Essential best practices to mitigate greenwashing
In the first article of the series, which explored ‘What greenwashing risks mean for the legal profession’, we outlined the key principles that legal and risk management professionals are to follow to mitigate such risks. These include:
Making accurate and truthful claims
Explaining conditions or qualifications
Using clear and understandable language
Ensuring accountability in the value chain
In this article, we take it a step further, delving into the best practices and reviewing real-life case studies for two of the principles: (1) making accurate and truthful claims, and (2) explaining conditions and qualifications to sustainability-related assertions. We also highlight how adopting globally recognized reporting frameworks, such as the GRI Standards, can help businesses to enhance transparency, reduce the risk of greenwashing, and improve stakeholder trust.
Making accurate and truthful claims
When making any environmental claims, businesses should ensure that:
The claim constitutes a verifiable environmental statement;
It is backed by scientific evidence; and
Consumers can assess and examine the claim against competitors.
It is imperative that marketing materials and ESG disclosures provide or direct consumers to the evidence that backs up the claims made, especially for any comparative statements - like ’greater energy savings’ or similar. Here, clear and transparent communication plays a key role, helping to prevent consumer misinterpretation.
Case study: UK Advertising Standards Authority (“ASA”) ruling on Wizz Air
Allegations: By stating that it is ’one of the greenest choices in air travel’, Wizz Air, a Hungarian airline, has violated UK advertising rules.
Basis for ruling: Although the airline provided evidence for the claim made, the advertisement itself did not include sufficient information for consumers to analyze it or compare the claim with those made by competitors.
Wizz Air’s defense: For their defense of the statement, Wizz Air submitted documentation proving that the airline:
had the lowest carbon emissions per number of seat kilometers flown by paying passengers - attributed to the youngest and most carbon-efficient fleet in Europe;
was actively renewing its fleet of airplanes and replacing the current fleet with airplane models that had the lowest fuel consumption per seat kilometer in their category;
had invested in research and development of sustainable aviation fuel; and
had established an ESG Governance structure, ensuring that the environmental issues were core to the business strategy, and that any sustainability statements were verified by data, assurance and benchmarking.
Counter-arguments: The ASA acknowledged that the claim was based on the type of aircraft used, and the carbon emissions per passenger measured in carbon emissions per number of seat kilometers flown by paying passengers. However, the issue was that the company did not include that same information in the advertisement itself, and the evidence was only produced in response to the investigation.
Outcome: In the end, the advertisement was prohibited, and Wizz Air was warned to ensure that any environmental claims made in the future are transparent, include verifiable evidence and provide sufficient information for consumers.
Explaining conditions or qualifications to sustainability-related assertions
To minimize the risk of making any misleading or ambiguous claims, companies should:
Disclose any caveats or limitations prominently; and
Ensure that sustainability-related goals are both credible and verifiable.
Both of these considerations should be integrated into due diligence and compliance processes in order to prevent misstatements.
Case study: Australian Securities and Investments Commission (ASIC) versus Vanguard Investments Australia Ltd. (Vanguard) [2024] FCA 308
Allegations: By overstating the ESG screening process for its Ethically Conscious Fund, Vanguard has allegedly misled investors and violated Australia’s financial services law.
Vanguard’s representations to the public: Vanguard made the following statements to potential investors that were deemed to be false or misleading:
the ESG Fund offered an ethically conscious investment opportunity by tracking the return of an index;
prior to being included in the index and the ESG Fund, securities were researched and screened against applicable ESG criteria; and
securities that violated applicable ESG criteria were excluded or removed from the index and therefore the ESG Fund.
Findings: In broad terms, Vanguard’s representations were viewed by ASIC to be false or misleading because:
the research and screening for the index, and the ESG Fund as a consequence, had significant limitations. For instance, a large proportion of issuers of securities included in the index (approximately 74% by market value) were not researched and screened against ESG criteria.
the fossil fuel screen did not cover companies that derived revenue from the transportation or exploration of thermal coal; and
the index and the ESG Fund included issuers that violated the applicable ESG criteria.
Outcome: Vanguard was penalized A$12.9 million. Mitigating factors, including self-reporting and corrective actions, reduced the original penalty of A$21.6 million initially sought by ASIC.
A key takeaway from this example is that any aggravating and mitigating factors must be included in the company’s internal compliance systems, ensuring that appropriate measures are in place for disclosures to accurately reflect the ESG characteristics of products and services. That way, issues can be identified and addressed quickly.
The fact that Vanguard received a 25% discount on the penalty because the company self-identified and self-reported the issue, as well as cooperated promptly and constructively with the ASIC investigation and court proceedings, demonstrates the value of ensuring that authorities are promptly alerted should an incident occur. The organization also needs to be able to demonstrate its remedial efforts effectively.
The role of sustainability reporting and GRI Standards
As illustrated, both case studies highlight the importance of transparency, accountability, and verifiability of ESG claims. Sustainability reporting - especially when aligned with globally recognized reporting standards such as GRI’s - provides a structured approach to achieving these goals.
How international standards, such as the GRI Standards, add value:
Enhanced transparency: the GRI Standards guide organizations in providing a structured approach towards making clear, comparable, and comprehensive disclosures about their environmental, social, and governance impacts. This helps stakeholders verify claims and understand the context of the organization's actions.
Risk reduction: by adhering to the GRI Standards, companies can reduce the risk of unintentional greenwashing. The Standards emphasize data accuracy, evidence-based claims, and stakeholder inclusivity, ensuring that sustainability reports meet regulatory and market expectations.
Respond to the needs of stakeholders: GRI-aligned sustainability reports offer a recognized foundation for comparable environmental disclosures, reflecting the information expectations of a wide range of stakeholders, including consumers, investors, and regulators.
Due diligence support: using international standards such as the GRI Standards helps organizations identify potential gaps in the management of key ESG issues and ensure that their claims are consistent with their operations and policies.
Transparency sets the conditions for long-term success
By embracing internationally recognized standards, such as the GRI Standards, businesses can also build credibility, avoid pitfalls, and contribute to a more sustainable and transparent marketplace. As the regulatory landscape around greenwashing continues to tighten, organizations that prioritize credible and evidence-based sustainability reporting will be better positioned for long-term success.
SIGN UP FOR THE ESG MASTERCLASS JOINTLY ORGANIZED BY GLOBAL REPORTING INITIATIVE AND ALLEN & GLEDHILL!
For a deeper dive into greenwashing and other key topics in the evolving ESG landscape, don’t miss the online ESG Masterclass jointly organized by Global Reporting Initiative and Allen & Gledhill:
Date: 25 to 27 February 2025
Time: 3.30pm to 6.45pm (Singapore Time)
Venue: Zoom
Who should join: Legal counsel, compliance professionals, key sustainability decision makers and business leaders
CPD Points: Participants may be eligible to earn up to 8 Public CPD Points (pending confirmation of accreditation for the online format).
Spots are filling up fast! For sign-ups and more information on the Masterclass, visit https://www.allenandgledhill.com/perspectives/our-commitment-to-sustainability-esg/esg-masterclass/
Authors:
Elsa Chen, Partner (Chief Economist), Allen & Gledhill LLP, and Dr. Allinnettes Go Adigue, Director of GRI ASEAN
12 February 2025