Greenwashing — commercial and regulatory considerations for directors and insurers

Understanding greenwashing and its impact on business

US environmentalist Jay Westerveld coined the term ‘greenwashing’ in 1986 to describe the practice of overstating the environmental and/or ethical benefits of a product or service.

As discussed below, greenwashing is a key consideration for company directors and their insurers in light of COP26 and the ongoing development of UK regulation, particularly with regard to firms authorised by the FCA and/or listed companies.

It is also relevant to any company vulnerable to shifts in consumer opinion and may occur inadvertently, given the vagueness of several ‘green’ credentials and associated words and phrases.

The Seven Sins of Greenwashing

The Seven Sins of Greenwashing, as coined by Jay Westerveld, include:

• The Hidden Trade-off — failing to address the full environmental cost of achieving a superficially sustainable outcome
• No proof — reliance on a lack of easily-accessible contradictory evidence
• Vagueness — imprecise language may be technically accurate but environmentally misleading
• Irrelevance — reliance on factors that are generally applicable and do not help consumers to differentiate
• The Lesser of Two Evils — reliance on a narrow comparison with other unsustainable options, rather than the whole market
• Fibbing — simple falsehoods
• Worshipping False Labels — branding that falsely indicates independent environmental accreditation.

The risks of greenwashing for companies and their insurers

Greenwashing poses an obvious risk of reputational harm. Opinion can quickly turn against those perceived to be misleading consumers, who are more engaged in relation to environmental issues today than they have been ever before. Companies hoping to turn this enthusiasm for the environment to their commercial advantage must therefore ensure that their asserted environmental credentials are accurate and justifiable, or risk losing the trust (and business) of the market.

Companies making inaccurate environmental disclosures can expect to face intervention. As Partner Nicola Gonnella discussed in a previous article, the Competition and Markets Authority (“CMA”) published a Green Claims Code in September 2021 containing guidance for businesses making environmental claims in the UK which is capable of enforcement by the CMA in both civil and criminal proceedings.

Since then, the FCA has published its ESG Strategy on 3 November 2021, based on the core themes of Transparency, Trust (see above), Tools, Transition and (stretching the alliteration to its limits) Team. Chapter 2 of the ESG Handbook, in force from 1 January 2022 and subject to the FCA's usual enforcement powers, specifically focuses on the disclosure of climate-related financial information, including reports in relation to both business management and products pursuant to the recommendation so the Task Force on Climate-related Financial Disclosures (“TCFD”).

The TCFD's recommendations

The TCFD, created by the Financial Stability Board, released its Recommendations for climate-related disclosures in 2017 covering the themes of Governance, Strategy, Risk Management and Metrics & Targets. The organisation is becoming increasingly influential, with the UK requiring that all publicly listed UK companies with a premium listing must “comply or explain” regarding the TCFD’s Recommendations by 2023. Further disclosures will be mandatory in certain sectors by 2025.

The EU has incorporated the TCFD’s Recommendations into its Guidelines on Reporting Climate-Related Information. In the USA, the SEC launched its Climate and ESG Task Force in March 2021 as part of its Division of Enforcement, looking for gaps and misstatements in disclosures of climate risks.

The UK Government has also set up a Green Technical Advisory Group to advise it on a green taxonomy, similar to the EU’s Taxonomy Regulation introduced alongside the Sustainable Finance Disclosure Regulation (“SFDR”) and Low Carbon Benchmarks Regulation, to drive the standardisation of environmental sustainability in investment.

Steps that were previously undertaken voluntarily are therefore increasingly becoming obligatory and subject to regulatory sanction. Directors and officers must of course ensure that their businesses comply with current rules to avoid criminal prosecution, civil liability or regulatory action, but there is also a clear argument in favour of seeking to stay ahead of the game with regard to sustainability as regulation continues to advance and market expectations continue to rise. Accurate and well-supported ESG disclosures should help to support and develop relationships with potential investors, business partners, employees, clients and consumers while minimising the risk of reputational harm, regulatory sanction, erosion or shareholder value and potential liabilities which may require notification to D&O or environmental insurers.

Crucially, careful and proactive management of ESG risks and related disclosures is also necessary to ensure that businesses adapt to the low carbon and/or net-zero economy as quickly as possible for the benefit of the environment as a whole. This is of course the fundamental point of all the environmental regulations and recommendations and such considerations will lie at the heart of any authentic ESG policy.