Greenwashing Litigation- How to Reduce the Risk
Litigation involving allegations of greenwashing is on the rise. Globally, the cumulative number of climate change-related cases has more than doubled since 2015, bringing the total number of cases to over 2,000. Around one-quarter of these were filed between 2020 and 2022.
Corporations faced with greenwashing claims have a lot at stake. Even more concerning than the time and expense of the litigation itself is the risk it poses to their brands. Consumers prefer buying from companies with a strong reputation for sustainability. What happens when an enterprise loses this reputation? The increased number of greenwashing claims grabbing headlines is making it a top agenda item for general counsel.
To protect their organizations from allegations of greenwashing, GCs must understand three things — what’s driving the increase in greenwashing claims, the potential legal basis for claims, and the actions that organizations need to take to mitigate this risk.
Why Are Greenwashing Claims On The Rise Now?
As the reality of climate change sets in, investors, stockholders, employees, and customers are all pressuring corporations to make public commitments to reduce their carbon footprint and take climate-positive action. Everyone wants to see change. Many companies are responding with public commitments to be “carbon neutral” or become “net zero” by 20__.
Carbon neutral and net zero are complex terms defined by carbon accounting rules. (More on the definitions here.) Very few people truly understand these terms. This can easily create a perception that corporate commitments on carbon are misleading.
Let’s take a consumer class action lawsuit recently filed against Delta Airlines as an example. Delta made a public commitment to become the first carbon-neutral airline as of March 2020. From a carbon accounting perspective, carbon neutrality is achieved by balancing emissions from operations with purchased carbon offsets.
Air travel accounts for approximately 2% of global emissions. Technology to reduce flight emissions is under development — but it is a long way away from being broadly deployable. Today it is impossible for Delta to operate its business without emitting carbon. But Delta can still meet the definition of carbon neutrality by purchasing carbon offsets on the voluntary market from third parties. Delta did this.
The core of the lawsuit alleges that carbon offsets are fundamentally flawed — that they don’t deliver the carbon reductions claimed by companies. And that consumers were misled into paying a premium to purchase tickets from a sustainable airline by a marketing campaign centered on carbon neutrality.
Keep in mind that climate activists play a key role in these kinds of lawsuits. Many well-organized and well-funded organizations are advocating for corporations to decarbonize rapidly. The courts provide a good forum for this advocacy. Activists organize and fund cases intended to change the system.
So here is the formula that is driving the increase in headline-grabbing greenwashing cases: Companies make complex carbon commitments → consumers are confused and/or companies are unable to meet commitments → activists leverage the gap to create system change through the courts.
As the climate crisis continues expanding over the next decade, these factors will only compound to increase the risk of greenwashing claims in litigation.
What Is The Legal Basis For Greenwashing Claims?
There are four primary categories of greenwashing claims in the United States — false advertising, securities fraud, shareholder lawsuits, and regulatory actions.
False Advertising — Consumers can bring claims under state or federal law for false advertising. A plaintiff would have to prove that the company made a false statement and that the statement damaged the consumer. False advertising claims can be made in cooperation with competitors and advocacy groups. It’s also possible for this type of claim to be structured as a class action. The case against Delta provides an example.
Securities Fraud — Investors can bring securities fraud claims against publicly traded companies related to greenwashing. In such a claim, an investor would assert that the company made false or exaggerated statements about its environmental or social performance, investors relied on these misrepresentations and suffered financial losses as a result. In 2021 investors filed a claim against Oatly — makers of oat milk — on this basis.
Shareholder Lawsuits — Although more novel, shareholders are beginning to bring claims against directors alleging that they breached their fiduciary duties by failing to adequately manage climate risks. Shell directors received such a lawsuit in the UK in February 2023. (It has since been dismissed).
Regulatory Investigations And Enforcement Actions — Greenwashing can attract the attention of regulatory bodies responsible for consumer protection and fair trade practices. Regulatory agencies may initiate investigations to determine if a company’s marketing claims are deceptive or in violation of relevant regulations.
How Can Companies Mitigate The Risk Of Greenwashing Claims?
As legal counsel, you may have a knee-jerk reaction to these claims — “Just don’t make any commitments.” But for most companies, this will not square with the reality of stakeholder pressures and the business risks posed by climate change. General counsel must partner with others across the company to find a balanced course forward. To get started:
Know Your Landscape: Review all the statements your company makes on climate — in the press, on your webpage, in marketing companies, and through regulatory filings. Make sure you understand the terminology being used. Investigate how data is being collected and what programs are in place to deliver on your commitments.
Take Action on Climate: Today responsible businesses are expected to address their climate impact. Your company needs to measure its carbon footprint, understand its climate risks, and take action to reduce both. Taking credible action will go a long way to reducing potential reputational damage from communications missteps.
Implement Controls: Ensure you have individuals in the right roles assigned to monitor and report on progress. They should have regular testing mechanisms like other compliance and financial control areas.
Finally, what do you do if your company has already made a climate commitment in which your board and executive team no longer has confidence? As with any other area, you will need to update, correct, or clarify the statement. You won’t be the first or last.