LIDW23 member-hosted event provided insights into current and future trends in the greenwashing space.
Latham & Watkins recently hosted a panel discussion during London International Disputes Week on the topic of greenwashing and how English law continues to evolve and adapt in order to meet the needs of international businesses and other stakeholders engaging with this issue. The event provided a platform to explore:
(1) The key drivers of greenwashing complaints
(2) The challenges organisations face when trying to define and explain their sustainability plans (including against the backdrop of rapidly evolving reporting guidelines)
(3) The associated litigation trends as observed globally
The panel included the Honourable Mrs Justice Cockerill DBE (Commercial Court Judge, High Court), Sophie J. Lamb KC (Partner, Latham & Watkins), Adam Heppinstall KC (Barrister, Henderson Chambers), and Meghan Sheehan (Director and Head of ESG and Sustainability, Kekst CNC).
This blog post summarises the key themes of discussion that took place and provides interesting insights as to what may lie ahead.
Key Drivers
The panel identified the main drivers which introduce both a reputational as well as a litigation and enforcement risk for corporate actors:
- Energy policy and the role of private capital in the energy transition: The 2050 net zero targets require radical transformation across all sectors of the economy. The European Green Deal emphasises the need to mobilise private financial and capital flows to green investments, therefore accelerating the rise of private investment into sustainable finance and the proliferation of “green” products and services.
- Proliferation of sustainability-related public statements and reports, as well as advertising and branding: This development may be due to voluntary leadership within the business community, seeking competitive advantage, the demands of civil society, market opportunities, consumer preferences, as well as regulation and politics.
- Rapidly evolving rules and standards:
- Emergence of interconnected legislative developments in the UK (e.g., the Sustainability Disclosure Requirements Consultation Paper)[1] and in the EU (e.g., the EU Taxonomy,[2] the Sustainable Finance Disclosure Regulation,[3] the Benchmark Regulation,[4] the Corporate Sustainable Reporting Directive,[5] and the recent EU proposal for a directive on green claims to address the substantiation of voluntary green claims in business-to-consumer practices and to target greenwashing[6]).
- A myriad of soft laws, reporting frameworks, and best practices, specifically the UN initiative targeting net zero commitments by non-state actors.[7]
- Varying rules across jurisdictions, which has created an uneven playing field. Notably, ESG regulation has increased in the EU, while a backlash against the ESG agenda can be observed in the US.
- Increasing regulatory appetite (particularly for consumer protection purposes) and well-organised and financed litigation activism targeting corporate strategy and alignment with the Paris Agreement commitments.
Managing ESG Reporting and Messaging
The panel reflected on challenges facing leadership teams trying to navigate their ESG disclosures and communications against the backdrop of large-scale environmental issues. A real shift occurred in recent years towards green advertising being seen as a source of great reputational risk rather than opportunity for business. Corporate actors should be mindful of any gaps between their external messaging and (i) their corporate practice, (ii) what they can actually achieve, (iii) what they can prove, and (iv) the evolving expectations from regulatory bodies.
Speakers observed that the absence of global consensus on how to achieve the net zero targets, or even on what a “green claim” is, makes it impossible to completely avoid the contentious risk. However, businesses can mitigate the risk by moving away from value-based language and instead focusing on specific facts, while being mindful of the pitfalls related to poorly defined terms.
Companies should look to integrate ESG considerations throughout their governance systems so that internal controls can accurately capture their reporting as well as external messaging.
Enforcement and Regulatory Risk
In the UK, two regulators are particularly active in the greenwashing space. The panel discussed Advertising Standards Authority’s frequent and nimble approach to enforcement alongside the Competition and Market Authority’s (CMA’s) hesitance to date to use significant powers under the Enterprise Act 2002. The draft Digital Markets, Competition and Consumer Bill published in April 2023 will likely change that approach and give CMA powers to issue direct fines and orders.[8]
The panellists also discussed trends on the other side of the pond, starting with the launch of the Securities and Exchange Commission’s ESG Taskforce in 2021 and subsequent investigations resulting in penalties or settlements. On the consumer side, the Federal Trade Commission has contributed to a proliferation of cases in the green marketing space, while raising interesting questions on the possibility of claims against an issuer for statements made in securities disclosures.
Greenwashing Litigation
Recent research has evidenced the growing importance of greenwashing litigation claims. Portland Communications’ Commercial Courts Report 2023 provides insights into the UK public’s perceptions around climate litigation, including greenwashing claims.[9] Portland’s polling shows “overwhelming support” for the increased use of lawsuits to hold businesses and governments accountable for damage to the environment. Further, 82% of respondents agreed that the increased number of companies sued for “greenwashing” issues is a positive development.
Panellist noted that this field of litigation involves repurposing familiar causes of action such as deceit or misrepresentation, while challenging claimants to find new ways to prove elements of reliance and loss. Considering how well-organised and funded non-governmental organisations are, more test cases will likely materialise. Future cases will likely elaborate on well-established principles of contract and tort law and raise interesting questions about crowdfunding and liability for costs. Cases currently in front of English courts are already incredibly complex and resource-intensive, grappling with issues such as standing, forum convenience, and jurisdiction.
Formulating a judgment on what is (or is not) appropriate in the context of corporate policies, strategic plans, or directors duties to protect the environments will be challenging, in particular considering the lack of consensus on how one should define concepts such as “green”, “sustainable”, or “net zero”. Upcoming cases will likely feature much discussion around the role of “tenable view” when taking decisions affecting the environment.
Speakers also pointed to concerns around the availability of appropriate expert evidence in circumstances where the English court system relies heavily on the experts’ independence and integrity. The speakers noted the difficulty of stripping out political and advocacy elements in the greenwashing/ESG cases, not to mention the lack of a recognised body of opinion on certain highly controversial questions such as net zero pathways. In the future, the courts may adapt to using their own experts (similar to arbitration proceedings) to advise them on points of consensus.
Looking Forward
The event concluded with summary remarks about what may be on the horizon for greenwashing litigation in the English courts. Panellists noted the importance of human rights as a possible driver for common law to adapt to the climate change claims, similar to developments in Australia and New Zealand. One should keep an eye on decisions coming from the Strasbourg Court and the Business and Property Courts in England and Wales to gauge a direction of future developments.
Latham & Watkins will continue to monitor developments in this space. For more information on this topic, see Latham’s Client Alert Focus on Greenwashing: The Latest Regulatory Proposals in the EU and the UK.
Endnotes
[1] https://www.fca.org.uk/publications/consultation-papers/cp22-20-sustainability-disclosure-requirements-sdr-investment-labels
[2] Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable lending.
[3] Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector.
[4] Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds ((EU) 2016/1011).
[5] Directive (EU) 2022/2464.
[6] Directive (EU) 2023/0085.
[7] https://www.un.org/en/climatechange/high-level-expert-group.
[8] https://bills.parliament.uk/bills/3453.
[9] https://portland-communications.com/publications/commercial-courts-report-2023/.
