How businesses can protect themselves from greenwashing claims

Accusations of greenwashing can lead to reputational damage, something about which the financial sector is particularly sensitive. 

Regulators in the UK and across Europe and in the US are stepping up their efforts to crack down on greenwashing. In the UK, the Financial Conduct Authority announced last year that it would implement measures to address greenwashing in the finance sector.

This widely anticipated announcement outlining new regulations on Sustainability Disclosure Requirements and investment labels, after some delay, is expected to be released later this year. The requirements would compel asset management companies to provide greater details on products such as funds being marketed as green and eco-friendly. 

Addressing greenwashing in advertising  

But it is not just regulators that have greenwashing in their sights. Action has been taken by the UK Advertising Standards Authority that has been calling out businesses in the financial services, airline and automotive sectors around misleading claims to the public of their sustainability credentials.  

For example, advertisements that claim products are carbon neutral using offsets are to be banned unless companies can give definitive proof that this is actually the case.

With corporates frequently marketing products using a variety of sustainability-friendly buzzwords such as carbon neutral, net zero, carbon-free or eco-friendly — all designed to appeal to environmentally conscious consumers — we can expect to see more enforcement around the use of these marketing tags.

All businesses, regardless of the industry sector in which they operate, need to take practical steps to ensure they are not the targets of greenwashing claims

In addition to regulators and the ASA, the financial sector is feeling the heat from shareholder activists, who are increasingly well organised and unhesitant about targeting financial institutions, particularly those who are supporting new fossil fuel projects. This has caused considerable consternation on the part of many banks, who are worried about the reputational risks that being targeted by activists may cause.

During this year’s annual meetings season, for example, we saw climate activists targeting US banks, urging them to stop funding new fossil fuel projects. Banking on Climate Chaos, an organisation that tracks bank financing for companies in the fossil fuel industry, found that US banks had loaned more than $4.6tn (£3.7tn) to the fossil fuel industry since 2016.

And, although many banks have sought to stave off negative publicity by reiterating their commitment to climate goals and pledging to ramp up their actions accordingly, greenwashing accusations linger.

Keeping a sense of proportion

Despite allegations of greenwashing, with regard to financing around fossil fuel projects, the situation is not always as clear-cut as some might think. For example, if financing from any endeavour relating to the fossil fuel sector is withdrawn altogether, then innovative companies such as small start-ups that are focused on finding ways to lower carbon emissions will struggle to find funding.

Innovation, especially in the technology space, is seen as fundamental to helping solve the climate crisis, but too often activists tar all businesses in this sector with the same brush. 

A sense of proportionality is needed, so that businesses addressing solutions enabling the transition from a high-carbon to a low-carbon world are not left out of the equation. 

What can business do to protect themselves from greenwashing claims?

All businesses, regardless of the industry sector in which they operate, need to take practical steps to ensure they are not the targets of greenwashing claims. These include:

1. Being transparent about sustainability-related initiatives. This means not embellishing, overpromising or exaggerating internal or external actions. Providing clear facts and evidence to back-up statements in all communications outreach — for example, in corporate reports, in internal and external meetings, on the website and when speaking with investors and clients — is an essential part of this process.
2. Examine value chains. While sustainability efforts might be ticking along nicely internally, it is vital for businesses to ensure that their suppliers and third parties have sustainability values that are aligned to those of the business. This also applies to operations or subsidiaries operating in markets where sustainability frameworks may not be as robust or fully developed as they are in more mature markets.
3. Do not be afraid to address criticisms. Companies that are seen as furtive or being evasive about greenwashing accusations are more likely to incur further negative attention. Instead, businesses need to address criticisms head on, take steps to change unwanted activities and communicate those efforts to stakeholders.
4. Consider third-party verification from established and well-regarded organisations in order to avoid potential bias. Such verification is considered valuable in terms of reassuring clients and other stakeholders that sustainability claims being made are bona fide in nature.
5. Seek expert counsel before accusations escalate. Too often, businesses wait until there is a crisis brewing before seeking help. If internal actions have failed to remedy the situation, early expert intervention can help bring things under control before reputational risk is incurred.

It is essential that businesses understand the difference between green marketing and greenwashing.

While it is clear that having a sustainability agenda can help a business differentiate itself from competitors and be seen as a way to win over hearts and minds, over-egging green credentials could end up having the opposite effect and alienate investors, consumers and others on whom the business depends for their ongoing survival. 

Rita Hunter is a partner and co-head of the sustainable finance and investment practice at Hogan Lovells

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