Net-zero has become the modern buzzword for sustainability and corporate social responsibility. As global awareness and demand for sustainable products and services accelerate, businesses eager to capitalise on this trend might run the risk of making false or misleading claims about the climate impact of their products or services, in what is commonly coined as greenwashing.
Beneath the shiny surface of sweeping carbon neutrality claims lies a more sinister danger of greenwashing as such hollow pledges might direct investment and consumption away from real climate change. Greenwashing exploits consumers who are willing to pay a premium to support environmental sustainability, but who are unable to verify the accuracy of such claims and hence accept them at face value. In a 2020 European Commission study, more than 50 per cent of green claims across the EU were found to be vague, misleading or unfounded. Such data demonstrates the pressing need for corporate responsibility around environmental claims to be articulated, identified and regulated, particularly in a market beset by fragmented standards, integrity issues and credibility concerns. National regulators around the world are increasingly recognising the need for greater corporate transparency and accountability to stamp out the insidious practice of greenwashing. So where is this green line between fact and fiction and what exposure does a corporate have when it crosses it?
Where does it go wrong?
To make carbon neutrality claims, a corporate typically relies on an assessment and reduction of its emissions alongside mitigating such emissions with the purchase of carbon credits. Putting aside the over-reliance on carbon credits and its own integrity issues, the foundation block of sustainable corporate programs lies in an accurate assessment of its carbon footprint, which is not a straightforward task. Although there are international standards such as the Greenhouse Gas Protocol and ISO 14064 which provide guidelines for corporations to measure and assess their emissions, companies still find themselves facing allegations of greenwashing. In 2021, a car manufacturer lost its appeal in Australia against a record A$125 million (S$1112 million) fine imposed on it for deliberately deceiving regulators and customers about the environmental performance of its cars. In 2020, an oil company withdrew its advertising campaign after facing a complaint that certain statements relating to the scale of its transition to renewable energy away from fossil fuels, was misleading.
The problem is compounded by the need to account for supply chain emissions (as opposed to direct operational emissions), which are notoriously difficult to calculate and monitor. Organisations struggle due to the lack of supply chain visibility and incomplete or unreliable supplier data. There is a lack of readily available emissions data in a standardised format across companies in supply chains, each located in a different jurisdiction with different accounting and corporate governance standards. Ensuring supply chain compliance with net zero targets requires rigorous audits, including obtaining detailed emissions data, conducting on-site visits or inspections and working with third-party verification bodies. The time, costs and lack of sophistication of suppliers involved mean that such exercises are likely to be impractical.
Clamping down on greenwashing – developments in other jurisdictions
In response to the growing issue of greenwashing, regulatory bodies around the world have implemented new regulations to address misleading environmental claims. Notable examples include the UK Competition and Markets Authority’s Green Claims Code, which enumerates six guiding principles for businesses making environmental claims. These principles emphasise the importance of truthfulness, clarity, transparency, fair comparisons, and substantiation of claims. The UK Advertising Standards Agency (ASA) has also ramped up efforts to crack down on greenwashing by releasing updated guidance on the use of “carbon neutral” and “net-zero” claims in advertising. The guidance highlights the need to avoid unqualified statements, provide a verifiable strategy based on future goals, and compliance with objective standards of evidence. Notably, the ASA banned two “green” advertisements involving a bank’s work to tackle climate change, after it emerged that the bank had omitted material information about its financing of businesses which made significant contributions to emissions.
On a broader scale, the EU has introduced the Green Claims Directive, which establishes detailed rules for the substantiation, communication, and verification of voluntary environmental claims. Under the Directive, companies must substantiate their claims using robust and science-based methods, and make all relevant information available to consumers. National third-party verification bodies will be constituted to assess conformity with substantiation requirements before a company’s green claim can be made public. Non-compliance can result in fines of at least 4 per cent of the company’s annual turnover.
In the US, the Federal Trade Commission (FTC) is the principal enforcer in this area. The FTC’s Green Guides provide regulations for marketing claims related to the environmental attributes of products and services, stating that it is deceptive to misrepresent general environmental benefits, and caution against unqualified and unsubstantiated environmental claims. In a recent class action lawsuit against a renowned clothing brand, the plaintiffs complained that they were misled into paying higher prices for clothing they believed to be sustainably manufactured, including misrepresentations of the use of 30 per cent less water in manufacturing, when they were not more sustainable than similar garments made by its competitors. These regulatory developments demonstrate a concerted effort towards ensuring greater corporate transparency and accountability in net zero claims. With organizations in almost every sector keen to broadcast their carbon neutrality claims, Singapore would also benefit from a more targeted legislation and initiatives aimed at tackling greenwashing. Singapore currently relies primarily on the Consumer Protection (Fair Trading) Act, a general legislation that protects consumers against unfair business practices, which may not be adequate to deal with the specific menace of greenwashing.
Companies & directors in the crosshairs
Corporates tempted to make outlandish statements on their sustainability practices face challenges from not just external parties such as consumers but also internally from shareholders. ClientEarth’s high-profile litigation as a shareholder in the English courts against Shell’s directors is a sobering reminder that activist stakeholders will not stop at trying to hold directors personally liable for the company’s ESG impact, even if no new directors’ duties specific to these issues have been prescribed. Likewise, shareholders in the US have also initiated derivative claims against directors for greenwashing. In a class action lawsuit against Oatly’s management, the directors were accused of providing misleading statements about the company’s environmental commitments and sustainability practices, allegedly inducing the plaintiff class of shareholders to purchase Oatly’s shares at artificially inflated prices. These are ground-breaking cases which will define the extent of directors’ duties and shape the landscape of climate litigation.
In the haste to be part of the green movement, directors should act as gatekeepers to ensure sustainability claims are made responsibly by corporates. Directors should ensure that adequate due diligence is conducted to evaluate the environmental impact of their company’s activities. This includes assessing the emissions generated throughout the supply chain, scrutinising the data used to support sustainability claims, and seeking independent verification where necessary. Directors should also establish robust internal controls and reporting mechanisms. This may involve implementing sustainability policies, conducting regular audits, and ensuring transparency in reporting practices. By demonstrating that they have taken reasonable steps to assess and verify their sustainability claims, directors put themselves in a better position to defend against allegations of greenwashing and climate change litigation. In a world where greenwashing can result in serious reputational repercussions, companies and directors must take such steps to ensure their sustainability claims are more than just a thin veneer of eco-friendly rhetoric.
* This article was first published in The Business Times on 11 July 2023.
Author: Baldev Bhinder, Shane Sim