From full life-cycle claims and inappropriate imagery to omitting vital information or exaggeration, the Advertising Standards Authority (ASA) has been increasingly clamping down on greenwashing.

The ASA, Financial Conduct Authority (FCA) and Competition and Markets Authority (CMA) are working closely together to tackle greenwashing. While they have separate regulatory responsibilities, there are some important areas of overlap. 

“Consumers care about investing in products that have a positive impact on the planet and people. That’s why we want to boost the integrity of the market and ensure people can make informed decisions with their money,” says Sacha Sadan, Director of Environmental, Social and Governance, FCA, confirming its anti-greenwashing guidance.

While there’s clearly reputational risk for companies in falling outside ASA rulings or FCA guidance, increasingly they may be stepping outside the law. In the EU, the Parliament and Council approved the Empowering Consumers for the Green Transition Directive. EU countries have 24 months to incorporate the update into their national law. The Green Claims Directive complements the EU’s ban on greenwashing and introduces a verification system for companies that want to make environmental-related claims, though this has yet to be approved. 

While these two EU legislative efforts on greenwashing and green claims are aimed at protecting consumers, greenwashing is also of concern to investors and the regulators/lawmakers who protect their interests.

“Non-financial corporate reporting has to be accurate to be meaningful and meet the needs of investors and other users of corporate reports,” says Richard Spencer, Director of Sustainability at ICAEW. “Greenwashing only serves to obscure vital information about a company’s route to becoming future fit, resilient and [having a] low impact on the climate and nature.”

Based on rising expectations for supervisors to ensure investor protection and market integrity against greenwashing risks, EU financial markets regulators are taking action to maintain a trusted environment for sustainable investments. 

Their report investigates the role of supervision in mitigating greenwashing risks and provides a forward-looking view of how supervision could be gradually enhanced in coming years across issuers, investment managers, investment service providers and benchmarks administrators.

Warnings from the profession

KPMG warns companies against creating a discrepancy in their environmental, social and governance (ESG) reporting between what they claim they are doing and what they are actually doing. It emphasises that transparency drives trust and value.

Increased ESG transparency, combined with diverging standards, can lead to increased greenwashing risks, according to EY. It points out that greenwashing risks can be mitigated when supported by gold-standard disclosures that are consistently applied across the organisation and externally validated. Grant Thornton warns that greenwashing becomes in scope for securities litigation, leading to claims for compensation.

Bringing in the lawyers

At a recent Falcon Windsor webinar on ‘Reporting without getting sued’, Jindrich Kloub, a Partner in the Brussels office of Wilson Sonsini said that, in his opinion, the Corporate Sustainability Reporting Directive (CSRD) will help companies avoid greenwashing. It is off the back of the disclosures – subject to limited assurance for compliance with the European Sustainability Reporting Standards – that companies will avoid the potential risk of greenwashing. 

He pointed to claims companies are making on their websites and in marketing material about their environmental credentials and how companies will be able to support their marketing materials with the information in their disclosures, which may help them avoid the risk of greenwashing accusations. 

Adam Wasserman, Executive Director of Finpublica (and former Head of Enforcement for the New York Stock Exchange) said that, unlike in the EU and the UK, there hasn't been major US legislation with regard to greenwashing. But there have been a few relevant SEC rules and proposals. For example, if a fund describes itself as having particular characteristics, 80% of the investment has to be in assets suggested by the name of that fund. This could apply to ESG funds, but also to others such as value funds and growth funds.

Multinational companies must make sure they do not say something on the green front in one location that is contrary to what they say elsewhere. 

“There may be situations where you wouldn’t necessarily have to report as much in the US and there might be more to say in an EU or UK filing,” says Wasserman. “In such circumstances, companies can report more information in the EU or UK, but need to make sure that what they say in one jurisdiction does not actually conflict with what they say elsewhere.”

One final word of warning comes from ICAEW’s Spencer: “The more companies greenwash and inevitably get found out, the more of a vicious cycle they create. It makes other companies more cautious and less ambitious in their disclosures.”