In recent years, there has been an increasing trend for companies to claim environmental sustainability, making public commitments to lower carbon emissions and other eco-friendly measures. However, this rise in environmental claims has also led to the concern of greenwashing, where companies make false or exaggerated statements about their environmental practices. This article delves into the issue of greenwashing, its risks, and the lack of accountability and regulation for ESG commitments.
What Is Greenwashing?
While proactive organizations want to demonstrate that they’re participating in meaningful ESG programs, they must be careful not to overstate their commitments or their ability to follow through on those commitments. To do otherwise could open them up to public scrutiny and even litigation, including claims of greenwashing.
Greenwashing occurs when an organization makes false or inflated claims about the environmental soundness of its practices or products. As more organizations make public—and often impressive-sounding—environmental sustainability claims, greenwashing is becoming a bigger concern.
Greenwashing is a global concern. According to a report from the Energy & Climate Intelligence Unit and Oxford Net Zero, over 20% of the world’s 2,000 largest public companies have made net-zero commitments, promising to lower human-caused carbon emissions to an amount that would be canceled out by greenhouse gas removal from the atmosphere.
But who is overseeing these claims or holding organizations to their promises?
Who Is Monitoring Sustainability Promises?
At this point, there is no global or U.S. regulatory body that scrutinizes corporate net-zero claims or monitors commitments. There is an organization that sets standards for net-zero targets, and the U.S. Securities and Exchange Commission (SEC) is taking a more active role in terms of setting requirements and monitoring carbon footprint accounting, but carbon emissions are essentially on the honor system for now.
That lack of accountability might tempt organizations to overstate their ESG claims and commitments—but that can be a risky move.
What is the Litigation Risk?
For starters, section 5(a) of the U.S. Federal Trade Commission (FTC) Act prohibits unfair or deceptive business practices. The FTC enforces the FTC Act as well as other consumer protection statutes, many of which are based on section 5(a) of the FTC Act. The FTC has also issued various administrative rules regarding environmental marketing claims specifically. One such rule includes the admonition that, “An environmental marketing claim should not overstate, directly or by implication, an environmental attribute or benefit.”
The FTC Act gives the FTC the authority to conduct investigations and seek compensation for injury to consumers. If the violator had actual knowledge of the unfair or deceptive practice, the FTC can levy civil fines of up to $10,000 per violation. And regulatory oversight of ESG claims could easily increase as government agencies continue to see heavy public reliance on organizations’ ESG commitments.
Nor are enforcement actions the only legal proceedings that organizations should be wary of. Private citizens can also sue organizations for false advertising and unfair competition under state consumer fraud laws. Courts have allowed such claims to proceed past the motion to dismiss stage in lawsuits challenging grocery chain ALDI Inc.’s label claiming its salmon was “sustainable” and Kroger Co.’s advertising of certain sunscreens as “reef friendly.”
Of course, organizations may also face enforcement actions and false advertising lawsuits over non-environmental ESG claims. Therefore, organizations should use caution when making statements regarding issues such as diversity in hiring practices or procurement of raw materials from conflict-free zones.
As many organizations are well aware, the risks of litigation can extend far beyond civil damages. In addition to being expensive, litigation can divert employees’ valuable time and attention and cause substantial reputational damage and loss of business. That’s why it’s so important for organizations to make sure their publicly stated positions are accurate and defensible.
That’s where having the right leaders can help. Let’s look at how enterprises are staffing their ESG programs.
How Are Organizations Staffing ESG Programs to Mitigate Risk?
As ESG becomes integral to business operations—and as the risks of poor ESG become clearer—organizations have created new staff roles to help them manage those programs. The people who occupy these emerging roles are typically called chief sustainability officers (CSOs). The role of CSO varies greatly, with some CSOs juggling multiple responsibilities within their organization. CSOs may carry other titles as well, such as vice president or director. Whatever the specific arrangement, the CSO is the person who is primarily responsible for managing sustainability within an organization.
There are benefits to be found for organizations that have a single CSO role and for those that combine their sustainability programs with another role. A CSO who is only responsible for sustainability initiatives is likely to have more expertise and bandwidth to focus on ESG. On the other hand, a combined role—such as Uri’s title as Chief Sustainability and Legal Officer—can give the individual greater visibility into the organization’s overall practices and contribute to stronger relationships throughout the organization.
Regardless of how an organization structures its CSO role, appointing someone to head up ESG programs—rather than distributing sustainability considerations across general counsel, compliance officers, and various department heads—is crucial to increased sustainability performance. As Uri explained, “Making progress on issues like diversity, climate change, and human rights requires a significant amount of focus, and you have to have an individual with responsibility for that focus.”
But bandwidth isn’t the only consideration. For an organization to truly move the needle on sustainability, its CSO must also have the authority to make decisions and the power to implement new measures. Uri advised, “The organization and executive team have to take the role seriously, give it a voice at the table, connect it to leaders across the organization, and create accountability.” CSOs must have good relationships and contacts throughout their organization to make a difference.
The risks of greenwashing and false advertising are not only financial but also include reputational damage and loss of business. To mitigate these risks, organizations are creating new staff roles such as chief sustainability officers (CSOs) to manage their ESG programs. Companies must ensure that their publicly stated positions are accurate and defensible, and CSOs must have the authority to make decisions and the power to implement new measures. Ultimately, transparency and accountability in sustainability practices are crucial for building trust with stakeholders and contributing to a healthier planet.
To learn more about how ESG is affecting enterprises
Download Hanzo's Guide to ESG & Sustainability