Tag: greenwashing

EU to Ban Carbon Offset Claims Entirely?

Responding to pressure from activists who have argued that “[c]arbon neutral claims are greenwashing, plain and simple,” the European Parliament and Council have reached a provisional agreement to ban all carbon-neutral claims in member states. If the Parliament approves the deal, member states will have 24 months to enact legislation to implement it. So, a new set of laws could become effective in 2026. Corporations will have some lead time to come into compliance.

The EU provisional agreement, if made final, will be the latest blow to carbon neutrality claims and is particularly unfortunate in not distinguishing between credible and non-credible offsets. This could also hurt voluntary carbon markets, which have been jarred by the recent demise of the giant, offset-producing African Kariba Project.

Commentators have also speculated that the EU Parliament and Council action is an effort to “put a thumb on the scales” of the FTC Green Guides revision process, currently underway in the United States. If the FTC were to follow suit, carbon reforestation projects worldwide could be jeopardized. Of course, the FTC is bound by the First Amendment and would be reluctant to “ban” a statement. However, it could erect onerous substantiation and disclosure requirements that render such claims much more difficult to make.

The ill-fated Kariba Project has become an unfortunate bellwether for carbon neutrality claims based on credits generated from reforestation or forest preservation. The episode may say more about financial speculation in carbon markets than it does about the science of reforestation. Replanting trees is a surefire way to sequester carbon – at least for a while – and financial incentives to do so should be encouraged, not discouraged.

These realities aside, the clear upshot is that carbon neutrality claims are increasingly under attack by activists who seemingly lump all carbon offsets together as “harmful” – whether generated by reforestation, carbon capture, or voluntary carbon reduction. That’s too bad, as any credible financial incentive to remove carbon from the atmosphere should be encouraged, if not financially incentivized. The role of independent certifiers is to ensure that the carbon offsets are real and not overstated. A flat ban seems counterproductive to environmental protection and greenhouse gas reduction.

The sad reality is that many companies will begin to migrate away from reliance on carbon offsetting. It is simply becoming too risky. Meanwhile, voluntary carbon trading markets will suffer greatly, and a crucial green development mechanism will be lost.

The sad reality is that many companies will begin to migrate away from reliance on carbon offsetting. It is simply becoming too risky.
©2023 Katten Muchin Rosenman LLP
by: Christopher A. Cole of Katten 
For more news on Carbon Offsetting in the EU, visit the NLR Environmental, Energy & Resources section.

Is ‘Freedom-Washing’ the New Greenwashing, and What Are Its Legal Consequences?

Companies will often make representations about modern slavery as part of their environmental, social and governance (ESG) measures.

In this article, we consider whether potentially false or misleading claims about modern slavery (i.e., freedom-washing) may be further called out by Australian regulatory bodies.

‘Freedom-washing’ is a term that can be used to describe a false or misleading claim by an organisation about the positive work being done to identify, assess and combat its modern slavery risks.

Even an understatement or nonstatement of an organisation’s modern slavery risks in its supply chains and operations may be considered ‘freedom-washing’ if it has the intent or effect to mislead the reader (for example, if the organisation’s responses appear overall to be more positive than they would otherwise appear in that light).

‘Freedom-washing’ will not necessarily involve an overtly false action. In some circumstances, a claim may not be entirely accurate despite being partly accurate.

An organisation required to report under the Modern Slavery Act 2018 (Cth) (Modern Slavery Act) needs to carefully consider the information it releases about its modern slavery risks and responses and whether it is potentially engaging in ‘freedom-washing.’

Importantly for all current and future reporting organisations, the scrutiny continues to mount around the legislative framework combatting modern slavery (including in terms of reporting, offences and penalties).

This scrutiny is highlighted by the release of the following recent important reports and studies:

  • The statutory report of the Modern Slavery Act (see here);
  • The targeted review of Divisions 270 and 271 of the Criminal Code 1995 (Cth) (see here); and
  • The Modern Slavery Index (see here).

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION (ACCC) / AUSTRALIAN CONSUMER LAW

As previously reported by K&L Gates, the ACCC has released long-anticipated guidance on environmental and sustainability claims (Guidance—see here), which sets out eight principles that businesses should follow when making environmental and sustainability claims and to comply with the Australian Consumer Law (ACL).

Although the Guidance was issued in the context of making environmental and sustainability claims, in our view, its eight principles can be applied equally to guide businesses in making ‘modern slavery’ claims without breaching the ACL. The Guidance encourages businesses to:

  • Make accurate and truthful claims.
  • Have evidence to back up claims.
  • Not leave out or hide important information.
  • Explain any conditions or qualifications on claims.
  • Avoid broad and unqualified claims.
  • Use clear and easy to understand language.
  • Remember visual elements should not give a wrong impression.
  • Be direct and open.

The ACL contains a broad prohibition against businesses engaging in misleading or deceptive conduct and prohibits the making of false or misleading representations about specific aspects of goods or services. As a result, claims that overstate an organisation’s modern slavery commitments generally, or inaccurately portray the working conditions within certain supply chains, may contravene the ACL.

We therefore recommend that organisations should also reflect on the Guidance when preparing a modern slavery statement or releasing information on modern slavery practices.

Breaches of the ACL incur very significant penalties. For corporations, the maximum pecuniary penalty per breach is the greater of:

  • AU$50 million;
  • Three times the value of the ‘reasonably attributable’ benefit obtained from the conduct; or
  • If this benefit cannot be determined, 30% of the corporation’s adjusted turnover during the breach turnover period (being a minimum of 12 months).

The ACCC will consider whether the following factors apply when determining whether to take enforcement action for a breach of the ACL:

  • The conduct is of significant public interest or concern;
  • The conduct results in substantial harm to consumers and detriment to business competitors;
  • Large businesses are making claims on a national scale;
  • The conduct involves a significant new or emerging market issue, or compliance or enforcement action is likely to have an educative or deterrent effect; or
  • ACCC action will help clarify aspects of the law, especially newer provisions of the ACL.

Furthermore, the ACCC will take into account the genuine efforts and appropriate steps that were taken by the business to verify the accuracy of any information they relied on.

But is there actually any appetite in the ACCC to seek to enforce the ACL with respect to ‘modern slavery’ claims?

To date, it has not given any indication that ‘modern slavery’ claims will be an enforcement priority. However, the ACCC has demonstrated a willingness to crack down on businesses that have sought to take advantage of increasingly environmentally and socially conscious consumers (e.g. greenwashing). Combined with growing scrutiny and broadening calls for tougher responses to be taken by government and business in combatting modern slavery, the possibility of ACCC action does appear to exist, if not now, then in the not too distant future.

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (ASIC) / FINANCIAL PRODUCTS AND DISCLOSURE OBLIGATIONS

General Provisions

The Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) both contain general prohibitions against companies:

  • Making statements or circulating information that is false or misleading; or
  • Engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service.1

ASIC released Report 763 earlier in the year (read it here), which expanded on its approach to ‘greenwashing’ outlined in Information Sheet 271 (read it here). It detailed ASIC’s recent interventions in response to growing claims from companies, managed funds and superannuation funds about their ESG credentials.

ASIC has expanded both its surveillance and enforcement activities in regards to ‘greenwashing.’ ASIC has pursued civil penalty proceedings and issued infringement notices to companies that are making statements that are false or misleading about ESG ‘greenwashing’ claims.

In light of these actions in the ESG space, we recommend companies be vigilant about the information they include in their modern slavery statements and be careful about the modern slavery disclosures they make in relation to a financial product or service.

Product Disclosure Statements

Under section 1013D(1)(l) of the Corporations Act, if a financial product has an investment component, its issuer must include in the product disclosure statement the extent to which labour standards or environmental, social or ethical considerations are taken into account in selecting, retaining or realising an investment. This is relevant in the modern slavery context where companies are releasing product disclosure statements that refer to modern slavery ESG considerations or make reference to previous market disclosures on modern slavery practices.

ASIC has undertaken reactive and proactive surveillance of product disclosure statements, advertisements, website and other market disclosures. ASIC is also progressing surveillance of the superannuation fund sector on ESG claims.

International Sustainability Standards Board (ISSB) Standards for Disclosure

In addition to ASIC’s enforcement powers, the ISSB has introduced two new standards, IFRS S1 and S2. The standards are likely to be substantially aligned to the mandatory climate-related disclosures in Australia being prepared by the Australian Accounting Standards Board and the Treasury.

Relevant to modern slavery, the new standard IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information requires an entity to disclose information about its sustainability-related risks and opportunities in its general purpose financial reports (read it here).

To achieve the required fair presentation of sustainability-related financial information, an entity is required to provide a complete, neutral and accurate depiction of those sustainability-related risks and opportunities. Additionally, any material information must be disclosed. Information can be material where it omits, misstates or obscures information that could reasonably be expected to influence the decision making of readers of such reports.

‘Sustainability-related risks and opportunities’ are broadly defined as risks and opportunities that could reasonably be expected to affect an entity’s cash flows or access to finance. Anything that impacts an entity’s value chain will be an opportunity or risk to its cash flows. The entity’s work force is an example of a sustainability-related risk and opportunity. Therefore, reporting entities may have to report modern slavery in their supply chains as a material risk to their value chain, particularly if they are operating in a sector where the risk of modern slavery is heightened (for example, renewable energy projects or garment manufacturing).

While compliance with the ISSB standards remains voluntary until codified under Australian law, it is expected that the standards will be widely adopted by companies internationally.

OTHER CONSEQUENCES OF FREEDOM-WASHING

There are many other potential legal consequences of freedom-washing. These include:

  • Criminal liability under section 137.1 of the Criminal Code Act 1995 (Cth): This offence applies where a person knowingly gives information that is false or misleading or omits any matter or thing without which the information is misleading, and the information is given to a Commonwealth entity;
  • Breach of directors duties: If directors are not appropriately managing and disclosing the company’s modern slavery risks, then they could be in breach of the duty to exercise skill, care and diligence;
  • Requisition resolutions: Shareholders may requisition a resolution at the company’s annual general meeting in regards to modern slavery and the company’s supply chain practices; and
  • Shareholder class action: Shareholders may start a class action if the company has breached continuous disclosure laws by not reporting a modern slavery issue correctly or accurately.

INTRODUCTION OF PENALTIES UNDER THE MODERN SLAVERY ACT

The report on the statutory review of the Modern Slavery Act was released on 25 May 2023.

Its recommendations included that the Modern Slavery Act be amended to provide that it is an offence for a reporting entity to:

  • Fail, without reasonable excuse, to give the minister a modern slavery statement within a reporting period for that entity;
  • Give the minister a modern slavery statement that knowingly includes materially false information;
  • Fail to comply with a request given by the minister to the entity to take specified remedial action to comply with the reporting requirements of the Modern Slavery Act; and
  • Fail to have a due diligence system in place that meets the requirements set out in rules made under section 25 of the Modern Slavery Act.

The Australian Government has signaled it will now consider Professor John McMillan’s review and will consult across government and with stakeholders in formulating its response to the recommendations. Companies operating business in Australia should watch this space carefully.

We acknowledge the contributions to this publication from our graduate Harrison Langsford.

FOOTNOTES

1 See sections 1041E, 1041G and 1041H of the Corporations Act 2001 (Cth), and sections 12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (Cth).

Copyright 2023 K & L Gates
Article by Michael Hain , Ayman Guirguis , Clive Cachia of K&L Gates
For more articles on ESG, visit the NLR Environmental, Energy & Resources section.

How to Succeed in Environmental Marketing Claims

Environmental marketing claims often present something of a Catch-22—companies that are doing actual good for the environment deserve to reap the benefits of their efforts, and consumers deserve to know, while at the same time, heightened scrutiny from the Federal Trade Commission (FTC), the National Advertising Division (NAD), state regulators and the plaintiffs’ bar have made such claims increasingly risky.

In 2012, the FTC issued the Green Guides for the use of environmental marketing claims to protect consumers and to help advertisers avoid deceptive environmental marketing. Compliance with the Green Guides may provide a safe harbor from FTC enforcement, and from liability under state laws, such as California’s Environmental Marketing Claims Act, that incorporate the Green Guides. The FTC has started a process to revise the Green Guides, including a request for comments about the meaning of “sustainable.” In the meantime, any business considering touting the environmental attributes of its products should consider the following essential takeaways from the Green Guides in their current form:

    • Substantiation: Substantiation is key! Advertisers should have a reasonable basis for their environmental claims. Substantiation is the support for a claim, which helps ensure that the claim is truthful and not misleading or deceptive. Among other things, substantiation requires documentation sufficient to verify environmental claims.
    • General benefit claims: Advertisers should avoid making unqualified claims of general benefit because substantiation is required for each reasonable interpretation of the claim. The more narrowly tailored the claim, the easier it is to substantiate.
    • Comparative claims: Advertisers should be careful and specific when making comparative claims. For example, a claim that states “20% more recycled content” begs the question: “compared to what?” A prior version of the same product? A competing product? Without further detail, the advertiser would be responsible for the reasonable interpretation that the product has 20% more recycled content than other brands, as well as the interpretation that the product has 20% more recycled content than the advertiser’s older products.
    • General greenwashing terms: Advertisers should be very cautious when using general environmental benefit terms such as “eco-friendly,” “sustainable,” “green,” and “planet-friendly.” Those kinds of claims feature prominently in many complaints alleging greenwashing, and they should only be used where the advertiser knows and explains what the term means, and can substantiate every reasonable interpretation of the claim.

Putting it into Practice: Given the scrutiny that environmental claims tend to attract, advertisers should exercise care when making environmental benefit claims about their products and services. They should narrowly tailor their claims to the specific environmental attributes they want to promote, and perhaps most important, they should ensure they have adequate backup to substantiate their claims. While the FTC Green Guides are due for a refresh (which we will surely report on), for the time being, they will continue to serve as important guidance for advertisers seeking to inform consumers without exposing their business to FTC scrutiny or class action litigation.

FTC Starts Long-Awaited Green Guides Review

  • On December 14, 2022, at an open meeting of the Federal Trade Commission (“FTC” or “Commission”), FTC commissioners voted unanimously to publish a Notice in the Federal Register announcing a Request for Public Comments on potential amendments to the Commission’s Guides for the Use of Environmental Marketing Claims (“Green Guides” or “Guides”).
  • The FTC solicits comments on the ongoing need for the Guides and on specific claims addressed in the Guides, including “recyclable,” “recycled content,” “degradable,” “compostable,” and more. It also asks if it should initiate a rulemaking process and address claims it declined to consider during the last review, such as “organic” and “sustainable.”
  • Importantly, given the growth in some state laws that purport to restrict claims, the FTC asks for input on whether the Guides conflict with federal or state laws. This proceeding is expected to garner significant input.
  • Once the Notice is published in the Federal Register (which the FTC anticipates will be in mid-January 2023), interested stakeholders will have 60 days from the date of the Notice to submit comments to the FTC, unless an extension is granted.
  • For more information about the FTC Notice, please read our report here.

© 2022 Keller and Heckman LLP

For more Energy and Environmental Law news, click here to visit the National Law Review.

REI PFAS Consumer Fraud Lawsuit Continues Trend of Similar Lawsuits

On October 28, 2022, a PFAS consumer fraud class action lawsuit was filed in Washington against REI over alleged PFAS content in various articles of waterproof clothing sold by the company. The REI PFAS consumer fraud lawsuit is but the latest in a growing line of PFAS lawsuits that allege that certain consumer goods contain PFAS, that the products or company’s values were marketed as healthy or environmentally friendly, and that consumers would not have purchased the products if they knew that the products contained PFAS.

As we predicted in early 2021, the increased attention on PFAS content in consumer goods in the scientific community and media presented significant risks to various industries, including the apparel and cosmetics industry, and our prediction was that the developments would lead to a significant number of lawsuits alleging consumer fraud. Consumer goods industries, insurers, and investment companies interested in the consumer goods vertical with niche interest in cosmetics companies must pay careful attention to the cosmetics lawsuits and the increasing trend of lawsuits targeting the industry.

REI PFAS Consumer Fraud Lawsuit

On October 28, 2022, plaintiffs Jacob Krakauer and Joyce Rockwood filed a lawsuit in Washington federal court seeking a proposed class action against REI. The lawsuit alleges that REI markets the company and its products as environmentally friendly and sustainable. Further, the lawsuit cites to statements made by REI that the company is taking proactive steps with respect to chemical use in its products to argue that such statements were false, misleading or induced consumers to purchase products when the presence of PFAS in the products was not disclosed.

In the Complaint, plaintiffs allege the following counts against REI:

  • Violation of state consumer protection laws and the federal Magnuson-Moss Warranty Act

  • Breach of warranty (implied and express)

  • Fraud (actual and constructive)

  • Fraudulent inducement

  • Money had and received

  • Fraudulent omission or concealment

  • Fraudulent misrepresentation

  • Negligent misrepresentation

  • Unjust enrichment

  • Negligent failure to warn

The plaintiffs seek certification of a nationwide class action lawsuit, with subclasses defined as consumers n Washington and Arizona. In addition, the lawsuit seeks damages, fees, costs, the establishment of medical monitoring, and a jury trial.

Just the Beginning For Consumer Products Companies

With studies underway, legislation pending that targets consumer goods, and increasing media reporting on PFAS in consumer goods and concerns over human health, product manufacturers should be increasingly wary of lawsuits similar to the REI lawsuit being filed against them. There are an increasing number of PFAS consumer fraud cases being filed, with some of the below as representative of recent trends:

  • Cosmetics industry:

    • Brown v. Cover Girl, New York (April 1, 2022)

    • Anderson v. Almay, New York (April 1, 2022)

    • Rebecca Vega v. L’Oreal, New Jersey (April 8, 2022)

    • Spindel v. Burt’s Bees, California (March 25, 2022)

    • Hicks and Vargas v. L’Oreal, New York (March 9, 2022)

    • Davenport v. L’Oreal, California (February 22, 2022)

  • Food packaging industry:

    • Richburg v. Conagra Brands, Illinois (May 6, 2022)

    • Ruiz v. Conagra Brands, Illinois (May 6, 2022)

    • Hamman v. Cava Group, California (April 27, 2022)

    • Azman Hussain v. Burger King, California (April 11, 2022)

    • Little v. NatureStar, California (April 8, 2022)

    • Larry Clark v. McDonald’s, Illinois (March 28, 2022)

  • Feminine hygiene products:

    • Gemma Rivera v. Knix Wear Inc., California (April 4, 2022)

    • Blenis v. Thinx, Inc., Massachusetts (June 18, 2021)

    • Destini Canan v. Thinx Inc., California (November 12, 2020)

As the above is indicative of, several major companies now find themselves embroiled in litigation focused on PFAS false advertising, consumer protection violations, and deceptive statements made in marketing and ESG reports. The lawsuits may well serve as test cases for plaintiffs’ bar to determine whether similar lawsuits will be successful in any (or all) of the fifty states in this country. Companies must consider the possibility of needing to defend lawsuits involving plaintiffs in all fifty states for products that contain PFAS.

It should be noted that these lawsuits would only touch on the marketing, advertising, ESG reporting, and consumer protection type of issues. Separate products lawsuits could follow that take direct aim at obtaining damages for personal injury for plaintiffs from consumer products. In addition, environmental pollution lawsuits could seek damage for diminution of property value, cleanup costs, and PFAS filtration systems if drinking water cleanup is required.

Conclusion

It is of the utmost importance that businesses along the whole supply chain in the consumer products industry evaluate their PFAS risk. Public health and environmental groups urge legislators to regulate PFAS at an ever-increasing pace. Similarly, state level EPA enforcement action is increasing at a several-fold rate every year. Now, the first wave of lawsuits take direct aim at the consumer products industry. Companies that did not manufacture PFAS, but merely utilized PFAS in their manufacturing processes, are therefore becoming targets of costly enforcement actions at rates that continue to multiply year over year. Lawsuits are also filed monthly by citizens or municipalities against companies that are increasingly not PFAS chemical manufacturers.

For more Environmental Law news, click here to visit the National Law Review.

©2022 CMBG3 Law, LLC. All rights reserved.

Restaurant Greenwashing: Diners Beware or Industry Beware?

In June 2021, a class action lawsuit was filed in California in which restaurant greenwashing was alleged due to sustainability statements made on Red Lobster’s menus. Now, Red Lobster has filed pleadings with the court seeking to have the case dismissed, arguing that plaintiffs failed to establish any colorable claim on which they can prevail. While it remains to be seen what the court will do with the lawsuit, the critical takeaway from the litigation is that any industry, not just the consumer goods industry, must realize that marketing buzzwords such as “sustainable”, “environmentally friendly”, and “responsibly sourced” are in the crosshairs. Now more than ever, globally situated companies of all types that are advertising, marketing, drafting ESG statements, or disclosing information as required by regulatory agencies must pay extremely close attention to the language used in all of these types of documents, or else run the risk of enforcement action or lawsuits.

Restaurant Greenwashing Lawsuit

The 2020 Red Lobster lawsuit alleged that “Seafood With Standards” statements on Red Lobster’s menus regarding the sustainability, traceability and responsible sourcing of its lobster and shrimp were false. Instead, the lawsuit argues, the Maine lobster served by Red Lobster are not sustainably sourced and the farmed shrimp used by the restaurant chain are not responsibly sourced. The lawsuit alleges that Red Lobster’s purveyors instead use environmentally damaging and inhumane methods for catching or harvesting the seafood supplies.  As such, marketing statements made on Red Lobster’s menus and in other advertising were false and misleading.

The claims in the Complaint range from allegations that fishing practices harm whale populations to allegations of inhumane treatment of female shrimp to boost reproductivity to allegations of antibiotic and chemical use in shrimp farms to promote rapid growth. The relief sought in the lawsuit is injunctive relied for the court to stop any practices found to be deceptive and misleading, as well as over $5 million in damages (which are as of yet unspecified in terms of exact amount).

Last week, Red Lobster fought back, arguing that the plaintiffs’ allegations regarding the marketing slogan and the information on the restaurant chain’s menus are overbroad. Instead, the company argues, the language on the menus merely invites diners to visit the Red Lobster website to learn more about the company’s commitment to sustainable, tracing and sourcing initiatives. The plaintiffs disagree and argue that an ordinary consumer would not view Red Lobster’s menus as merely a “redirect” to the company’s website, but instead an assertion about the products found on the menu.

Corporate Preparation Is Key

In less than two months in 2022, the fashion industry, the cosmetics industry, and the restaurant industry have seen litigation and regulatory agency activity increase with respect to greenwashing concerns. Restaurant greenwashing complaints provide a natural supply of potential plaintiffs for potential class action lawsuits given the number of consumers that would be subject to the reach of marketing by the industry. We predict that 2022 will see a great degree of regulatory enforcement action and legislation seeking to curb over zealous marketing language or statements that could be seen as greenwashing, and the Red Lobster lawsuit is certainly one to watch to determine the future impact on the industry.

While there are numerous avenues to examine to ensure that ESG principles are being upheld and accurately conveyed to the public, the underlying compliance program for minimizing greenwashing allegation risks is absolutely critical for all players putting forth ESG-related statements. These compliance checks should not merely be one-time pre-issuance programs; rather, they should be ongoing and constant to ensure that with  ever-evolving corporate practices, a focused interest by the regulatory agencies on ESG, and increasing attention by the legal world on greenwashing claims, all statement put forth are truly “ESG friendly” and not misleading in any way.

This article was written by John Gardella of CMBG3 law firm. For more articles on greenwashing, please see here.

Greenwashing and the SEC: the 2022 ESG Target

A recent wave of greenwashing lawsuits against the cosmetics industry drew the attention of many in the corporate, financial and insurance sectors. Attacks on corporate marketing and language used to allegedly deceive consumers will take on a much bigger life in 2022, not only due to our prediction that such lawsuits will increase, but also from Securities & Exchange Commission (SEC) investigations and penalties related to greenwashing. 2022 is sure to see an intense uptick in activity focused on greenwashing and the SEC is going to be the agency to lead that charge. Companies of all types that are advertising, marketing, drafting ESG statements, or disclosing information as required to the SEC must pay extremely close attention to the language used in all of these types of documents, or else run the risk of SEC scrutiny.

SEC and ESG

In March 2021, the SEC formed the Climate and Environmental, Social and Governance Task Force (ESG Task Force) within its Division of Enforcement. Hand in hand with the legal world’s attention on greenwashing in 2021, the SEC’s ESG Task Force was created for the sole purpose of investigating ESG-related violations. The SEC’s actions were well-timed, as 2021 saw an enormous increase in investor demand for ESG-related and ESG-driven portfolios. There is considerable market demand for ESG portfolios, and whether this demand is driven by institute influencers or simple environmental and social consciousness among consumers is of little importance to the SEC – it simply wants to ensure that ESG activity is being done properly, transparently and accurately.

Greenwashing and the SEC

The SEC has stated that in 2022, it will be taking direct aim at greenwashing issues on many different levels in the investment world. As corporations and investment funds alike increasingly put forth ESG-friendly statements pertaining to their actions or portfolio content, the law has thus far failed to keep pace with the increasing ESG statement activity. It is into this gap that the SEC sees itself fitting and attempting to ensure that the public is not subject to greenwashing. In order to tackle this objective, expect the SEC to focus on the wording used to describe investments or portfolios, what issuers say in filings, and the statements made by investment houses and advisors related to ESG.

From this stem several topics that the SEC’s ESG Task Force will scrutinize, such as: whether “ESG investments” are truly comprised of companies that have accurate and forthright ESG plans; the level of due diligence conducted by investment houses in determining whether an investment or portfolio is “ESG friendly”; how investment world internal statements differ from external public-facing statements related to the level of ESG considerations taken into account in an investment or portfolio; selling “ESG friendly” investments with no set method for ensuring that the investment continues to uphold those principles; and many others.

2022, the SEC, and ESG

Given the SEC’s specific targeting of ESG-related issues beginning in 2021, we predict that 2022 will see a great degree of SEC enforcement action seeking to curb over zealous marketing language or statements that it sees as greenwashing. Whether these efforts will intertwine with the potential for increased Department of Justice criminal investigation and prosecution of egregious violators over greenwashing remains to be seen, but it is nevertheless something that issuers and investment firms alike must closely consider.

While there are numerous avenues to examine to ensure that ESG principles are being upheld and accurately conveyed to the public, the underlying compliance program for minimizing greenwashing allegation risks is absolutely critical for all players putting forth ESG-related statements. These compliance checks should not merely be one-time pre-issuance programs; rather, they should be ongoing and constant to ensure that with  ever-evolving corporate practices, a focused interest by the SEC on ESG, and increasing attention by the legal world on greenwashing claims, all statement put forth are truly “ESG friendly” and not misleading in any way.

Article By John Gardella of CMBG3 Law

For more environmental legal news, click here to visit the National Law Review.

©2022 CMBG3 Law, LLC. All rights reserved.