This intensifies the existing pressure on businesses making net zero pledges. We are already seeing:
Commitments to reach net zero by 2050 have surged in recent years. More than 1300 businesses with a market capitalisation of $US23 trillion-plus have signed up to the Business Ambition for 1.5° campaign initiated by UN leaders; many more beyond that list have introduced targets.
Net zero targets are increasingly demanded by investors, consumers and across supply chains. At the same time, once set, those targets face increasing scrutiny.
In Australia, the securities and competition regulators (ASIC and ACCC) have announced a focus on greenwashing as a strategic priority. In the US, the Securities and Exchange Commission (SEC) recently proposed rules that would require public companies to disclose extensive climate-related information in their SEC filings. In Singapore, disclosure standards is an increasing focus. Climate reporting is mandatory for certain listed companies from 2023.
What is ‘greenwashing’?
Greenwashing is overrepresenting or overstating how sustainable and eco-friendly practices, operations or products are.
In Australian consumer law, this amounts to making claims about future net zero targets or how ‘green’ services or goods are, without any reasonable basis to do so.
In the UK, guidance published by the Competition and Markets Authority (CMA) in September 2021 outlines when it is likely to take enforcement action under existing consumer law for greenwashing. The guidance requires that companies have a holistic basis for saying their business, product or service is green.
The CMA considers that the use of terms like ‘green’, ‘sustainable’ or ‘eco-friendly’ without further explanation are likely to be seen by them as suggesting that a product, service, or business as a whole has a positive environmental impact, or at least no adverse impact.
The UN IPCC has referred to greenwashing as "cosmetic environmentalism" or "simply hypocrisy".[1]
What can businesses do to minimise risks?
To minimise exposure to greenwashing claims and criticism, whether through the courts or from the UN, businesses should:
What if there is a setback to meeting a target?
Disclosure is necessary for any updates or setbacks to meeting those targets.
This highlights the need to ensure particular care is taken around commitments on scope or timing when drafting net zero commitments, with legal assistance sought early and as necessary.
More detail is in KWM’s recent publication on climate related disclosure and governance trends of the ASX50.
Real estate in the UK is among sectors that must rethink touting environmental credentials. Property developers commonly boast of the improved energy performance ratings of buildings they intend to develop, but their assessment may exclude 'embodied carbon' (i.e. carbon produced in the process of manufacturing the concrete and other materials needed for the redevelopment). The embodied carbon from demolition and reconstruction potentially significantly undermines the operational carbon savings over decades from a new build. This has not been missed by the UK Government.
Plans to demolish the art deco building that houses Marks & Spencer's flagship London store and replace it with a carbon positive building has ignited fierce debate on the topic. The carbon positive design tells only part of the story.
For now the application by M&S for demolition consent is pending and it can expect a rough ride through the planning process. Whilst the consultation has now closed, industry will watch with interest the views of the Westminster City Council planning committee when the matter comes forward for consideration (and no doubt, lively debate!).
The CMA will certainly do more in the future to encourage developers and investors to account for embodied carbon.
Companies operating in the UK should note that it is not just consumer marketing that puts them at risk. Business-to-business advertising can also constitute an offence under the Business Protection from Misleading Marketing Regulations 2008.
In its guidance on greenwashing, the CMA has indicated it can still take enforcement action if the actual carbon reduction is so negligible that the claim is misleading. Where that threshold lies is not set in stone. One example given in the guidance is that a company labelling a yoghurt pot with a 'reduced plastic packaging' tag can have committed an offence if only 5% of the plastic packaging was actually reduced.
What rules apply to financial products?
There are best practice guidelines for Sustainability Linked Leveraged Loans, produced by the Loan Market Association (LMA) and the European Leveraged Finance Association (ELFA). The guide explains when and how to provide pertinent ESG information to prospective lenders, to ensure sufficient time for them to review and challenge the selected KPIs and sustainability performance targets.
Reporting and verification requirements strengthen transparency. The guide also explains various roles which may be involved (including ESG rating providers, ESG consultant, sustainability co-ordinator, and external reviewer).
As for ‘greenwashing’, the Sustainable Lending Glossary of Terms published by the LMA, Asia Pacific Loan Market Association (APLMA) and Loan Syndication and Trading Association (LSTA) defines it as the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly when in fact it does not meet basic environmental standards.
Why is the UN talking about greenwashing?
The UN set up an expert group to tackle confusion over emissions cuts and net zero targets on March 31, 2022. Officially titled the High-Level Expert Group on Net-Zero Emissions Commitments of Non-State Entities (largely, that means businesses), the group is expected to make recommendations before 2022 ends.
Those recommendations will look at:
The group is led by Catherine McKenna, Canada’s former Minister of Environment and Climate Change. McKenna is joined by 15 members of the group, including Climate Analytics CEO Bill Hare (Australia), former Governor of the People’s Bank of China Zhou Xioachuan (China), Commissioner of the Spanish Financial Markets Authority and Rapporteur of the EU Platform on Sustainable Finance Helena Viñes Fiestas (Spain) and The Sunrise Project program director Amanda Starbuck (United Kingdom).
The efforts are driven by the urgency for real emissions cuts amid what the UN calls a “worsening climate crisis”.
“To avert a climate catastrophe, we need bold pledges matched by concrete action. Tougher net-zero standards and strengthened accountability around the implementation of these commitments can deliver real and immediate emissions cuts,” UN Secretary-General António Guterres said at the time of the launch.
Want more detail?
To understand how dramatic the landscape shift is, it helps to contemplate one of the risks mentioned above: climate change litigation.
There are around 2,240 cases of climate change litigation worldwide: an exponential increase from rates even a decade ago, according to data from Sabin Center & the University of Melbourne.
We’ve written a number of pieces related to the risks of climate change litigation and the requirements of climate disclosures – and we will continue to share our knowledge in this rapidly evolving space. Making the complex simple.
References
[1] UN Intergovernmental Panel on Climate Change, Sustainable Development and Mitigation chapter
Other resources
Climate change litigation – what is it and what to expect?
