- German and US investigations into 'greenwashing' put companies on notice
- Lawyer says similar action against financial institutions likely in the UK
The raid of German asset manager DWS by 50 police officers last month ushered in a new type of corporate scandal. Financial institutions are typically raided because of suspected money laundering or tax fraud. In this case, however, it was allegations of so-called 'greenwashing' that prompted the criminal probe – and lawyers believe that UK companies could soon face similar action.
Greenwashing refers to groundless environmental claims made by businesses in a bid to improve their image. In the case of DWS, the funds arm of Deutsche Bank (DE:DBK), it was targeted after claiming a significant proportion of its funds under management were chosen using strict sustainability criteria. This turned out to be stretching the definition of environmental, social and governance (ESG) investing.
Until recently, greenwashing was a term largely used by campaigners, accusing companies such as banks and energy companies of misleading the public about their activities, using net zero carbon emission goals to obscure increases in fossil fuel production or lending, for example. But now it could pop up in court as an example of investment fraud.
“I think we’ll almost certainly see similar action to the DWS raid in the UK, of a financial institution suspected of making misleading green claims,” said Richard Reichman, a partner at BCL Solicitors specialising in corporate crime. “But I think the most likely scenario that we’ll see is direct civil fines imposed by the Competition and Markets Authority (CMA), rather than an influx of prosecutions.”
There could be plenty of targets for UK regulators, although the threat alone is likely to see many potential offenders cleaning up their act.
A global sweep of websites conducted by the CMA found that 40 per cent of green claims made online could be misleading. The fashion industry is a prolific offender, with almost 60 per cent of sustainability claims by certain brands classed as “unsubstantiated” or “misleading” by the Changing Markets Foundation. The CMA has now started its own review into the behaviour of UK fashion brands.
Regulators in the US have also started to show their teeth. The Securities and Exchange Commission is currently investigating Goldman Sachs over its ESG investment funds, according to media reports, and recently fined BNY Mellon $1.5mn (£1.2mn) for allegedly misstating and omitting information about ESG considerations for mutual funds that it managed.
A similar trend is emerging in the UK. The CMA fired a warning shot last year, with a ‘green claims code’ that set out businesses’ obligations under consumer protection law. In April of this year, the government went on to bolster the CMA’s powers, allowing the regulator to fine businesses up to 10 per cent of global turnover for consumer protection breaches.
This is not simply a civil matter – in the UK, as in Germany, greenwashing can result in criminal prosecutions.
“There’s no specific offence of greenwashing,” says Jacqueline Harris, a commercial litigation partner at Pinsent Masons. “But there are other regulations and criminal laws that cover practices that might be termed greenwashing. For example, if greenwashing amounted to fraud that could be a criminal offence.”
All that glitters is not green
In certain conditions, greenwashing can also count as a criminal offence under the Consumer Protection from Unfair Trading Regulations 2008, which prohibits unfair commercial practices.
Reichman at BCL added that amendments to the current regime were “highly likely” in order to make it easier to punish greenwashing. The CMA itself is pushing for freestanding legislation to criminalise misleading and unsubstantiated green claims. Financial institutions, together with travel, fashion and food companies, are expected to face particular scrutiny.
Just how easy it will be to crack down on hollow claims remains to be seen, however. The UK’s record on tackling corporate crime is already poor, and greenwashing is a more slippery offence than most. As discussed in our feature on carbon counters, there is a dearth of concrete facts and figures around sustainability, and a lack of standardised terminology. Proving that a company has consciously misled customers will be no mean feat, therefore.
Earlier this month, Tesco (TSCO) was rebuked by the Advertising Standards Authority for failing to prove that its Plant Chef burgers were more environmentally friendly than their meat equivalents (as the company had claimed in a recent advert), but serious financial sanctions against UK companies have yet to emerge.
The direction of travel is clear, though – particularly for asset managers – and one-off fines are not the only thing for investors to worry about: shares in DWS have fallen by almost a quarter since its police raid and its chief executive has resigned, leaving management with a major clean-up job on its hands.
The popular ploy of marketing everything from burgers to investment funds as 'green' doesn’t look sustainable any more.
