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ESG disclosure mandates & standards likely to spur rise in greenwashing claims in 2024 & beyond

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

Natalie Runyon  Director / ESG content & Advisory Services / Thomson Reuters Institute

· 5 minute read

The increase in mandates for disclosure on ESG issues, especially around impacts on the environment and human rights within supply chains will drive greenwashing litigation in 2024 and beyond

Claims of greenwashing — allegations of fraud related to environmental, social & governance (ESG) matters involving misconduct or misstatements — will emerge more prominently in 2024.

Potential litigation is likely to focus around three major areas of ESG concerning: i) voluntary company disclosures; ii) litigation that challenges products and the integrity of companies’ supply chains; and iii) legal action confronting existing corporate diversity, equity & inclusion (DEI) policies and practices, according to Carl Valenstein, co-head of the ESG practice at Morgan Lewis, and Partner Franco Corrado. In addition, the increasing multifaceted mandates for corporate ESG disclosures worldwide are likely to keep greenwashing as a major challenge into 2025 and beyond.

Greenwashing lawsuits have continued to gain steam as companies have increased their voluntary disclosures concerning ESG-related commitments to satisfy investor and consumer demands. Decarbonization and net zero commitments are at the forefront of this risk and look to remain a hot button topic. The addition of the European Union’s march towards the first reporting deadlines of its Corporate Sustainability Reporting Directive at the beginning of January 2025 is ensuring that litigation risk around ESG issues is going to stick around for a few more years, says Valenstein. Indeed, he adds that the EU’s mandates around double materiality disclosures and the increased attention paid to supply chain practices creates fodder for litigants, who now will have access to more public information to scrutinize for potential claims.

Robin Cantor, an economist and managing director at Berkeley Research Group, agrees and points to methodologies being used to estimate greenhouse gas (GhG) impacts as an area of exposure. Tools that estimate GhG emissions using averages, such as the one from the Environmental Protection Agency, may or may not be a good proxy for reporting numbers across a supply chain, even if it is reported in the notes of the disclosure report. A plaintiff could allege that the averages used in the estimation do not consider all the information that plaintiffs think are important and therefore, they could challenge the validity of the reporting.

Litigation over products and supply chains gaining steam

Just a few years ago, cases involving greenwashing tended to focus on some aspect of a product itself, often in the food & beverage, personal care, and apparel industries. Gradually, however, greenwashing claims have expanded to class action suits that challenge supply chain integrity, including the sustainability of the practices utilized to make and distribute those products, as well as human rights and animal rights issues, according to Corrado. For example, the recyclability of products that are marketed as made from recycled materials has been another area ripe for challenge, he adds.

Cantor sees the same trend as an economist and notes the complications of varying legal decisions made across jurisdictions. “Some courts have said that a recycling claim on a product is not misleading if the product is capable of being recycled, but other courts have said that a similar claim is misleading because the local recycling facilities cannot actually perform the recycling,” she explains.

Attacks on the impact of supply chains on environment and social issues likely will continue, and many of these cases to date reside in the cocoa industry and sugar industries because of troubling labor practices with claims that the cocoa is not sourced ethically or sustainably despite alleged representations to the contrary.

Another area of expansion in the third-party litigation environment includes companies using voluntary carbon markets to achieve their net zero commitments. Greenwashing claims are questioning whether or not using carbon offsets for companies’ net zero targets is sufficient to actually achieve carbon neutrality. In addition, carbon offsets are under attack for being a voluntary system with no regulatory consequence; while other critics are challenging the companies’ goals themselves as to whether or not they are even realistic.

Guidance for in-house legal departments

Legal risk around greenwashing is likely to be here for a while, but there are still actions that companies can take to protect themselves. To reduce legal risk exposure, Corrado and Valenstein recommend certain key actions for in-house legal departments, including:

Review all public statements related to ESG — ESG communications create risk, so in-house legal teams should increase their reviews of all public statements to provide an extra layer to mitigate risk exposure. Valenstein advises companies to fact check and identify areas in which they may need to walk back previously stated goals or qualify existing statements. Further, companies may need to have multiple lawyers with different areas of expertise to review the information — one from a marketing angle, another from securities law perspective, and still another from the public disclosure vantage point, Valenstein adds. “We receive tricky questions from clients on net zero commitment disclosure that need both a review from a litigator and a securities lawyer because derivative actions can instigate a breach of fiduciary duties.”

Proactively train your advertising and marketing colleagues — According to Corrado, marketing and advertising teams need to understand the risks associated with making ESG related statements. “We regularly train business professionals and those who craft marketing copy to know what to look out for and share examples of how seemingly innocuous statements have been distorted by the plaintiffs’ bar,” Corrado explains. “We walk them through best practices on how to modify their own advertising practices to help mitigate risk.”

Many countries, including the United Kingdom, Australia, Hong Kong, Taiwan, Singapore, Canada, China, Brazil, and South Africa have announced plans or have indicated a strong possibility that they will integrate the new reporting standards from the International Sustainability Standards Board into their national laws. This means that legal risks around greenwashing likely will continue over the next few years.

Claimants and their lawyers who leverage legal systems to ensure companies ethically create positive environmental and social outcomes in their operations will have plenty of public information to review for future potential legal action. In-house legal teams need to be equally ready.

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