With greenwashing, companies give the impression that they are more sustainable than they actually are. Greenwashing not only harms affected customers, investors and employees by deceiving them. Greenwashing poses a liability risk for companies and company directors. Recent developments are exacerbating the risk.
The three letters ESG are in everyone’s mouths. They stand for “Environmental”, “Social” and “Governance” and refer to comprehensive sustainability and responsible corporate management. Social movements such as Fridays for Future require companies to do their part to protect the environment and promote social justice. This is also reflected in political sustainability goals such as the UN Sustainable Development Goals and the European Green Deal. In order to achieve these goals, companies are increasingly committed to sustainability. A current example is the German Supply Chain Due Diligence Act (SCDDA; Lieferkettensorgfaltsgesetz), which since January 1, 2023 has required large companies to observe certain due diligence requirements in their own company and along their supply chain in order to avoid or end human rights or environmental risks.
Sustainability has become a real compliance issue due to increasing regulation and court decisions. Companies that do not follow the rules risk liability. Their company directors can also be personally liable if they fail to ensure compliance with the law. However, the formulation of and compliance with sustainability goals can also bring advantages for a company by minimizing liability risks, improving reputation and facilitating access to financing options. Sometimes companies try to present themselves in a “green” light through sustainable measures and marketing strategies in order to become or remain attractive for investors, customers, and employees. This increases the risk of greenwashing.
Greenwashing allegations against companies are not a new phenomenon. However, current developments in legislation are likely to increase the risks and harms to businesses associated with greenwashing. In the following, I will highlight three drivers of this development: the reformed competition law, the new class action lawsuit, and the protection of whistleblowers.
Novelty in competition law: Consumer claims for damages in the event of greenwashing
A key driver of this development is competition law. The law against unfair competition (Germany: “UWG”) was amended in May 2022 to implement the EU Omnibus Directive and close gaps in consumer protection. A novelty: For the first time, the UWG provides for a claim for damages by consumers in the event of anti-competitive behavior by companies. So far, only competitors and certain organizations and associations have been able to take action against affected companies in the event of unfair business practices under the UWG. The reform aims to ensure that consumers who are harmed by unfair commercial practices can claim damages. A company is acting unfairly, for example, if it advertises misleadingly about the sustainability of its products or services, i.e. by engaging in greenwashing. What is remarkable about this is that the informed choice of the consumer is already protected, i. H. a consumer claim for damages can already be considered if misleading action causes them to make a business decision that they would not otherwise have made. What is meant by this is, for example, the inducement to buy a cosmetic product that is advertised as “fair trade” but does not actually meet the requirements of a fair trade product. If the actual sustainability does not match the advertised sustainability, potentially all buyers of a product or service can claim damages from the company concerned. This increases the risk for companies that a large number of consumers will take action against them.
All against one: Class action lawsuits for greenwashing
The damage that an individual consumer suffers from greenwashing can vary greatly. When it comes to green deceptions in connection with financial investment products, the individual damage to the individual is relatively high. If, on the other hand, it is about everyday and mass-produced products, the individual damage is rather small. However, even in the case of minor individual damage, the risk increases if the people affected try to assert their claims collectively against the company. The bundling of claims from hundreds or thousands of injured persons poses a significant risk of liability and litigation costs for companies. Litigation financiers, legal tech companies, specialized law firms and lawsuit vehicles are also aware of this. They also know how to use social media to attract and rally the attention of large numbers of aggrieved consumers to their rights. Often it is not primarily about the judicial enforcement of their claims. As soon as a critical number of consumers has been acquired, the aim is to persuade the company concerned to make payments in settlement negotiations.
Another important factor that will contribute to class action lawsuits related to greenwashing is the new redress lawsuit. She’s coming this year. When exactly is still uncertain. Actually, Germany should have transposed the corresponding European class actions directive into national law by December 25, 2022, but this has not been successful. The Federal Ministry of Justice has had a draft since September 2022, which is currently being coordinated by the departments. The concrete implementation must be awaited. However, the planned remedial action already points to possible waves of lawsuits regarding greenwashing allegations. It promises consumers quick and effective enforcement of their claims, for example for damages under the UWG, by allowing them to conduct class action proceedings in similar cases. It is a collective action in which certain consumer protection associations can sue for consumer claims instead of individual consumers.
Whistleblower: Protection when greenwashing is discovered
Before claims can be pursued, greenwashing must first be uncovered. This is often done by actors from within the company, for example employees – i.e. whistleblowers. This is not easy for them, as they may face reprisals. Their situation will soon improve significantly. In 2023 (the exact date is still open) the Whistleblower Protection Act (Hinweisgeberschutzgesetz; HinSchG) will come into force. This law enables whistleblowers to report infringements openly or anonymously to internal or external bodies, while at the same time offering them protection against reprisals in the workplace, such as e.g., Termination, transfer, or bullying. The Whistleblower Protection Act should therefore promote the detection of greenwashing in the future.
It is important for companies to be aware that greenwashing carries significant liability risks. In the future, it is likely that market participants will pursue claims for damages related to greenwashing more frequently. For this reason, companies should prevent accusations of greenwashing by introducing clear and realistic sustainability goals and transparent communication and reporting. Communicating about sustainability goals is often left to the marketing and HR departments. Instead, holistic approaches are required with interdisciplinary specialists, external consultants, clear responsibilities, internal training and audits, and the necessary documentation. ESG and sustainability must be part of the overall compliance management system and risk management system in the company. In addition to the risks, the opportunities must be seen. The protection of whistleblowers, for example, promotes the uncovering of infringements. A clever whistleblower system in the company makes it possible to find out about grievances at an early stage and to eliminate them before liability risks materialize.
All this not only minimizes liability risks. It maintains and enhances the company’s reputation. It takes years to build a good corporate reputation and only one greenwashing scandal to ruin it.
Source: NORDEN Legal; Cäsar Czeremuga, LL.M.; 6th January 2023