With more businesses using sustainability as a marketing tool, in a bid to attract environmentally aware consumers or to secure investment in environmental, social and governance (ESG)-related funds, it was only a matter of time before “green” or “eco-friendly” claims would attract the regulators’ attention.

In July 2022, the UK Competition and Markets Authority (CMA) launched an investigation into three fashion giants – ASOS, Boohoo and George at Asda – to scrutinise their so-called green claims. This probe follows on from the publication of the CMA’s “Green Claims Code” (the Green Code) in September 2021, the product of its inquiry into green claims that first began in 2020.

The Green Code explains that “misleading environmental claims occur where a business makes claims about its products, services, processes, brands or its operations as a whole, or omits or hides information, to give the impression they are less harmful or more beneficial to the environment than they really are”.

The CMA will now compile evidence using its information-gathering powers to determine whether the three fashion brands have breached consumer protection legislation and it will examine whether their statements and language are too “broad and vague” and give consumers the misleading impression that certain clothing collections are more “green” than they actually are. 

Potential consequences

If the CMA concludes that these companies’ green claims constitute “greenwashing”, potential outcomes include securing undertakings from the companies committing to change, taking no further action or starting litigation.

The Green Code sets out the legal framework for the guidance which is based on consumer protection rules under the Consumer Protection from Unfair Trading Regulations 2008 (CPRs) and the Business Protection from Misleading Marketing Regulations 2008 (BPRs), which both contain powers of entry and investigation. The BPRs protect traders in business-to-business cases from misleading advertising.

The CPRs introduced a general prohibition across all sectors preventing traders from engaging in unfair commercial practices towards consumers. Under the CPRs, sanctions include both criminal prosecution and enforcement through the civil courts; they also give consumers a civil right of redress.

Where an offence under the CPRs is said to have been committed with the consent or connivance of an officer of the company (a director, manager, secretary or similar officer) or is attributable to any neglect on their part, under regulation 15, the officer as well as the body corporate are guilty of the offence.

In addition, the CMA works closely with other enforcement and regulatory bodies, such as the Trading Standards Service and the Advertising Standards Authority (ASA), and will consider “which authority is best placed to act, when taking decisions about enforcement action on misleading environmental claims”.

Separately, the CMA’s announcement should also put corporates on notice of potential dawn raids (ie, surprise inspections that examine potential violations of competition law). Dawn raids have now recently resumed – a relevant example being the concerted action by the European Commission and the CMA against the automobile sector in March 2022 regarding the recycling of end-of-life vehicles.

It remains to be seen whether the authorities will have the appetite and resources to initiate criminal investigations for so-called “greenwashing”. On the horizon are proposed reforms to the CMA’s powers as announced by the UK Government in April 2022, which could lead to a potentially more interventionist regulator.

Do not “wait and see”

In July 2022, the CMA interim chief executive warned that “all fashion companies should take note: look at your own practices and make sure they are in line with the law”.

In short, the CMA expects corporates to be prepared to justify and substantiate any claims they make on sustainability, including by co-operating and providing access to internal documentation to evidence any claims made. This means looking into the business introspectively as well as looking across to what competitors are doing and preparing to engage with the regulator.

Internally, corporates should be deploying two strategies in parallel: (i) a communications strategy; and (ii) a sustainability strategy. In relation to communications, it is clear that ultimately, consumers are looking for businesses to be “authentic” and want the messaging to coincide with the product they purchase or in which they invest.

Regarding a sustainability strategy, corporates would be well advised to engage lawyers at an early stage to ensure that the internal documentation on which any sustainability claims are made will withhold scrutiny and is evidence-based.

Finally, the notion of working with competitors should not be ruled out as resources can be pooled to formulate sector-tailored commitments and standards which may reassure the regulator.

Enforcement in other jurisdictions

The CMA’s investigation follows hot on the heels of several civil and criminal actions being brought across the globe for alleged “greenwashing”.

In August 2021, a civil case was filed in Australia by the Australasian Centre for Corporate Responsibility against Santos Ltd in respect of its claims that natural gas provides “clean energy” and that it has a “credible and clear plan” to achieve “net zero” emissions by 2040. This is the first case where the veracity of a company’s net zero emissions target has been challenged.

In April 2022, it was reported that the ASA was preparing to warn HSBC about misleading customers by selectively publicising its green initiatives, while omitting information about its ongoing financing of companies with large greenhouse gas emissions.

In May 2022, BNY Mellon Investment Adviser, Inc. agreed to pay a US$1.5 million penalty to settle the charges brought by the Securities and Exchange Commission (SEC) for misstatements and omissions regarding its ESG considerations when managing certain mutual funds. This is the first time that the SEC has settled with an investment advisor concerning ESG statements.

The SEC and the German financial watchdog BaFin are looking into reports and a whistle-blower’s claims that DWS Group, a subsidiary of Deutsche Bank, allegedly misled investors on the basis that it had overstated the environmental credentials of its products, which DWS has consistently refuted. DWS and Deutsche Bank were raided by German police in Frankfurt in late May 2022.

Looking forward

ESG compliance has become an increasingly complex and challenging regulatory environment for companies to navigate. Increased levels of corporate transparency have been brought about by whistleblowing, corporate leaks, and the huge dissemination of corporate information online, often through social media campaigns. These factors have forced companies to look more closely at their health and safety, environmental and wider human rights practices to ensure compliance not only with legislation, but also with product and industry standards as well as consumers’ moral and ethical expectations.

Corporations must start looking at their sustainability and communications policies now, be open to dialogue with the authorities and their competitors and be ready to provide the evidence that supports and substantiates their respective environmental claims.

The authors would like to thank Paralegal Mariana Garção for her assistance in drafting this article.