholders, for alleged corporate ESG failings. In the UK, recent cases such as ClientEarth v Shell Plc have garnered significant attention in the press. In the case of ClientEarth, a not-for-profit environmental organisation brought a lawsuit against Shell’s board of directors.

The case was significant as it was a first-of-its-kind derivative action globally, seeking to hold directors personally liable for alleged climate risk mismanagement. Ultimately, ClientEarth’s application to bring the derivative action was rejected by the High Court in July 2023 on the basis that there was no prima facie case for giving permission to continue to pursue the claim, and in November 2023 the Court of Appeal rejected ClientEarth’s permission to appeal.

While ClientEarth’s claim did not progress at the threshold phase, this example serves to demonstrate the novel ways in which activist organisations are bringing ESG-related claims to court.

Importantly, and sometimes secondary to whether a claim like ClientEarth v Shell “wins,” the process of these claims being brought can generate unwanted press attention and scrutiny for corporates and shine a light on the very issues the claimants seek to have addressed by the court, re-directed to the court of public opinion.

It is likely only a matter of time before we start to see greenwashing litigation claims being brought against corporates in the UK. Given the significant risk of potential reputational damage when claims are brought, it is important for corporates to have a strong communications strategy in place and legal advisors ready to advise and navigate the complexities when a corporate is on the receiving end of a greenwashing/broader ESG-related claim.

CONCLUDING REMARKS

The CMA, ASA and FCA are clearly regularly taking proactive steps, including bringing investigations against companies that may be engaging in greenwashing practices. Measures such as the Code and the FCA’s new anti-greenwashing rule are helpful in generating awareness around how greenwashing is regarded to arise, holding businesses to account and clarifying what practices to avoid so as not to come under regulatory scrutiny for greenwashing.

What is particularly notable is that the requirements include statements to be clear, accurate, unambiguous and capable of being substantiated. These requirements are very much in line with the requirements of regulators around the world.

Ultimately, to avoid coming under the regulatory microscope, companies should spend time carefully reviewing their sustainability and communications strategy, particularly for consumer-facing businesses.

They should liaise with internal stakeholders to ensure that all environmental and sustainability claims are factually correct and can be backed up with evidence when marketing and advertising their products and services to consumers, so that if an investigation were brought by a regulator there would be sufficient material to corroborate the basis upon which a “green” claim had been made to the market and to consumers.

[1] Competitions & Markets Authority, CMA Guidance on Environmental Claims on Goods and Services, at 4.

[2]The UK Code of Non-broadcast Advertising and Direct & Promotional Marketing, The CAP Code, Edition 12; see Rule 11.3.

[3] Financial Conduct Authority, Guidance Consultation, Guidance on the Anti-Greenwashing Rule, at 2 (Nov. 2023).

[4] Id.

[5] Harvard Law School Forum on Corporate Governance, Greenwashing: Navigating the Risk (July 24, 2023).

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