“Green marketing”—where businesses advertise products and services as eco-friendly—has been on the rise. Examples are everywhere: H&M, one of the world’s largest fashion retailers, vaunts its “Conscious” clothing line, which uses “sustainable materials” such as organic cotton and recycled polyester. Cosmetics industry giants Estée Lauder and L’Oréalis are pushing “clean beauty” products. And according to Morningstar Inc., capital flows into funds that claim to focus on environmental, social, and governance (“ESG”) issues jumped in 2020, driving assets under management up 29% in the fourth quarter to nearly $1.7 trillion. A recent Bank of America survey found that 40% of investable assets are now touted to be ESG friendly or compliant. That has led governments, competitors, and consumers to become increasingly savvy at detecting and suing for “greenwashing.”
What Is Greenwashing?
“Greenwashing” occurs when a business creates the impression that its products and practices are environmentally friendly when they are not, or not to the extent claimed or implied. It can be intentional or result from imprecise wording. Thus, a company may claim its product is “made of recycled material.” But is the entire product made of recycled material, or only a part? Section 260.13 of the FTC’s Green Guidelines—“designed to help marketers avoid making environmental claims that mislead consumers”—warns against unqualified claims of recycled content unless the entire product, excluding minor incidental components, is made from recycled components.
Greenwashing Claims on the Rise
In 2020, the National Advertising Division (NAD) of the BBB National Programs—the advertising industry’s self-regulatory forum—saw a substantial increase in the number of greenwashing claims, including claims of biodegradibility, to questionable third-party certifications, to purportedly non-toxic products. The SEC also joined the issue with its March 4, 2021 announcement of the creation of a Climate and ESG Task Force in the Division of Enforcement. The Task Force “will develop initiatives to proactively identify ESG-related misconduct,” including analyzing disclosures “relating to investment advisers’ and funds’ ESG strategies.” And on March 16, 2021, three environmental groups filed the first complaint with the FTC against an energy company for alleged greenwashing. Given the rise in green marketing, the capital flowing into “green” funds, and the increasing focus on detecting greenwashing, we are likely to see more enforcement efforts and civil suits.
Federal and State Consumer Protection: Perhaps the most infamous greenwashing case is the Volkswagen diesel emissions scandal. Volkswagen sold consumers on the low-emission features of its cars despite its cheating on emissions tests with “defeat devices.” It ultimately agreed to pay $14.7 billion to settle with the Department of Justice, the State of California, and the FTC. Elsewhere, the FTC has investigated and found more than 90 cases of businesses misleading consumers with greenwashing and has imposed civil penalties.
These efforts are likely to only increase during the Biden Administration, as will civil lawsuits. On March 16, 2021, Earthworks, Global Witness, and Greenpeace filed an FTC complaint against Chevron for deceptive advertising that “overstates investment in renewable energy and its commitment to reducing fossil fuel pollution.” They claim Chevron has violated the Green Guides “by consistently misrepresenting its image to appear climate-friendly, while its business operations overwhelming rely on climate-polluting fossil fuels.”
Regulators on other continents are also increasing their scrutiny of green marketing claims. In January 2021, the European Commission released the results of a study that for the first time screened green online claims from sectors such as garments, cosmetics, and household equipment. The study found that “in 42% of cases the claims were exaggerated, false or deceptive and could potentially qualify as unfair commercial practices under E.U. rules.” And with the EU Sustainable Finance Disclosure Regulation having gone into effect on March 10, 2021, European regulators will devote more attention to the accuracy of green marketing. And the European Commission’s Sustainable Finance Action Plan imposes obligations on fund managers, financial advisors, and others to disclose information on ESG considerations to potential investors and on their websites.
Private Consumer Actions: In recent years, a flurry of such suits has been filed against traditional energy companies. In May 2020, a non-profit sued ExxonMobil, claiming it is “greatly overstating the level in which it engages in cleaner forms of energy … thereby deceiving consumers,” in violation of the District of Columbia’s Consumer Protection Procedures Act. Beyond Pesticides v. Exxon Mobil Corporation, D.C. No. 2020-CA-002532. The complaint alleges that only a small part of Exxon’s business is devoted to clean energy, as it simultaneously invests heavily in fossil fuels.
In a suit that lasted eight years, consumers of Wesson cooking oil brought a putative class action alleging the manufacturer had “deceptively and misleadingly marketed its cooking oils” as “100% Natural” when they were made from GMOs. The suit settled, with the manufacturer agreeing not to label, advertise, or market Wesson Oils as “natural” and paying damages to the class. Briseno v. ConAgra Foods, Inc., 844 F.3d 1121 (9th Cir. 2017). In July 2019, consumer nonprofits sued Tyson Foods for misleading consumers by proclaiming its commitment to sustainable practices, even though it is allegedly the “second largest polluter” in the U.S. that routinely allows the “horrific abuse” of its livestock. Food & Water Watch Inc. v. Tyson Foods Inc., D.C. Case No. 2019-CA-004547.
Securities Law Enforcement: On March 3, 2021, the SEC’s Division of Examinations announced that one of its annual examination priorities will be to review ESG funds’ “advertising for false and misleading statements, and review [their] proxy voting policies and procedures and votes to assess whether they align with their strategies.” The next day, the SEC announced the creation of a Climate and ESG Task Force that, among other things, will analyze issuer ESG disclosures.
State governments have also targeted investor disclosures for greenwashing. In 2018, the New York Attorney General sued ExxonMobil for misrepresenting to its investors the cost of future climate change regulations by applying a lower proxy cost for carbon internally than it had publicly disclosed. New York v. ExxonMobil Corp., 119 N.Y.S.3d 829 (N.Y. Sup. Ct. 2019). After a two-week bench trial, the court found for Exxon, concluding that Exxon’s disclosures could not reasonably have misled investors. The Massachusetts AG has its own case against Exxon, alleging that it deceived investors by failing to disclose climate change risks and misrepresenting its business. Massachusetts v. ExxonMobil Corp., 462 F. Supp. 3d 31, 38 (D. Mass. 2020). Exxon’s motion to dismiss is pending.
Private Securities Suits: Under Section 10(b) and Rule 10b5 of the ’34 1934, if a company includes an affirmative statement in its disclosures, it has a duty to ensure that the statement is accurate and complete. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. And because the anti-fraud rules apply even to less formal statements such as press releases, investor calls, and websites, a company may face litigation for “greenwashing” even if it avoids including such representations in its official disclosures.
In 2019, 3M shareholders filed a securities class action against the company for allegedly “issuing false and misleading statements to conceal the truth about the Company’s exposure to legal liability” for manufacturing products containing per- and polyfluoroalkyl substances. In Re: 3M Co. Sec. Litig., CV 19-15982 (D.N.J. Aug. 31, 2020). The plaintiffs claim that 3M concealed and misrepresented evidence that the chemicals are toxic, and its “omissions and misrepresentations” caused 3M’s stock price to trade at “artificially inflated prices.” The suit is ongoing. With more money pouring into “socially conscious” funds, there will be an increase in litigation over whether the funds actually are adhering to their stated ESG-related principles. One such case has arisen in Australia.
Traps to Avoid
1. Making Unqualified Environmental Claims. Many countries have laws and guidelines about greenwashing, which center on statements businesses can make about their products and services. The FTC’s Green Guide warns, for example, that it is deceptive to make broad, unqualified general environmental benefit claims, such as calling a product “ecofriendly” without saying why it is ecofriendly. Although the Guides are not binding on courts or state authorities, adherence to them will provide powerful arguments that genuine attempts were made not to mislead. Likewise, Australia, the E.U., the U.K., Norway, and Canada have similar regulations and guidelines.
2. Suggesting or Implying Independent Certification or Endorsement Without Adequate Basis. Although it is wise for businesses to obtain unbiased, reliable third-party assessments, labels, or certificates to show how their products or services are ecologically sound, they must be careful. Companies have found themselves in trouble for suggesting a label or certificate was independently awarded when it was not. The FTC charged the Moonlight Slumber mattress company for claiming that its products had been certified with the “Green Safety Shield,” while omitting that the awarded seal was its own creation..
3. Focusing Solely on the End-Product or Service. A fashion company may be quick to launch its “sustainable” line of clothing using recycled fabrics, but neglect to acknowledge they are manufactured in factories powered by coal-generated electricity. Or a company may espouse environmental concerns in one area, while ignoring or downplaying its less-than-sustainable practices in another. Ben and Jerry’s came under fire for this in 2018 when the Organic Consumers Association (“OCA”) accused it of conducting a misleading marketing campaign called “Caring Dairy.” Organic Consumers Ass’n v. Ben & Jerry’s Homemade Inc., 2018 CA 004850 B (D.C. Super. Ct. July 9, 2018). The campaign touted the business’s commitment to animal welfare standards, but the OCA claimed this was misleading because the company sourced ingredients from operations that contributed to water pollution, thereby creating a false image of its environmental standards. The District of Columbia Superior Court denied the motion to dismiss, finding a reasonable consumer “could plausibly interpret Ben & Jerry’s labeling and marketing as affirmatively (and inaccurately) communicating that the company’s ice cream products are sourced exclusively from Caring Dairies and/or other humane sources.” The parties mediated for two years before the case was dismissed.
Although these cases may strike some as extreme or even frivolous, the fact that judges are letting them get beyond the pleading stage tells us that the threat has to be taken seriously—at least until appellate courts provide guidance on how far afield an inquiry may go into a company’s environmental record. For now, statements and commitments must be backed up by specific, clear, factual evidence, not just puffery about “green” efforts.