The dirty word in ESG circles is “greenwashing,” a term describing exaggerated or misleading statements made by a company about its ESG initiatives. How exaggerated and misleading? According to a recent Harris Poll for Google Cloud, nearly 1,500 executives say they believe in the value of their organizations’ environmental sustainability efforts, but 68 percent in the U.S. admit their companies have at times overstated this value.
The eye-opening findings suggest that greenwashing is relatively common. The irony is that very few CEOs would ever allow their company’s financial performance to be overstated, yet the subjectivity of some ESG ratings seems to give them confidence in their company’s sustainability statements.
“False statements about ESG are no different than false statements about financial performance,” says Jamie Gamble, managing director at PwC. “Not to mince words, but a false statement about ESG that’s designed to dupe someone into giving you money or leaving their employ to come work for you is particularly loathsome, given the importance of ESG to their personal values.”
Perceptions of a company’s adherence to lofty ESG principles may encourage people to buy its products and services, invest in its stock or join the business, believing its eco-friendly and human rights statements are in alignment with their own values. When this turns out not to be the case, the risk of a lawsuit alleging deceptive trade practices, false advertising and fraud can be expected. “Not only is greenwashing unethical; it’s also illegal,” Gamble says.
Since the creation of the SEC Climate and ESG Enforcement Task Force by the SEC in 2021 to oversee a public company’s ESG-related disclosures, a growing number of securities lawsuits have been filed against businesses in diverse industries. In May 2022, for instance, investment firm BNY Mellon was charged by the SEC with making ESG-related material misstatements and omissions about certain mutual funds. The company reportedly agreed to pay a $1.5 million penalty, without admitting or denying the SEC’s findings, and undertook remedial actions.
A class action lawsuit against egg producer Vital Farms underscores the legal risks of making false advertising claims. The plaintiffs argued that statements on the company’s egg cartons that its operations were “ethical” and “certified humane” were false, as were its statements regarding “pasture-raised” hens.
Vital Farms moved to dismiss the federal case, asserting that its use of the terms “certified humane” and “pasture-raised” was certified by the Humane Farm Animal Care (HFAC), a nonprofit certification organization endorsed by the ASPCA. The argument was rejected by the court, on the grounds that HFAC’s definitions differed from how consumers would understand the meaning of the company’s statements. At press time, the case was pending.
Those two cases are the tip of the iceberg. Other companies accused of greenwashing include Walmart, Kohl’s, McDonald’s, Mercedes-Benz, Kirkland Albacore Tuna and Burt’s Bees, according to Truth in Advertising. This is just the short list, with dozens of other companies tallied up by the nonprofit advertising watchdog organization. Many claims are pending, settled or referred to the Federal Trade Commission.
The various lawsuits bring into focus the potential for overreliance on an ESG rating as a proxy for authentic actions improving the environment and social conditions. Differing ratings firms have been criticized for the different approaches they take, which may result in two different ratings for the same company. An encouraging ESG rating from one firm doesn’t give a business carte blanche to promote itself in press releases and ads as “eco-friendly” or “We’re proud of our diversity.”
ESG ratings firms are on the carpet to prove the veracity of their findings. In September 2022, U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) asked a dozen ESG ratings firms to provide information on how they calculate their ESG scores. In determining a company’s ESG rating, Sen. Toomey wrote that “many ESG ratings firms consider information that is not material or financially relevant under federal securities laws.”
Given that greenwashing suggests a company’s “dirty laundry,” the onus is on boards to ask searching questions of senior management about the potential for false or prevaricating ESG statements.
“Board members better be prepared to respond to investors about why ESG issues are a top priority,” says Michael Burdiek, a member of multiple boards serving privately held and public companies. “If the statements are overly promotional or remotely fictitious, much less completely false, an ESG lawsuit is just the tip of the iceberg. Once trust is lost among consumers, investors and employees, it’s hard to regain it.”
Gamble concurs. “My advice to board members is to make sure there are well-designed and robust disclosure control regimes in place regarding statements on sustainability, diversity, philanthropy and other ESG-related subjects,” he says. “Greenwashing is bad for all kinds of reasons, but the fundamental point is that it is a lie about what you are and what you’re doing. Lies almost always get found out.”