Corporate sustainability claims are expected to come under fresh scrutiny after a US regulator concluded a public consultation into its 11-year old anti-greenwashing guidelines.
Public feedback on the US Federal Trade Commission’s current version of the “green guides” — used to police environmental marketing claims — has shown how several groups are at odds over how both to define as well as to enforce greenwashing infractions.
During the consultation period, several consumer advocacy groups proposed tougher enforcement for financial products.
Americans for Financial Reform, a left-leaning coalition of consumer, labour and community groups, has recommended that the FTC include terms such as “Paris-aligned” as it relates financial institutions’ use of “net zero” and other commitments to fossil fuel transition plans.
“The explosive rise of the ESG investment space has raised new questions about what constitutes fair and faithful marketing and disclosure around financial products and services,” AFR said in an April 24 letter to the FTC.
However, other companies are fearful of increased regulation and enforcement which could put them at risk of incurring “potential substantial civil penalties,” says Jon Direnfeld, a partner at law firm Orrick.
Switzerland-based food group Nestlé says it supports the FTC’s green guides, but does not want these policies added to the agency’s enforcement rules for environmental claims.
It is “critical” for the FTC to keep its green guides “flexible and nimble,” Nestlé said in an April 24 letter to the agency, adding these policies should be updated more frequently as technology and business practices evolve.
Already, the FTC has shown increased aggressiveness in hunting for greenwashing. Last year, it settled with US retailers Walmart and Kohl’s for marketing dozens of rayon textile products as bamboo. The companies paid $3mn and $2.5mn in penalties, respectively.
“Walk down the aisle at any major store [and] you are likely to see packages trumpeting their low carbon footprint, their energy efficiency, or their ‘sustainability’,” FTC chair Lina Khan said in December. The agency’s green guides are supposed to “help companies avoid running afoul of the law’s ban on deceptive advertising”.
The FTC’s decision to consult on its “green guides” comes amid a growing push by global regulators to combat greenwashing. Last March, the European Commission proposed rules to fight greenwashing in the rapidly growing bond market. And, last year, the FTC’s counterpart in the UK, the Advertising Standards Authority, banned HSBC’s advertisements after being found to be misleading about the bank’s own green credentials. It was the first time the regulator had barred ads by a bank on greenwashing grounds.
The US Securities and Exchange Commission is also writing separate rules to root out greenwashing in the financial sector. Last year, the agency proposed to toughen the regulation of financial product names, especially those of investment funds with sustainable themes. While financial companies said they support the SEC’s effort, they have also asked for changes.
“If it’s easy to tell if milk is fat-free by just looking at the nutrition label, it might be time to make it easier to tell if ‘green’ or ‘sustainable’ funds are really what they say they are,” SEC chair Gary Gensler said last year.
As part of its greenwashing enforcement, the SEC last year settled charges with BNY Mellon and Goldman Sachs over allegedly misleading environmental, social and governance claims by the banks. The banks agreed to pay $1.5mn and $4mn in penalties, respectively.
“Consumers and markets continue to place a premium on corporate sustainability and climate change policies,” says Stacy Kray, co-head of Orrick’s environmental practice.
For companies, “we do see risks, including anti-ESG enforcement and legislation efforts led by Republican politicians in the US,” she adds.
In March, 21 Republican state attorneys-general challenged ESG-minded asset managers over the effects of their commitments to net zero carbon emission targets.
In a letter addressed to some of the largest US fund managers, originally reported by Reuters, the attorneys-general said “many of you have committed to take actions inconsistent with your clients’ financial interests”. Several asset managers are also members of the Net Zero Asset Managers Initiative, set up to accelerate the transition towards net zero global emissions.
Amid this tension between regulators and politics, companies will need to spend more time and money scrutinising their own green claims before making them public, Kray believes.
“We don’t think this means that companies will no longer try to be green,” she says. “Rather that companies will need to be more rigorous with the governance controls and procedures they use to manage and verify sustainability claims.”
