Kate Gee and Alex Cheah discuss the implications of regulatory crackdown on greenwashing for environmental disputes

By Kate Gee & Alex Cheah

Counsel Kate Gee and Associate Alex Cheah discuss how regulators’ ‘greenwashing’ crackdown may bring environmental disputes further to the forefront.

Kate and Alex’s article was published on 4 July 2023 in IFA Magazine, here, and Wealth DFM, here.

‘Greenwashing’ continues to make headlines. In March, the UK Advertising Standards Authority (ASA) updated its guidelines for advertisers, raising the bar for companies who want to promote their sustainability credentials or make environmental claims regarding their business model or their products. The ASA has also brought more than 20 enforcement actions involving greenwashing. Airlines, banks, fashion brands and energy companies are among those targeted for misleading statements and representations regarding the operational sustainability and environmental credentials of their businesses.

The incentive to greenwash stems from increased consumer demand for sustainable products and commercial activities. At the same time, there is increasing regulatory and industry pressure to provide environmentally responsible products and services, as evidenced by developing environmental, social and corporate governance (ESG) frameworks. This has resulted in greater scrutiny and high-profile court proceedings relating to greenwashing and other ESG issues, brought by affected customers, by regulatory bodies or by activist groups.

In June 2023, the ASA found that recent ads by Shell, Repsol and Petronas had misled the public on the climate and environmental benefits of their products by omitting “material information” regarding the companies’ less climate-friendly operations. The impugned advertisements included a TV promotion for Petronas, an online ad for Repsol and TV, poster and YouTube ads for Shell. Meanwhile, the Swiss advertising regulator recently ruled that world football’s governing body, FIFA, had misled consumers over the extent to which the 2022 Qatar World Cup was “fully carbon neutral”.

Delta Air Lines, the world’s largest airline carrier by revenue, is facing a class action in California in connection with its stated carbon offsets. The claimants assert that Delta “overstated or miscalculated the benefits of the projects it supports”. Meanwhile, a District Court in Amsterdam recently ruled that proceedings brought by environmental groups against KLM regarding alleged greenwashing in the airline’s ‘Fly Responsibly’ commercials may proceed on the basis that it is a “general interest case” – and accordingly, we can expect to see more of these claims, and others like it, hitting the headlines.

In May 2023, European Supervisory Authorities (ESAs) published progress reports on greenwashing in the financial services sector. One report defined greenwashing as “a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants”.

As institutional investors place greater importance on the ESG status of the assets they purchase, market and sell (for example, BlackRock’s ESG Multi-Asset Fund or Baillie Gifford’s Positive Change Fund), the commercial incentive to amplify or omit environmental aspects of company activity may also increase.

Recently, the Financial Reporting Council (FRC) has proposed an overhaul of the UK Corporate Governance Code to increase boardroom responsibility for the accuracy of accounts and accountability for misconduct. The draft code advocates for increased integration of ESG matters and culture within a company’s strategy and reporting, emphasising the responsibilities of the board and audit committee for ESG reporting.

The proposed revisions aim to link companies’ remuneration policies more closely with their results, including ESG objectives. This matches developments in the EU, where large companies are required to publish regular reports on social and environmental risks, and on how their activities impact people and the environment, together with information that supports those results.

With great scrutiny concerning ESG, so too have we seen a rise in claims before the English courts directly arising out of ESG issues – often being brought within the group litigation framework.

In two cases relating to duty of care – Okpabi v Shell and Lungowe v Vedanta Resources – the UK Supreme Court has confirmed that UK parent companies can be liable for the negligence of a foreign incorporated subsidiary if they exercise sufficient control over the operations and management of the subsidiary. Last year, in Municipio de Mariana v BHP, the Court of Appeal allowed more than 200,000 claimants to pursue group litigation against BHP Group UK Ltd in relation to environmental and social damages caused by the collapse of the Fundão Dam in Brazil.

Future claims in relation to greenwashing and ESG could be brought pursuant to Group Litigation Orders, especially where many consumer claimants are available. The likely causes of action could include misrepresentation, misstatement and shareholder derivative actions. Although the recent case of ClientEarth v Shell was not allowed to proceed (because the court found that Shell’s directors had prima facie not acted unreasonably – in the sense that they had not acted in a way in which no reasonable director could have – and the claim could not be said to have sufficiently strong support from Shell’s members), it is likely to be just the start of a wave of litigation in this space, pushing and defining the boundaries.

As scrutiny of companies’ environmental conduct continues to increase, and opportunistic claimants seek to use legal proceedings and media campaigns to put pressure on corporates, ESG litigation will inevitably become a focal point in English Courts. To mitigate the risk of regulatory enforcement or potential claims, companies should keep their ESG obligations at the forefront of board level decisions, policymaking and implementation – at all levels of their organisations.

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