Greenwashing - Increased Compliance Risk for Companies

Hogan Lovells

Hogan Lovells

As political and social efforts for climate protection and sustainability increase, so does the pressure on companies to address these issues. “Climate-neutral”, “eco-friendly” or “ESG-compliant”: those or similar words can be found more and more frequently on products, in advertising campaigns or investment brochures. If the underlying circumstances are not sufficiently explained or if the alleged characteristics are not complied with, civil law and – especially in the financial sector – also criminal law risks arise: Greenwashing is a matter of concern for politics, authorities and courts in Europe and the US. Companies should prevent these risks by implementing ESG compliance processes.

Greenwashing in the focus of criminal and supervisory authorities

Especially in the financial sector, prosecution and supervisory authorities in Germany as well as in the US are stepping up action against suspicions of greenwashing – including dawn raids, which recently also took place in Germany. The US Securities and Exchange Commission (SEC) already set up its own “Climate and ESG Task Force” for this purpose last year. The focus of the investigation is on companies and funds, which advertise sustainable or ESG-compliant investments to their investors.

Insofar as these statements are incorrect or can at least be misleading, there are significant compliance risks up to the accusation of capital investment fraud. For companies, this is complicated by the fact that there are still no clear standards for advertising “sustainable” , “green” or ESG-compliant investments.

The increased investigative activity comes along with an increasing regulation by supervisory authorities in the field of ESG investments. At European level, two regulations for the classification of and information on the sustainability of investments have already been introduced – the Disclosure Regulation and the Taxonomy Regulation. An investment in an economic activity is considered “sustainable” according to Art. 2 No. 17 of the Disclosure Regulation, when

  • it makes a contribution to the realization of an environmental or social goal,

  • it does not lead to a significant impairment of one or more (other) goals, and,

  • the companies, in which investments are made, apply good governance practices.

In the US, the comment period on the SEC’s draft for stronger regulation of ESG investments is still ongoing. The draft provides a categorization with graduated information obligations. According to it, the ESG strategies as well as, in certain cases, the greenhouse gas emissions must be presented.

Further investigations and lawsuits expected

For companies, the new or planned regulations provide initial indications of the transparency requirements that authorities will impose on the advertising with sustainable investments. However, they also contain an increasing risk that with tighter regulation, further enforcement measures will follow.

The risk here is that investigations and proceedings may spread to industries outside the financial sector. The EU Commission already announced that it will take stronger action against greenwashing as an unfair business practice by amending the UGP Directive. With further implementation of the EU Commission’s Green Deal, it is expected that the EU and national legislators will increase the pressure on companies to substantiate advertising claims about the sustainability of their products and services with facts.

Environmental and consumer associations such as “Deutsche Umwelthilfe” (German Environmental Aid) already take legal action against companies in numerous proceedings alleging greenwashing – often successfully and causing considerable damage to the companies’ reputation.

Recommended actions

In the light of the increasingly stricter measures, companies should be aware of the risks associated with the frivolous advertising with ESG and sustainability terms. In order to avert or limit such risks, companies should focus on an ESG compliance module in their compliance management system. Since clear definitions have often been lacking so far, the corresponding advertising claims should be coordinated with the legal or compliance department before they are published.

In doing so, companies should keep a close eye on the current regulatory developments. It is to be expected that in the future further categories and standards will emerge, which companies can use as guidelines when advertising their products. Those will also result from the authorities’ practice in dealing with further cases.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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