Developments in Regulatory and Private Action against Greenwashing

Attention is increasingly being paid to the role of regulators in addressing greenwashing and its variants including ‘bluewashing’, ‘fairwashing’ and ‘purposewashing’, highlighting the initiatives of regulators in certain countries to act on this issue. While this public effort to address ‘corporate lies’ is an important one, it exists in tandem with private legal action aimed to solve the same problem. In this article, one of us demonstrates that there is an increasing risk of private litigation for companies that mislead the public about their human rights performance. Charting the rise of these consumer and investor cases, the article suggests that US courts have been reticent in addressing this problem but identifies certain cases which illustrate a change in tack.

In the United States, consumer protection or consumer fraud cases are being filed in growing number, alleging that companies have either provided false and misleading information or omitted information about their human rights impacts and efforts to mitigate these. Investors are using similar allegations to underpin fraud cases brought under federal securities law. Both investors and consumers assert in these claims that they relied on and were deceived by the information given by the company and suffered damage by either paying an unwarranted price premium for a product or security or making a product or security purchase they would not otherwise have made.

The first wave of consumer cases, predominantly in California, has been unsuccessful. Courts rejected a series of cases alleging that companies omitted to disclose documented modern slavery in supply chains. Undeterred, plaintiffs are filing new cases which, in a change of tactic, allege affirmative misrepresentations on the companies’ part, rather than omissions. There are signs of better outcomes for the plaintiffs in these new cases. Cases brought in the District of Columbia by non-governmental organisations (who can sue as representatives of consumers under the relevant state law) are similarly showing signs of success.

Like consumers, investors face major in their efforts to challenge greenwashing. Their method for doing so is through a private right of action derived from securities law for misleading statements or omissions made in connection with the purchase or sale of securities. Courts are showing a gradual willingness to entertain these legal challenges based on public statements made in sustainability reports or other disclosures, to the extent they can be shown to be sufficiently specific rather than merely aspirational. Successes to date have been largely limited to claims involving environment and/or health and safety disclosures, however.

The article contextualizes consumer and investor litigation, arguing that other means by which companies can be held to their word should be strengthened—in particular, through public oversight and enforcement by agencies such as the Federal Trade Commission and the Securities and Exchange Commission accompanied by more robust disclosure laws.

This is happening to some degree in practice, with private litigation following or being preceded by regulatory action. For instance, investors sued mining company Vale after the collapse of two separate tailings dams in Brazil. Both instances involved a tragic loss of human life and massive environmental damage, with immeasurable consequences for the affected communities’ lives and livelihoods. In both, the company had vastly overstated its environmental, health and safety compliance at the dams. The cases were settled and—last year—the Securities and Exchange Commission announced that it too was bringing an action for securities fraud.

In the United Kingdom, there has been no discernible trend of consumer / investor cases like the US cases discussed in the article. There are, however, a number of regulators grappling with how to approach greenwashing, and a first-of-its-kind derivative action was brought by shareholders (and led by the climate charity ClientEarth) against the directors of Shell for ‘failing to manage the  material and foreseeable risks posed to the company by climate change’ which has the potential to dramatically impact litigation in this area. Regulators that are the most advanced in their approach are the Competition and Markets Authority (CMA), the UK’s principal competition and consumer protection authority, and the Advertising Standards Authority, both of which approach the issue from the perspective of consumer protection as opposed to the preservation of the integrity of financial markets. In September 2021 the CMA announced its intention to focus on companies making misleading environmental claims with the launch of its Green Claims Code. It announced its first investigations for greenwashing in July last year into fast fashion retailers BooHoo, ASOS and ASDA.  In this article one of us provides the background to the launch of the Green Claims Code and here we discuss further developments in the CMA’s approach. Following the CMA’s announcement, in December 2021, the Committee of Advertising Practice and Broadcast Committee of Advertising Practice published ‘advertising guidance’ to assist marketers and advertising agencies to interpret existing rules on environment related advertising issues focussing on misleading environmental claims and social responsibility. Since then, the Advertising Standards Authority has made a number of findings of greenwashing including by a well-known bank. The Digital Markets, Competition and Consumer Bill due be published this month or next could give the CMA the power to fine companies up to 10% of their global turnover for certain misleading green claims.

Whilst the UK’s financial regulator the Financial Conduct Authority is certainly focussing on how to address the risk of greenwashing, it is, unlike its opposite number in the United States, yet to take any enforcement action for greenwashing. Instead the regulator claims to be focussing on putting in guardrails, developing its first set of sustainability disclosure requirements (SDR) targeting greenwashing and working with firms to get them to change behaviour rather than going straight to the point of enforcement. That said, and as one of us has written here, even without the proposed new rules the FCA already has powers through which it could take enforcement action in relation to greenwashing or wider ESG issues.

To conclude, despite a significant political backlash against ESG in the United States, the trends of regulatory action and private litigation identified in this blog post are set to continue.

Rachel Chambers is an Assistant Professor of Business Law at the University of Connecticut School of Business and a Barrister in England and Wales.

Katherine Tyler is a Legal Director (Barrister) at Kingsley Napley.