Greenwashing and Economic Crime

Corporate “greenwashing” – the making of claims around environmental and social performance that are not rooted in evidence is an increasing problem.  Broadly speaking, corporate greenwashing is to be found in two places:

• In the mandatory formal environmental reporting made by the board under company law and regulation that is relied upon by investors and other stakeholders; and
• In the statements made by a company as it markets its goods and services that are relied on by customers. 

In either case, greenwashing could have implications for third parties. Greenwashing in a corporate report may encourage an investor or other stakeholder to invest, or remain invested in or associated with the company when in fact, had it known the truth, it would not have done so. Greenwashing in product and service advertising may encourage customers to buy goods or services when, had they know the truth, they would have shopped elsewhere.   
When the truth comes out, regulatory and civil liability consequences can follow.

Economic Crime and Corporate Transparency Act 2023

The regulatory consequences of greenwashing have recently been bolstered by the failure to prevent fraud (“FTPF”) offence introduced in the Economic Crime and Corporate Transparency Act 2023 (“ECCTA”).

An organisation and its subsidiaries can be criminally liable where any employees or associated persons (such as agents and others that provide services for or on their behalf) commit fraud intending to benefit the organisation, and where reasonable fraud prevention procedures are not in place. It does not matter whether the directors or senior managers of the organisation were aware of the conduct for the offence to apply.

The employees/associated persons involved can also be prosecuted along with the company. Unlimited fines may be imposed.

So if, for example, a company “greenwashes” its products as ‘sustainable’ timber knowing that this claim is fabricated and that the timber is harvested from protected forest, an offence has been committed. This is so even if customers for the timber are not actually secured – it is enough that the fraud was intended to benefit the company.

The solution

The new provisions around FTPF provide yet another good reason for companies to have proper governance around environmental and social issues – “ESG” - embedded within the company. ESG helps ensure that the company does not greenwash. When environmental and social considerations are embedded across an organisation, which is what ESG aims to achieve, a good and soundly supported narrative on environmental and social issues that appeals to key stakeholders will emerge. The temptation to greenwash should fall away, and along with it the risk of incurring regulatory sanction (including under ECCTA) and civil liability.