This was first published by RPC in November 2023.There is no shortage of stories concerning companies mishandling their promises and responsibilities in relation to tackling climate change. One of the key issues is "greenwashing", which is when a business makes a claim about its environmental efforts without merit. Last year RPC published a blog outlining practical steps businesses can take to prevent greenwashing. In this blog, we summarise the key takeaways from the CGI's report on tackling greenwashing from a corporate governance perspective.
The report illustrates how greenwashing can be seen as a corporate governance issue, and not simply a marketing or public relations one. What's more, regulation in this space is now under constant development, and there is a growing expectation that corporate governance professionals need to have a thorough grasp of the regulatory landscape and possible repercussions associated with greenwashing.
Greenwashing as a corporate governance and board issue
Good corporate governance now includes ensuring that your board is adequately trained and prepared to identify and address possible greenwashing within your organisation. In support of this, the CGI's report states that "organisation-level governance factors have been demonstrated to be more important for the avoidance of greenwashing than country factors (such as public scrutiny)". The CGI's report set out three principles for action to assist in avoiding a disconnect between an organisation's sustainability messaging and its actions:
- Produce high-quality, transparent disclosures: If you are required to make disclosures, make sure that you use reputable reporting frameworks and ensure that your targets are science-based. Perform a materiality analysis and select relevant and specific metrics for your key performance indicators (KPIs). Be transparent in your claims and disclosures and avoid vague claims or claims that solely focus on the good without recognising the challenges faced by your organisation in addressing relevant environmental issues.
- Increase board capacity and guarantee robust oversight: Provide relevant training and resources for your board in relation to climate change and other environmental issues and put greenwashing on the agenda for your board and committee meetings (ensuring that relevant people in your organisation are involved so your organisation can get a full picture). If it is your responsibility to manage corporate governance within your organisation, make sure you clearly understand how to oversee and monitor environmental and other sustainability related claims. If your organisation's methods are not up to scratch, make plans to improve them. You may need to employ internal or external oversight procedures for your processes and procedures. Consider whether a specific committee should be established to monitor climate and sustainability issues.
- Implement change and create accountability: After careful consideration of where your environmental risks and responsibilities lie, your board should look to develop a climate strategy (if it hasn't already) for the short, medium and long-term. Strategy alone will not be sufficient: implementation of practices to assist in achieving these goals will demonstrate an intention to succeed, as well as bringing your organisation closer to achieving its climate goals. Publish regular reports on your organisation's progress (whether year on year, or against your peers).
For further guidance from CGI, see their full report here on tackling greenwashing from a corporate governance perspective.
Regulation of greenwashing
The consequences of greenwashing could be severe, particularly in the everchanging regulatory landscape. Whilst scrutiny from regulators in relation to environmental risks has been largely focussed on public companies and large private companies, it would be prudent for smaller private companies to ensure they are up to speed and compliant. Corporate governance professionals should therefore heed the advice of the CGI and seek to implement a broad range of strategies against greenwashing.
The regulatory landscape in respect of greenwashing is currently a patchwork, with no single body regulating sustainability claims. However, the CGI contends that further guidance, regulation and legislation preventing greenwashing will arise in future, with cohesion between jurisdictions being a focus in the compliance sector.
The key regulators for greenwashing in the UK are the Competition and Market Authority (CMA), the Advertising Standards Agency and the Financial Conduct Authority. Regulatory requirements to report against the UK Green Taxonomy are also expected to be introduced. Whilst the current view is that the cost of greenwashing appears to be largely reputational, further enforcement action as well as civil penalties appear to be on the horizon.
The CMA published its Green Claims Code in 2021, which assists businesses in ensuring their environmental claims are consistent with consumer protection legislation. The CGI report notes that the Digital Markets, Competition and Consumers Bill seeks to provide further enforcement muscle for the CMA. Most notably, the bill (which is currently at the report stage in the House of Commons) would allow for substantial penalties against those engaging in greenwashing practises which breach consumer protection law (such penalties not exceeding £300,000, or if higher, 10% of the annual turnover of the respondent).