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In today's eco-conscious world, companies are understandably eager to flaunt their green credentials. But beware: greenwashing - exaggerating or faking environmental efforts - is under the microscope, and not just by regulators.

What is Greenwashing?

Greenwashing happens when companies create a misleading impression about the impact their product, service or business has on the environment. These tactics come in many forms, and the intention behind them isn’t always to mislead, but if they have that effect, it can lead to serious legal and reputational headaches. It's not just about consumer protection; it's a major liability issue.

Legal storms brewing

Greenwashing is sparking a wave of litigation and intense regulatory scrutiny.

Perhaps the most high-profile types of claims are those advanced by activist shareholders, who are using existing company laws to push climate litigation. As we have previously highlighted (here and here), such attempts have fallen flat.

But other litigation risks are lurking.

For publicly listed companies, shareholders (often investors) can sue for losses tied to overstretched green claims using other legislation, provided the facts fit. If an investor loses money due to untrue, misleading or missing information in a relevant prospectus or listing particulars, the responsible party can be held liable. Further, if an investor loses money due to untrue or misleading statements, or dishonest omissions or delays, in published company information (like annual reports or accounts), the company can be held liable. This applies if someone with managerial responsibility knew the information was false or acted dishonestly.

There is an increasing risk of claims arising from the practice of carbon off-setting, whereby companies purchase credits from projects which reduce greenhouse gas levels to “off-set” emissions they create and reach a net zero position. Greenwashing cases have been emerging across the world in recent years against companies as a result of green claims made in reliance on carbon off-set schemes. The lack of oversight of carbon off-setting, which Greenpeace described as “a scammer’s dream scheme” may also result in litigation for the mis-selling of these credits. 

Directors of private companies are also at risk. They owe wide-ranging statutory duties to the company – liability for misstatement, duty to promote the success of the company and duty to exercise reasonable care, skill and diligence, for example. Although these duties are for the company to enforce, they constitute powerful tools, particularly if there is a change of control of the company or if an insolvency professional looks back at director conduct and seeks to monetise claims the company has against its directors past and present. 

The rise of class actions

Of other civil claims which can be bought by consumers or those which contract with the company making a greenwashing claim, it is worth mentioning class actions. Class actions are on the rise in England and Wales. Where companies are found to have been fudging their green credentials (for example, by a regulator), this may pave the way for this type of action. 

Navigating the green maze

Companies must tread carefully, ensuring that their environmental claims are truthful and backed by evidence. Regulatory bodies such as the Competition and Markets Authority (CMA) have made tackling greenwashing a top priority and will be cracking down on greenwashing with fines of up to 10% of annual global turnover, and daily fines of 1-5% of daily turnover if those under investigation don’t comply with the CMA’s demands.  The CMA will decide which companies to investigate, conduct the investigation (using strong powers to compel disclosure), determine whether there has been a breach, and if so what level of penalty to impose. The CMA has already investigated companies for making misleading green claims in the fashion retail sector and is broadening its investigations into the fast-moving consumer goods space. Must-read rules and guidance have been published – Lewis Silkin’s Environmental blog has it covered. The burden is on companies to maintain transparency and integrity. Failure to do so can result in catastrophic legal and financial consequences, highlighting the need for genuine sustainability and legal compliance.
 

Get DMCC ready

The Digital Markets, Competition and Consumers Act 2024 marks a significant shift in the regulation of digital markets and consumer protections in the UK. This new regime focuses on:
 
  • Enhancing competition: ensuring fair play in digital markets.
  • Addressing deceptive practices: cracking down on misleading business practices.
  • Promoting sustainability: encouraging eco-friendly business operations.

Businesses across all sectors, from e-commerce to digital advertising and consumer-facing industries, must pay close attention to these changes to stay compliant and competitive.

Find out more at Lewis Silkin’s Get DMCC ready hub

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