Greenwashing: Another key factor in the year ahead

A recent special Fraud and Financial Crime report produced by Raconteur and published in The Times* included an article exploring why this year, 2023, “could prove to be a pivotal year for anti-fraud regulation”. The points to look out for included the significant changes to the criminal law which look set to be brought about by way of the Economic Crime and Corporate Transparency Bill (in particular the creation of at least one new ‘failure to prevent’ fraud offence), reforms to Companies House, enhanced transatlantic cooperation on the transfer of data, and plans to regulate the crypto sector.

While these developments are indeed noteworthy, the article did not mention another significant and potentially far-reaching area: an impending expanded regulatory clampdown on greenwashing.

There has been a notable increase in investigations and enforcement relating to environmental, social and governance (ESG) issues over the past few years, particularly focused on greenwashing: the making of false or misleading environmental claims about products or services. It is becoming more and more important for companies to take stock of their positions, and consider how they may engage with regulators if they find themselves facing an enquiry or investigation.

As we have described previously, the UK’s Competition and Markets Authority (CMA) has become particularly active in this area. In September 2021, it launched the Green Claims Code, intended as a guide to help businesses comply with existing laws on green- or eco-related statements made to consumers. In early 2022, the CMA opened a review of environmental claims in the fashion sector; this was followed by a more formal investigation into the fashion brands ASOS, Boohoo and George at Asda in July 2022, and most recently the announcement of forthcoming examination of green claims in relation to everyday consumer items such as food and drink, cleaning products, toiletries and personal care items.

Meanwhile, in the financial services sector, The Pensions Regulator has said it will be checking whether scheme trustees with more than 100 members have published a document detailing the policies that shape how their investments weigh ESG and climate change factors, among other considerations, and could fine corporate trustees up to £50,000 for compliance failures.

More broadly, the Financial Conduct Authority has long been stating its intention to become more active on ESG matters in the UK and has been clear that it sees the financial sector as having a central role in the UK’s transition towards a net zero economy.

Notable developments in this area include new rules announced in December 2021 that will require asset managers to make certain climate related public disclosures (with the first tranche of these due in June 2023), the publication in June 2022 of the FCA’s ESG strategy document (titled ‘A Strategy for Positive Change’) and feedback statement which expressed support for regulating ESG data and ratings agencies and for taking a globally consistent regulatory approach. This was followed in November 2022 by the formation of a group to develop a code of conduct for ESG data and ratings providers. Prior to that, in October 2022, the FCA consulted on a set of proposed new rules specifically targeting greenwashing and the labelling of investments, and also published  the results of its consumer research (which supported the use of what the FCA calls “behaviourally informed sustainability factsheets” for investment products). Subject to the results of this consultation, the FCA is expected to publish final greenwashing rules by the end of the first half of 2023, which will substantially enhance the regulatory framework for ESG issues and, by extension, will make it easier for the FCA to take action against non-compliant behaviour.

Most recently, the FCA has warned agencies which provide ESG benchmark data on that they will be sanctioned if their disclosures are not improved. In a ‘Dear CEO’ letter to benchmark administrators, the FCA said that agencies should consider their messages carefully and ensure their benchmark methodologies clearly describe why certain ESG factors were applied. “Given the importance of ESG benchmarks and our initial supervisory findings, which indicate the potential for widespread failings, we will be doing more work in this area across the portfolio,” the letter concluded. The letter followed a review of ESG benchmarks which the FCA carried out after warning administrators that it was concerned about their quality.

Whilst the FCA has not made any public announcements that it is currently conducting any ESG-related enforcement investigations, there can be little doubt that it is putting what amount to guardrails in place and is looking to see what it can achieve by working with firms to get them to change their behaviour, which is consistent with its broader supervisory approach. That said, in his evidence to the Treasury Sub-Committee on Financial Service Regulation in February 2023, the FCA’s Director of ESG Sacha Sadan recognised the FCA’s ability under its existing rules and statutory framework to take action for claims that were unfair and misleading which, in the right circumstances, could be applied to ESG claims and enforcement action is likely to follow sooner rather than later.

As it prepares to take on this new element of regulatory supervision and enforcement, the FCA, informed by its recently constituted ESG Advisory Committee, will doubtless be following with interest the activities of its overseas peers in this area in particular in two key jurisdictions which have seen a definite uptick in regulatory enforcement for greenwashing.

In March 2021, the US Securities and Exchange Commission (SEC) launched a new taskforce specifically aimed at developing new initiatives to proactively identify ESG-related misconduct which is “consistent with increased investor reliance on climate and ESG-related disclosure and investment.” The Climate and ESG Task Force sits within the SEC’s Division of Enforcement.

The SEC’s website includes a list of ESG-related matters in which the agency has taken action against firms. Although described as non-exhaustive, the list reveals a notable uptick in actions in this area in 2022, with six cases listed for the year in contrast to two in each of the years 2020 and 2021, and a total of six between 2008 and 2018. Whether this reflects the agency’s actual casework or the priorities it wishes to make public, it sends a clear message that the SEC is taking ESG, including greenwashing, very seriously.

In Australia, the Australian Securities and Investments Commission (ASIC), the country’s securities regulator, reported handing down its first-ever greenwashing penalty in October 2022 to a listed energy company alleged to have lied about sustainability measures at an electricity plant it operated in Botswana. Since then there have been a number of other actions brought by the regulator including in December 2022 against investment manager Vanguard Investments Australia following a self-report by the organisation and more recently, in February 2023 when it launched its first ever court action for greenwashing. ASIC said in a press release that it had taken the local arm of Mercer to court for allegedly “making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options”.

These developments are high profile and indicate that globally there is a clear regulatory commitment to robust and effective enforcement in this area.

* The Raconteur supplement was sponsored by Kingsley Napley, but independently written and produced.

FURTHER INFORMATION

For further information on the issues raised in this blog post, please contact Katherine Tyler, James Alleyne or a member of our Corporate Crime team.

ABOUT THE AUTHORS

Katherine Tyler is a legal counsel in the criminal litigation team where she specialises in extradition and investigations with a cross-border element, particularly those involving allegations of human rights abuses or environmental harm. Katherine leads on Business and Human Rights and is co-chair of the firm-wide group.

James Alleyne is Legal Counsel in the firm’s Financial Services Group. He advises clients on the full spectrum of financial services and FCA-related matters, including on authorisation applications, perimeter and supervisory issues, enforcement investigations and cases before the Regulatory Decisions Committee and Upper Tribunal.