ESG and the dangers of ‘greenwashing’

Insurance & Risk: Sona

Trying to Impress?

Impressing stakeholders with examples of ESG practice has become an attractive proposition – to the extent that some have over-egged the pudding, making false and unsubstantiated claims about their activities, products, and services. To date, this sort of deceit has not been punished to any great extent, however, lawsuits are now emerging in the USA, and it is only a matter of time before the same sort of legal action appears here in the UK.

Regulation is also increasing, and there has already been some action taken against ‘greenwashing’. The Competition and Markets Authority (CMA) has investigated the eco-claims of leading fashion brands and retailers, and secured undertakings from these brands with regard to future marketing, having found that their claims could not be substantiated. These retailers now have to be unswervingly honest about their assertions and not use misleading ‘natural’ imagery that implies environmental friendliness. They have taken a reputational hit even though the CMA has no financial penalties to levy. Of course, that could change if the Digital Markets, Competition, and Consumer Bill is passed, and significant penalties of up to 10% of turnover could be imposed on future offenders.

The drive to rapidly launch green tech products onto the market might also have been too rapid, making product liability claims more likely in this space. There is also the potential for more environmental liability cases to emerge if products marketed as being ‘environmentally friendly’ are proven to actually cause environmental damage.

Other legislation exists to monitor statements relating to ESG, and the Financial Conduct Authority has instituted a package of measures to reduce greenwashing with regard to some investment products.

Transparency

Company directors need to get on top of this situation now to be absolutely certain that ESG claims can be substantiated. The whole area of litigation against the directors of organisations that engage in ‘greenwashing’ is now one to consider as part of corporate risk management. Shareholder class actions could easily emerge, and due diligence is essential. 

Companies must embed responsible principles into their strategies and honestly communicate ESG-related actions, ensuring transparency and truthfulness underpins all. Directors should take their duty of care with regard to this extremely seriously and show a deep interest in the initiatives being cited as shining examples of ESG policy.

If challenged and needing to mount a defence, they will also need a Directors and Officers insurance policy that can help pull accurate and mitigating evidence together and fund the cost of legal defence services. Talk to us about this cover – and others surrounding the ESG agenda – today.