The Legal Implications of Greenwashing

Stakeholders, investors, and consumers today are requiring more from their businesses than just a healthy bottom line. With pressing environmental concerns plaguing the planet and an urgency to move towards more sustainable ways of living, businesses are coming under increasing scrutiny regarding their operations and their impact on the environment.

With mounting pressures to reduce their carbon footprint, shift toward renewable sources of energy, and implement greater sustainability practices throughout their supply chains and overall operations, it can be tempting for companies to present themselves to the public in a greener light than is actually true.

This practice, known as 'greenwashing,' can have several negative consequences for a business. In addition to potential legal repercussions and hefty fines and penalties, greenwashing can also result in reputational damage for a business as trust and confidence in the brand are undermined and eroded.

In this article, we will explore the legal implications of greenwashing, providing businesses with greater clarity in this ever-evolving area to help them mitigate the risks associated with non-compliance.

What is Greenwashing?

Greenwashing occurs when a business misleads consumers, investors, or the public by making exaggerated or misleading claims regarding its environmental or sustainability practices. Greenwashing can appear under many guises, ranging from vague or unsubstantiated claims to ones intentionally designed to deceive or mislead consumers or investors into believing a company is more environmentally friendly than it actually is.

While there is currently no legal definition of greenwashing, each jurisdiction may enforce legal action against such practices under existing laws, such as those relating to false advertising claims or consumer protection, resulting in hefty fines, penalties, and even the confiscation of revenues from relevant products.

The deceptive practice of greenwashing is also coming under heavy scrutiny in the financial sector, as financial services providers are increasingly being taken to task by regulators regarding their marketing and communication of financial products. This is particularly the case concerning the environmental, social, and governance (ESG) claims of investment businesses, as false claims and inadequate transparency can lead to charges of fraud and potential financial penalties.

For a business facing prosecution for greenwashing practices in relation to its investment offerings, it is advisable to seek counsel from an experienced criminal lawyer who is experienced in dealing with fraud and white-collar crime. For more information on matters relating to fraud and white-collar crime in Edmonton, Canada, contact Purser Law, the best Edmonton criminal lawyer.

Minimizing the Legal Risks

As a business, it is imperative that all representations made to the public regarding practices are accurate and transparent. This not only ensures compliance with local laws and regulations but also maintains trust and standing within the marketplace. The following steps can be taken by businesses to avoid claims of greenwashing and potential legal challenges:

Packaging: Businesses must ensure they avoid misleading claims on their packaging and are able to back up any such claims with verifiable evidence. Whether it's the use of language such as 'eco-friendly,' 'fair trade,' 'sustainable,' or 'carbon neutral,' a company can be found guilty of greenwashing if it is unable to justify its claims with objective evidence.

Vague terms or certifications from entities that lack credibility or industry standing may also lead to claims of greenwashing. Similarly, the use of deceptive imagery on packaging that falsely portrays a product as environmentally friendly may also run the risk of greenwashing.

Advertising: Businesses must avoid making false claims in their advertising campaigns and any disclosures to the public. Failure to do so can expose a business to regulatory risks under various regulatory bodies such as the UK's Advertising Standards Agency (ASA), the Financial Conduct Authority (FCA), and the Competition and Markets Authority (CMA).

In the U.S., courts frequently refer to the Federal Trade Commission Green Guides for guidance on the use of misleading marketing claims regarding environmental matters. The Securities and Exchange Commission is also combatting greenwashing claims by imposing tougher requirements on ESG funds. Its amendments to the Investment Company Act "Names Rule," prevent ESG funds from misrepresenting fund names and require them to invest at least 80% of their assets into investments that align with the fund name.

Meanwhile, in Europe, a new Directive has been approved, giving consumers greater protection against false or misleading environmental claims by targeting the use of vague or generic claims or statements made in business-to-consumer ("B2C") contexts.

To mitigate the risks of legal action, businesses should steer clear of broad or vague claims regarding their products or environmental practices and ensure they have the data or information required to support any statements made.

Impact: To avoid regulatory challenges and allegations of greenwashing, businesses may be required to account for the environmental impact of their activities. This is highlighted by a new E.U. law known as the Corporate Sustainability Due Diligence Directive (CSDD), which places obligations on large companies to assess and manage the social and environmental impacts across their supply chain.

Similarly, in the U.S., the SEC's creation of a Climate and ESG Enforcement Task Force will determine whether firms' processes and practices match their disclosures. At the beginning of the year, California also passed a new anti-greenwashing law called the Voluntary Carbon Market Disclosures Act. This legislation requires both private and public entities to disclose information regarding their use of voluntary carbon offsets in an effort to provide greater accountability and transparency around their environmental claims.

Greenwashing Litigation

As consumers, investors, and legislators become more vigilant against false or misleading environmental claims, businesses that fail to adhere to the rules required of them are also coming under increasing scrutiny and being held to account for their actions. In recent times, there have been several notable cases of greenwashing involving many household names, including:

Volkswagen: This German automobile manufacturer was fined $34.69 billion for falsifying carbon dioxide emissions tests by using software in its vehicles that modified the results, thereby circumventing the regulatory standards. While advertising its vehicles as low emission, in reality, they emitted up to 40 times the limit permitted by emissions standards.
Kohl's and Walmart: These companies were fined a total of $5.5 million for making misleading representations claiming that some of their products were made from the eco-friendly material bamboo rather than rayon.
Keurig: The makers of this home coffee-making system were fined $3 million for using deceptive advertising practices regarding their single-use coffee pods. The company claimed the pods could be recycled when, in fact, they were not widely acceptable for recycling.

These cases highlight the legal, financial, and reputational repercussions businesses face for making false environmental claims and for misleading the public.

Frequently Asked Questions

What are some examples of greenwashing?

Examples of greenwashing include the use of false or misleading terminology on packaging, such as 'eco-friendly,' 'sustainable,' or 'fair trade,' without any verifiable or objective evidence to back up such claims. It also includes false or misleading advertising claims, such as suggesting or stating that a product is made from environmentally friendly material when it is not.

What regulations are in place to prevent greenwashing?

Each country has its own legal framework in place to combat greenwashing. In the UK, regulatory bodies such as the ASA, FCA, and the CMA can fine companies for making false advertising claims regarding environmental matters, while in the U.S., the Federal Trade Commission Green Guides are commonly referred to by the courts for guidance on misleading marketing claims. A new directive has also been passed in Europe, giving consumers greater protection against false or misleading environmental claims.

Are there any notable cases of greenwashing?

Several businesses have been penalized in recent years for engaging in greenwashing practices. These include high-profile names like Volkswagen, Kohl's and Walmart, and Keurig, with fines ranging from $3 million to $34.69 billion. In addition to the legal and financial consequences imposed on these businesses, they also face potential damage to their reputation.

As this article demonstrates, the issue of greenwashing must be placed high on the agenda for any businesses today to ensure they remain compliant within an ever-increasing legal landscape and to hold themselves accountable in the eyes of the public as positive stewards of the environment.