Environmental, social and governance (ESG) regulation is escalating on a global level and the authorities and non-governmental bodies have been homing in on corporates involved in ‘greenwashing’. In July 2022, the UK Competition and Markets Authority (CMA) launched an investigation into three fashion brands – ASOS, Boohoo and George at Asda – to examine their green claims. This probe follows the publication of the CMA’s Green Claims Code in September 2021.
The CMA states that, ultimately, consumers expect environmental claims to be based on supporting evidence. Where they are not, ‘businesses are likely to have fallen below the standards of diligence and care consumers are entitled to expect of them’. Specifically, ‘misleading environmental claims occur where a business makes claims about its products, services, processes, brands or its operations as a whole, or omits or hides information, to give the impression they are less harmful or more beneficial to the environment than they really are.’ In their July 2021 response to the CMA’s consultation on the draft consumer protection law guidance, the Changing Markets Foundation stated that their findings showed that 59% of fashion brands’ green claims were unsubstantiated or misleading to consumers.
What happens now?
The CMA will now gather evidence to determine whether the three fashion brands have breached consumer protection legislation. It will examine whether their statements and language are too ‘broad and vague’ and give consumers the misleading impression that certain clothing collections are greener than they actually are. It will also look at the criteria used to decide which products are included in their environmentally sustainable collections and statements made about fabric accreditation schemes and standards. If the CMA concludes that these companies’ green claims constitute ‘greenwashing’, it may decide to take no further action, may secure undertakings from the corporates to commit to change or, failing that, it may initiate civil or criminal proceedings.
The Green Claims Code sets out the legal framework for the guidance which is based on consumer protection rules under the Consumer Protection from Unfair Trading Regulations (CPRs) and Business Protection from Misleading Marketing Regulations (BPRs), both of which contain powers of entry and investigation. The BPRs protect traders in business-to-business cases from misleading advertising.
The CPRs introduced a general prohibition across all sectors preventing traders from engaging in unfair commercial practices towards consumers. Under the CPRs, sanctions include criminal prosecution and enforcement through the civil courts; they also give consumers a civil right of redress.
Where an offence under the CPRs has been committed with the consent or connivance of a company officer – a director, manager, secretary or similar – or is attributable to any neglect on their part, the officer and the corporate will be guilty of the offence. Such an offence could be a ‘misleading omission’.
A misleading omission occurs when material information has been omitted or hidden, or information is provided in a way that is ambiguous or fails to identify its commercial intent, ultimately causing or likely to cause a consumer to make a transactional decision they would not have made otherwise.
There is a limitation period for a prosecution under the CPRs of three years from the date of the offence taking place or one year from the discovery of the offence by the prosecution, whichever is earlier.
Other considerations
In addition, the CMA works closely with other enforcement and regulatory bodies, such as the Trading Standards Service and the Advertising Standards Agency (ASA), and will consider ‘which authority is best placed to act when taking decisions about enforcement action on misleading environmental claims’.
In June 2022, the ASA also published guidance on misleading environmental claims and social responsibility which operates alongside the CMA’s Code. Shortly afterwards, the ASA ruled that Tesco’s adverts for its ‘Plant Chef’ range were likely to mislead, making unsubstantiated claims that those products were better for the planet than meat-based alternatives.
The FCA’s 2022–2023 Business Plan states that one of their ESG priorities is tackling misleading marketing and disclosure around ESG-related products. In their first climate-related disclosure report published in July 2022, the Financial Conduct Authority (FCA) warned that ‘we are now increasing our focus on supervision and enforcement of climate-related issues, both in relation to our disclosure rules and wider climate-related consumer and market harms. This includes actively looking for cases of greenwashing to pursue.’
Separately, the CMA’s announcement should put corporates on notice of potential dawn raids – surprise inspections that examine potential violations of competition law. Dawn raids have now resumed – a relevant example being the concerted action by the European Commission and the CMA against the automobile sector in March 2022 regarding the recycling of end-of-life vehicles.
The CMA’s new powers
It remains to be seen whether the authorities will have the appetite and resources to initiate criminal investigations for ‘greenwashing’. The UK government announced sweeping proposed reforms to the CMA’s powers in April 2022, of which many will require the implementation of legislation and parliamentary time.
If these powers are brought into effect, the CMA would be able to enforce consumer law directly rather than going through the courts, and they could impose hefty fines. These fines could be as much as 1% of a business’ annual worldwide turnover for a failure to comply with an investigation measure such as an information request, as well as an additional daily penalty of up to 5% of a business’ annual worldwide turnover while non-compliance continues. A business could also be fined up to 5% of its global turnover by the CMA with a similar daily penalty for breach of an undertaking or direction. Where a business has broken consumer protection law, the CMA would be able to impose a penalty of up to 10% of the business’ global annual turnover.
Take action now
In July 2022, the CMA interim chief executive warned that ‘all fashion companies should take note: look at your own practices and make sure they are in line with the law.’
It is important to note that the CMA is conducting a wider investigation of the fashion industry and says that ‘other sectors will come under review in due course.’ Across the board, the watchdog expects corporates to be prepared to justify and substantiate any claims they make on sustainability, including by co-operating and providing access to internal documentation to evidence any claims made. This means looking into the business introspectively as well as looking across to what competitors are doing and preparing to engage with the regulator.
Internally, corporates should be deploying two strategies: a communications strategy and a sustainability strategy. In relation to communications, it is clear that consumers want businesses to be ‘authentic’ and the messaging to match the product they buy or in which they invest. For instance, in the current sourdough frenzy, a loaf of bread labelled as ‘organic sourdough’ must meet sector-specific rules that food products must be made from at least 95% organic ingredients to be labelled as organic – anything less would be misleading.
Regarding a sustainability strategy, corporates should engage lawyers early on to ensure that the internal documentation on which any sustainability claims are made will withstand scrutiny and is evidence-based. For example, in relation to Principle 6, most environmental claims are likely to be factual claims that can be tested against scientific or other evidence. The CMA states that businesses should be able to substantiate their claims and ‘should hold robust, credible, relevant and up-to-date evidence that supports them. Where they compare their products or activities to one or more competitors, that evidence should cover all of them.’ This is critical in the context of litigation where the courts may ask a business to provide evidence of the accuracy of its claims. Examples of such evidence include published research or studies that a business has commissioned or conducted – however, the best evidence is that which is independent and widely supported.
Corporates reported to be investigated by the CMA may also suffer reputational damage. Hedge funds have already predicted that Boohoo and ASOS’ share price will drop and that a negative finding by the CMA will probably dissuade investors, all of which could lead to these companies’ demise.
Finally, the notion of working with competitors should not be ruled out as resources can be pooled to formulate sector-tailored commitments and standards, which may reassure the regulator.
Enforcement in other jurisdictions
The CMA’s investigation follows a number of civil and criminal actions brought by the authorities across the globe for alleged ‘greenwashing’.
In August 2021, a civil case was filed in Australia by the Australasian Centre for Corporate Responsibility against Santos Ltd in respect of its claims that natural gas provides ‘clean energy’ and that it has a ‘credible and clear plan’ to achieve ‘net zero’ emissions by 2040. This is the first case where the veracity of a company’s net zero emissions target has been challenged.
In April 2022, it was reported that the ASA was preparing to warn HSBC about misleading customers by selectively publicising its green initiatives, while omitting information about its ongoing financing of companies with large greenhouse gas emissions.
In May 2022, BNY Mellon Investment Adviser, Inc. agreed to pay a $1.5 million penalty to settle the charges brought by the SEC for misstatements and omissions regarding its ESG considerations when managing certain mutual funds. This is the first time the SEC has settled with an investment adviser concerning ESG statements.
The SEC and the German financial watchdog BaFin are looking into reports and a whistleblower’s claims that DWS Group, a subsidiary of Deutsche Bank, allegedly misled investors on the basis that it had overstated the environmental credentials of its products, which DWS has consistently refuted. DWS and Deutsche Bank were raided by German police in Frankfurt in late May 2022.
In July 2022, a class action lawsuit was filed against H&M Hennes & Mauritz LP in New York on the basis that ‘H&M’s labelling, marketing and advertising aims to mislead consumers about its products’ environmental attributes.’
ESG regulation is here to stay
ESG compliance has become an increasingly complex and challenging regulatory environment for companies to navigate. Increased levels of corporate transparency have been brought about by whistleblowing, corporate leaks and the dissemination of corporate information online, often through social media campaigns. These factors have forced companies to look more closely at their health and safety, environmental and wider human rights practices to ensure compliance not only with legislation, but also with product and industry standards as well as consumers’ moral and ethical expectations.
Corporations must start looking at their sustainability and communications policies now, be open to dialogue with the authorities and their competitors and be ready to provide the evidence that supports and substantiates their respective environmental claims.
Maria Cronin, Partner, Peters & Peters and Cécile Nicod, Associate, Peters & Peters
Image credit | Shutterstock
