ThoughtLeaders4 Disputes Magazine • ISSUE 13 | ESG |
Greenwashing allegations have already become a focus for a number of NGOs and climate activist organisations . Given greater ESG awareness , it is likely only a matter of time before prosecutors , whether government or private , begin to bring cases against organisations and groups engaged in activity that they see as greenwashing .
Greenwashing can also give rise to civil litigation risk . There are a wide range of potential civil actions that can be brought by shareholders , customers and other interested parties . These include derivative actions under the Companies Act 2006 and claims under Financial Services and Markets Act 2000 While early days , it is clear this is a developing area .
The penalties for failure to comply with the regulatory and legal regime in the UK can be significant . However , as with other forms of compliance and financial crime , much of the penalty is in the process of being investigated and / or prosecuted , even if a conviction is not subsequently secured .
What Are The Other Risks Associated With Greenwashing ?
Driven by the pressure to be ‘ green ’ and to achieve competitive advantage , many companies position their products or themselves as sustainable . Should the consumer trust them all ? Many organisations set ambitious sustainability targets that often fall short of what is required , are not fit for purpose , or cannot be met . The lack of consensus as to what constitutes ‘ green standards ’ or ‘ sustainable ’ is often defined by third-party verification or certification bodies , which means that it can be difficult for companies and consumers alike to distinguish greenwashing claims , without a clear global standard or knowledge behind the label .
Going forward , products and services that are marketed as ‘ eco ’, ‘ carbon neutral ’ or ‘ environmentally friendly ’ will be subject to increased scrutiny and will require validation . Making unsubstantiated or unvalidated claims could lead to serious consequences .
Consumer trust , often earned over periods of many years may easily break down after an incident of greenwashing , impacting companies ’ revenue , reputation and operations , potentially causing substantial damage to companies ’ bottom-lines .
It is not only greenwashing that companies must manage , but ‘ greenwishing ’ and ‘ greenhushing ’ as well .
In some cases organisations will choose not to publicise their ESG credentials at all ( greenhushing ) for fear of making claims they cannot substantiate , or being penalised by investors who might consider ESG to undermine profit . While silence on sustainability matters might reduce the risk for corporate liability , it can also increase the reputational risk if there is a lack of transparency .
Companies may also unknowingly or unwillingly set unrealistic targets or make unfounded public statements about their intent to improve their sustainability profile ( greenwishing ). They may overpromise and underdeliver by greenwishing , perhaps hoping to meet specific sustainability credentials however lacking the internal resources , capabilility , budget or will to do so . There are cases where this is particularly challenging for those SMEs that may not be able to afford to pay for advice , or for annual certification fees to validate their ESG claims . However , this should not stop any company looking to achieve better sustainability outcomes and communicating their progress honestly and openly . There is publicly available government guidance , which is free to everyone , which helps companies to avoid making unsubstantiated or misleading claims .
How Do We Find The Right Balance ?
It may be quite easily concluded that between greenwashing , greenwishing and greenhushing , making material progress on ESG issues and communicating on this effectively is an ever-complicated minefield . However , being transparent about a company ’ s current state and progress on their sustainability efforts has never been more crucial .
It is true that embedding ESG in a company ’ s strategy and communicating this to stakeholders is never a straightforward journey . It requires investment and cross-functional ownership .
The perceived complexities should not deter efforts . However , organisations could mitigate the risks by seeking suppliers that have evidence based ESG credentials for their value chains . It is true that this may sometimes incur initial capex outlays , or higher operational costs . However , this initial expenditure could be dwarfed by the risks to revenue , operations and reputation that may result from misleading ESG strategies .
There is no one-size-fits-all approach . Companies must find the appropriate balance for them by continuing to evaluate their sustainability initiatives , conducting external due diligence and integrating ESG into their risk frameworks . Companies that do so will have the confidence to communicate their substantiated claims with clarity and are more likely to benefit in the long-run .
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