What are the risks faced by public companies involved in greenwashing?

European and U.S. regulators should take a closer look at the environmental, social and governance (ESG) disclosures of public companies and financial institutions by introducing new disclosure and certification rules and strengthening their enforcement. These measures come at a time of growing concern that companies are exaggerating their sustainability performance in order to capitalize on the growing demand for green investment.

The main focus of the implementation is "greenwashing", a term that describes when a listed company, mutual fund or other public investment vehicle makes a misleading statement about its ESG policies or performance.

As evidence of this growing trend, U.S. and European regulators have taken initiatives and investigated high-profile greenwashing cases in 2022 and 2023.

• Regulatory developments

These actions originate in a variety of places, including March 4, 2021, when the SEC announced the creation of a Climate and ESG Task Force within its Division of Enforcement to focus on ESG-related gaps and inaccuracies in disclosures by publicly traded companies, mutual funds and other investment vehicles. New or forthcoming legislation in various jurisdictions will further expand the legal framework on which regulators can rely to operate.

• Canada

In addition to the activities of consumers and competitors, greenwashing has become an increasingly important priority for Canadian law enforcement agencies, including the Competition Bureau. Competition law prohibits companies from making false or misleading statements to the public in order to promote the sale or use of a product, service or business interest. To determine whether a statement is considered "material", the Bureau examines whether it is likely to influence consumer behavior, for example by encouraging them to buy or use the advertised products or services.

• United States

The SEC used its existing powers and simply applied them in the context of greenwashing. The SEC was expected to carry out more ESG-related investigations and fines this year. Wall Street's top regulator recently adopted a new rule to crack down on greenwashing and other deceptive or misleading business practices by U.S. investment funds. Amendments to the SEC's two-decade-old Name Rule require 80% of a fund's portfolio to match the assets advertised by its name. Investment funds with assets of $1 billion or more will have 12 months to comply with the amendments, and investment funds with assets of less than $1 billion will have 18 months.

• United Kingdom

In the UK, the new anti-money laundering rule will require companies to ensure that any reference to the sustainability characteristics of a product or service is consistent with the sustainability profile of the product or service, and is clear, fair and not misleading. This new FCA rule sends a clear signal that the regulator is taking an interventionist approach to greenwashing. The FCA has not waited for the implementation of the new rules in June 2023 to investigate or take enforcement action against alleged greenwashing practices.

More recently, the Advertising Standards Authority (ASA) will begin enforcing rules on the use of terms such as "carbon neutral", "net zero" and "nature positive" as part of an anti-greenwashing campaign later this year, following a six-month review.

• European Union

The EU Sustainable Finance Disclosures Regulation (SFDR) has already introduced more stringent disclosure requirements and criteria for investments classified as sustainable, essentially enshrining in law what financial companies can claim to be green. The EU also plans to introduce stricter rules for other products and services that companies wish to qualify as sustainable.

• The investigations

• Canada

In October 2022, the Bureau decided to investigate charges of misleading advertising against the Royal Bank of Canada ("RBC"). The complaint accuses RBC of touting its commitment to climate action while continuing to finance the development of fossil fuels. The investigation is still ongoing. Ecojustice, one of the environmental advocacy groups advancing these arguments, has suggested that if the Competition Bureau's investigation concludes that RBC's statements are misleading and false, the bank could be forced to stop advertising itself as supporting the principles of the Paris Agreement and aiming to achieve net zero emissions targets by 2050.

• United States

Last year, the SEC fined BNY Mellon Corp. $1.5 million and Goldman Sachs Group Inc. $4 million for ESG misrepresentations and policy breaches within their investment management units.

• United Kingdom

Last year, the UK's Advertising Standards Authority decided to ban HSBC Holdings PLC's misleading climate ads, while the UK's Competition and Markets Authority recently launched an investigation into green claims made by companies selling essential household products. The first investigation covers environmental declarations for certain consumer goods (such as food and beverages, cleaning products, toiletries and personal hygiene items). The second survey covers a wide range of environmental claims made by three fashion brands on their clothing, footwear and accessories. What's more, as part of the fight against greenwashing, the UK's advertising watchdog has banned a group of ads by major oil and gas companies on the grounds of deception.

Recently, advertisements claiming that products are carbon-neutral thanks to offsets are set to be banned by the UK's advertising watchdog, unless companies can prove that the offsets actually work. Gucci is the latest company to come up against a major environmental commitment based on offsetting.

• European Union

In May, German police raided the Frankfurt offices of the DWS Group and its majority shareholder, Deutsche Bank AG. Investment firm DWS, controlled by Deutsche Bank, will pay $25 million to respond to accusations of misrepresentation of its ESG investments and breaches of policies designed to prevent money laundering.

• Australia

In a recent case, the Australian Securities and Investments Commission accused the American company Vanguard of inaccuracies in its ESG statements. ASIC accuses the company of misleading behavior regarding certain environmental, social and governance criteria applied to investments in its funds. ASIC is seeking declarations and monetary penalties from the court.

• What we can expect

• In the UK and the US, the market for ESG litigation funding is growing, as is the willingness of activists to go to court. Faced with this heightened scrutiny, financial institutions face a major challenge: ensuring that their sustainability statements comply with ever-changing regulatory expectations.

• Shareholders and activists are likely to play a role. For large global institutions, it will be particularly difficult to control what is said publicly about sustainability within their companies. Banks will also face practical challenges in sourcing and verifying the ESG data on which they base their sustainability claims.

• The potential requirement to provide information on Scope 3 GHG emissions, which includes reporting on carbon emissions from external suppliers, and the short timeframe for compliance, could leave many companies unprepared. With the rules likely to come into force in late 2023 or 2024, companies have little time to lose.

These trends are likely to lead to desirable changes in corporate sustainability practices. Transparent publication of key data, both aggregated and disaggregated, will give investors access to information that is useful for decision-making. This information can be analyzed to identify risks. Using the entire emissions value chain also enables investors to take quantifiable measurements to facilitate their investment decision-making.