Business Greenwashing Trap

•  It can damage their reputation incurring financial cost

T Leaders around the world are reaffirming their commitment to accelerate measures to fight climate change. Similarly, Christine Lagarde, President of the European Central Bank (ECB), recently stated that the fight against climate change is on the agenda of ECB’s Governing Council on assessment and discussions when determining the monetary policy of the Euro-zone.

At the same time, international studies show that businesses committed to developing a strong Environmental, Social, and Governance (ESG) profile by redefining their operational models are much more likely to attract new funding. Investments embedding ESG criteria have increased exponentially in recent years and are estimated to exceed $53 trillion by 2025.

However, not everything should be considered “green” even if promoted or labeled as such. Complaints about the so-called "Greenwashing" or "green laundering" are increasing rapidly. The Greenwashing phenomenon arises primarily from abusive marketing practices that exaggerate or misrepresent the Sustainability characteristics of a product, a service or a strategy.

Over time, it is attributed to every framework of commercial and business practice, e.g. a new vehicle, a savings product, a commitment to zero emissions, a green building, reduction of carbon footprint and net zero products. Promotion or labeling of such products or services should correspond to their real objective, otherwise can be considered as exaggerated and misleading.

As stakeholders push companies to develop production processes that will reduce their environmental and negative social footprint, many fall into the Greenwashing trap, either intentionally or because of negligence.

Unfortunately, businesses from a vast array of sectors (even those that are strictly supervised and heavily regulated) in their attempt to capitalize on this growing ESG market, are overpromoting their "green" credentials. The result of such probably genuine efforts, usually not thoroughly assessed fitting in the operational structure of a business, is to reach or even exceed the limits of unfair "washing" and recognized codes of conduct. This tendency to exaggerate best practices can or has lead to an increased risk of Greenwashing allegations. Indicative are the findings of a recent study, according to which, almost 60% of the claims about sustainable practices by certain fashion houses could be classed as "unsubstantiated" and "misleading".

The ramifications of Greenwashing are not just about the reputation and good name of a business. There can also be direct financial implications leading to litigation through lawsuits as well as imposition of regulatory penalties.

An example of such a case is Client Earth (clientearth.org), a pioneering non-governmental organization (NGO) staffed mainly by lawyers that aims, among other things, to protect the environment through legal tools provided by the Rule of Law. In 2019, the organisation, alleging misleading or false representations, filed the first legal claim of its kind against BP Petroleum and most recently, against Chevron. It is indicative that in the United States the companies ExxonMobil, Wesson Oils and Tyson Foods Inc. are in the crosshairs of both non-profit organizations as well as supervisory authorities, following Greenwashing claims. These cases should and are monitored both for their scientific development on the basis of existing laws and regulations, as well as the level of implementation of models and practices that will be judged depending on the result.

On the other side of the Atlantic, litigation has also been launched by investors who claim to have purchased investment products based on misleading "green" marketing, unsatisfactory disclosure or on information that was not accurate or thorough in relation to ESG regulations and legal obligations as defined under applicable legislation. It is no coincidence that supervisory authorities in both the US and Europe are becoming increasingly stricter in controlling and disclosing ESG practices and in general at first stage promoting of Sustainable Finance (diverting growth through funding of sustainable investments). In our next article, we will refer in detail to the actions of the competent supervisory authorities in the European Union (EU).

Cypriot businesses, which are now more actively involved with Sustainability and the presentation of green products (Green Finance) and services, should be very careful and not get carried away by enthusiasm or deliberately, because Greenwashing's pitfalls and risks are not easily overcome without financial cost.

Lawyer, Banking & Financial Services, LLB. LLM. LPC, CISL, University of Cambridge.