Watch out if you are making Net Zero Claims – or how to avoid “greenwashing”

In this article, regulatory specialist Verena Charvet considers the increasing (and successful) use of the law to hold companies to account for their “green” claims and what any organisation needs to bear in mind when making net zero claims.

What are the issues?

It has always been the case that companies need to be able to back up the claims they make –- especially to consumers and in regulated sectors. That is increasingly true of climate and other ESG commitments. Alongside this, there appears to be growing appetite to seek recourse to the law to gain greater transparency, to hold businesses accountable for not meeting their own claims and to force boards to adopt “sustainable” policies in their businesses. Such actions have been taken by civil society organisations[1], regulators[2] and individuals[3] who are more frequently looking to use legal routes for transparency, to change ESG policies or implementation goals. Such action can damage the reputation or cash flows of target corporates even if what they are saying is a “sales puff” and was not intended to be relied on.

The legal origins of the term “puffery” (or “a mere sales puff”) can be traced back to an 1893 English Court of Appeal case Carlill – v- The Carbolic Smoke Ball Company. The case involved a manufacturer’s promise to compensate customers with £100 pounds (in that era, a considerable sum), if they were to contract the ‘flu after properly using the Carbolic Smoke Ball—a rubber ball with a tube that allowed users to inhale carbolic acid vapours purportedly to prevent disease.

The “Mere Puffery” Defence

Eventually, a consumer sued the company after it refused to reimburse the customer who contracted the ‘flu. During trial, the manufacturer’s defence was that its marketing claims were “mere puff” and not meant to be construed literally. The defence failed.

However, the Court did endorse the notion that traditional rules relating to promises might not apply to advertisements that were clearly not meant to be taken seriously. Thus, the legal defence of “puffery” was born.

Despite the “mere puffery” defence, there have been increasing numbers of successful cases brought against those whose claims are unsupported or are not supported by independent data.

These cases can be grouped into those arising from:

• Global regulators investigating zero claims.[4]
• Advertising watchdogs banning adverts with ‘net zero’ claims that are perceived to be misleading to consumers:[5]
• Consumer and advocacy groups are using consumer laws to hold companies accountable for allegedly making statements that the consumers rely on when making purchasing decisions[6]
• Directors being confronted by shareholders over misleading sustainability and/or net zero claims[7]
• Companies are publicly facing criticism for the methodology used in estimating and reporting carbon emissions: [8]
  
  
  
  

What does this all mean?

In seeking to avoid such challenges, companies, when making net zero claims in the UK, should bear in mind:

• Regulator-to-regulator communications. For example, the Financial Conduct Authority (FCA) has memorandum of understanding (MoU) with it’s global counter-parts (including those in the EU) through which information is shared. The MoU enable coordination with other regulators on a robust regulatory response to address claims. The MoU information sharing may also give rise to action being taken against a locally regulated entity even though the activity happened in another jurisdiction;
• Must follow the guidance on avoiding misleading environmental claims that has been issued by the Competition and Markets Authority (CMA), as well as the Advertising Standards Authority (ASA) guidance on misleading environmental claims and social responsibility;
• When publishing carbon emissions as part of a company’s pledge to address climate change and/or claiming to be aligned to the Paris Agreement, that they must verify that the underlying assumptions used in reporting carbon emissions support the claims being made;
• When the company makes net zero claims, those statements are consistent with the company strategy, clear and unambiguous, and backed up with data;
• That there is also an increasing number of regulatory considerations which need to be taken into account which vary between sectors. For example, companies registered in the UK need to consider the 2021 Green Claims Code[9], which consists of new rules designed to ensure that any environmental claims on goods and services do not mislead customers and can be substantiated.
  
  

In addition, UK registered companies should bear in mind the Transition Plan Taskforce (TPT), launched by HM Treasury in April 2022, to develop a gold standard for climate transition plans. The TPT is informing and building on international disclosure standards. The UK Government and the FCA are actively involved and will draw on the TPT’s outputs to strengthen disclosure requirements across the UK economy.

It is envisaged that the Taskforce’s work will promote decarbonisation by ensuring that companies and financial institutions prepare comprehensive plans to achieve net zero. Companies will likely be required to follow guidance when preparing climate transition plans in the future[10].

In the financial services sector, the FCA has proposed a package of new rules to improve trust in sustainable investment products. The measures will include restrictions on the use of terms such as ‘sustainable’, ‘green’ and ‘ESG’ and promote the use of investment product sustainability labels. The FCA Policy Statement is expected to be issued in Q3 2023[11].

How can Punter Southall Law help?

At Punter Southall Law we have a number of lawyers who are experienced in guiding clients through the minefield of regulatory requirements and expectations in relation to the corporate / mergers and acquisitions, employment and financial services sectors.  

To discuss your business needs, please contact Verena Charvet, an expert in ESG and financial services regulation at verena.charvet@puntersouthall.law