As consumers are becoming more conscious of the extent to which organisations make ethical business decisions, there is pressure on businesses to engage in sustainable practices to gain a competitive advantage. In addition, a growth in shareholder activism means businesses will increasingly be held responsible by investors to ensure that they give due importance to issues such as environmental and human rights. We anticipate that 2024 will see an increase in claims by investors, activist groups, and consumers arising out of exaggerating, misleading and/or overstating how 'green' a business' products, services or operations are in reality.
It is understandably attractive for businesses to spotlight their environmental, social and governance (ESG) intentions and commitments but when those commitments are not reflected in products, services, or business operations, or where targets are not met, this can lead to regulatory breaches and litigation. Although there is currently no widely accepted definition of greenwashing in the UK in the context of litigation, Greenpeace defines it as "a PR tactic used to make a company or product appear environmentally friendly, without meaningfully reducing its environmental impact."
One of the most significant consequences that a business may face is reputational damage from which there may be no coming back. ESG credentials are becoming more significant to consumers and to other businesses keen to maintain ethical supply chains.
Regulators are increasingly focusing on greenwashing. The Advertising Standards Agency has announced guidance for advertising that makes sustainability claims, building upon the Green Claims Code introduced by the Competition and Markets Authority in September 2021. In addition, in 2023, the Financial Conduct Authority (FCA) completed a consultation period for the new anti-greenwashing rule, which requires firms to ensure that any reference to sustainability in their products or services is consistent with its actual sustainability profile, as well as clear, fair, and not misleading. The FCA is due to release its Policy Statement in this regard on 30 June 2024, from when this rule will apply to all FCA regulated and authorised firms. Read more about the rise of ESG regulation here.
Litigation is already on the rise and has started to become a weapon in the arsenal of activist groups. One such example is ClientEarth's shareholder claim brought in February 2023 against Shell. ClientEarth argued that Shell's directors had breached their legal obligations under company law by failing to properly manage climate risk. Whilst the court denied permission for ClientEarth to continue with its claim against Shell, this is an example of the novel methods being deployed by activists to bring climate change litigation. We anticipate further activist shareholder claims in 2024 and beyond and the possibility of activist groups considering strategic litigation of this nature against businesses in jurisdictions other than the UK, which might be more favourable to such litigation.
Even where such claims are unsuccessful, their existence attracts attention and has the potential to cause significant reputational damage which can result in a business failing. More recently the Competition and Markets Authority confirmed it is investigating Unilever for overstating how 'green' some of its products are and its commitment to recyclability. Such investigations are likely to increase in 2024 and where breaches of consumer protection or other laws are found to have occurred, will open the floodgates for civil claims.
In addition to the risk of claims being made against the directors of companies personally and, depending on the nature of the business, business leaders should also be aware of the risk of greenwashing claims by groups of individual consumers. The context in which such litigation arises will become increasingly varied but may well include: product liability claims, where a consumer claims that the product as represented by the supplier was different to what they purchased; breach of statutory duty claims, where a consumer seeks to rely on laws and regulations establishing environmental standards or prohibiting greenwashing; and potentially fraud type claims, where a consumer could show both that a company's stated green credentials were false and that the company objectively knew that they were false.
Against this backdrop, non-financial reporting has become just as vital to businesses as regular financial updates. Conducting an ESG audit is best practice to evaluate risk, capabilities, and transparency. The process will highlight and verify data which a company has disclosed to its stakeholders and regulators. To avoid claims, a transparent ESG strategy should be designed and implemented, then reviewed for continuing fitness for purpose. Central to the discharge of the director's duties will be an obligation to ensure that the ESG strategy is followed, and the business's rules, processes and procedures are aligned with the behaviours and attitudes of its people. This will reduce the risk of personal liability of directors and damage to business reputation should there be a failure.
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