Greenwashing and the rise of green-hushing

Posted: 18/01/2023

The ESG matrix continues to expand with a myriad of legal and regulatory considerations for those companies operating in the energy sector, among others. It is at times measured, at others – to quote those in the industry – ‘tedious’ and ‘onerous’. Certain of the ESG indices are laudable because of the benefits they bring, relevantly mitigating the risk of greenwashing and engendering a more sustainable environment. However, there is an increasing countereffect, ‘green-hushing’, whereby companies deliberately downplay their environmental/green credentials or simply keep them confidential. This article touches on the current regulatory environment for greenwashing, covering certain jurisdictions, looks at the pros and cons of green-hushing, and offers some practical tips.

Greenwashing

Some business leaders are content to greenwash when it comes to a company’s existing or projected green credentials. Regrettably, greenwashing appears to be very common. The U.K. government reported that a Competition and Markets Authority (CMA) global review of randomly selected websites disclosed that 40% of ‘green claims’ made online could be misleading consumers[i]. More recently, the European Commission said it found that 53% of environmental claims used to advertise products in the EU are misleading or unfounded[ii].    

The motivations for this are various but may include: attracting investors – in particular green investors; securing green subsidies – which are sizeable in western markets[iii]; placating investors’ concerns; and improving one’s image. In a market where capital and liquidity are increasingly tight and competition fierce, such drivers should come as no surprise. But whatever the motivation, exaggerating green credentials means that a company and, in some instances, its directors, run the risk of certain legal and commercial repercussions noted below. The solution seems obvious: just tell the truth. But the reality is less clear especially when a company’s statement(s) is open to interpretation, statements reach multiple jurisdictions, and markets change.

Examples of current greenwashing laws

Greenwashing generally falls into three categories which are each premised on a misrepresentation regarding: (i) corporate and governmental commitments, (ii) product/service qualities, and/or (iii) disclosure of environmental/sustainability/climate change investments and related financial risks.  In a nutshell, there are prescribed greenwashing laws (or codes) in the U.K., USA and Australia whereas in the E.U. and some parts of Asia, there are no specific laws and instead general consumer protection, and public market laws address the issue. Much has already been written on the subject and it is not intended to delve into the detail, but below is a high-level summary.

Investor and interest group activism

While the aforementioned greenwashing laws afford regulators and, in some instances, consumers a cause of action, there is also a myriad of other claims and actions that investors and/or interest groups (subject to proving the necessary standing) may bring. While such matters are beyond the scope of this article, they can be summarized as, for example, tortious claims in negligence, consumer protection class actions, and corporate oppression remedies. Non-legal recourse can also include filing resolutions with a company: Recently, a group of Glencore’s shareholders filed a resolution calling for the company to disclose how its projected thermal coal production aligns with the Paris agreement objective; one of the reasons given for the action, to help investors assess risk[iv].

Green-hushing

Green-hushing is, at its most basic, understating a company’s green credentials or keeping such details silent altogether. The term was first coined by academics in 2008, but it has become prevalent in recent times: A 2022 survey complied by South Pole revealed that one in four companies surveyed have set science-based emission reduction targets, but they do not plan to publicise them[v].

Why green-hush?

The reasons why corporates may green-hush are varied. Some suggest it is fear of increased scrutiny from and critique by the media – alongside NGOs and consumer market authorities – that has made companies wary of publishing their green credentials[vi]. Others suggest it is the ‘fear’ that companies don’t wish to be called out if they fall short of their stated targets and/or labelled for greenwashing and there is little value in being truly open about climate goals. There is also a concern among corporates as to their legal repercussions, namely that environmental-related legal claims are not part of their value proposition; unsurprisingly, corporates don’t wish to be sued and/or prosecuted and would instead prefer focus on delivering shareholders’ profits. Equally, the increase in interest-group legal actions which result in protracted proceedings and significant legal costs may also temper corporates from making ambitious statements. While talk of promoting one’s brand and demonstrating leadership in green credentials appears laudable, for some that is not enough of an incentive and the risks, potential or otherwise, outweigh the rewards.  

A corollary to the ‘why green-hush?’ is what is the ability of a company to green-hush? Public companies are subject to strict rules which prescribe, for example, that a company must disclose information to the market if a reasonable person would expect it to have a material effect on the company’s share price[vii]. It is conceivable that, in some instances, a company’s green credentials and/or its green goals may be ‘material’ and thus require disclosure. Conversely, private companies are not, in general, subject to the same rigor[viii]. There is therefore greater potential for private companies to green-hush than public companies, so the issue may well be more profound than presently understood.      

The effects of green-hushing

Green-hushing, however, brings with it numerous consequences, for example:

• Companies may be less ambitious as to their green goals and the tendency to be optimistic is tempered or negated.
• Targets and achievements become harder to scrutinise, thus limiting knowledge-sharing and potentially leading to opportunities being missed for sectors to decarbonize by working together.[ix]
• Misleading statements are potentially made to the market about a company’s true potential and/or intention, thus potentially prejudicing shareholders (See above).
• Green-hushing can put companies at odds with their ESG goals; ESG goals are part-motivated by investors and other stakeholders; therefore, green-hushing risks putting companies at odds with their stakeholders[x].
• Further to the above, ESG factors are becoming important to investors and companies omitting such details may lead to missed investments. Relevantly, Alvera notes that by 2020, more than 3,000 organisations representing more than $100 trillion in assets had signed up to the ‘Principles for Responsible Investments – a UN-backed initiative holding that ESG factors must be taken into account when making investment decisions[xi].
• It also potentially means missing out on the opportunity to inspire positive change and move their wider industry in a more sustainable direction and attract investment from stakeholders who want to invest in sustainable businesses which could speed up the development of new sustainable technology[xii].

Despite the above, the reality is the growing pressure on corporates to disclose green credentials has led to an increase in adverse media reports and/or environmental claims such that corporates wish to limit their exposure and risk profile; this has merit from both a commercial and legal perspective.

Where does the balance lay?

To negate allegations of greenwashing and mitigate the potential for green-hushing, there are a few solutions.

• Be honest. It is easier for a company to defend its green credentials where they are based on accurate, clear, unambiguous, complete and indisputable facts; ergo, no fudging, period. (In the case of green goals, they also need to be realistic and achievable.) To this end, ensure that proper records are maintained such that the validity of such credentials can be sustained if required.
• If a more nuanced approach is required – and that’s not to ‘fudge’ but finesse points that may be open to debate or conjecture – then qualify such statements with relevant caveats, all the while being as accurate, clear, complete etc. as possible (see above). If the statement concerns a future ESG-related projection/outlook, then the application of ‘forward-looking statement’ (‘FLS’) qualification is prudent. FLSs are common in the public equities market. However, to the uninitiated, it is effectively a disclaimer whereby management explicitly discloses that the statement is, among other things, not a guarantee as to future performance, based on reasonable assumptions, involves known and unknown risks and that no reliance should be placed on it. Despite this, the makers of such statements sometimes fall foul of the law for not being reasonable – that is a very subjective test.  
• Be modest. As a reputable used car salesman once told me – yes, such individuals do actually exist – it is better to under-promise and overdeliver than the other way around when appealing to customers. The same is true for ESG-related statements intended to appease both investors and regulators. Unless there is a compelling reason, whether it is legal or contractual obligation to disclose such information in full, then consider adopting a conservative approach. A fuller statement, or indeed a corrective statement, can be delivered later when the factual position is clearer.     

Conclusion

It is not only energy companies that will be affected by environmental issues; voters, investors and consumers will increasingly be able to hold states and companies to account^[xiii]. Whether or not a company wishes to green-hush should be determined on a case-by-case basis. There is – absent any legal or contractual requirement – no obligation for a company to disclose its green goals, instead, business leaders are left to do whatever is in the best interests of its shareholders. Unpalatable as this may be to some, this is the reality of the situation and suggesting that there is a ‘moral duty’ is, with respect, trite.

That said, it is not fanciful to suggest that the growing trend of ESG-related laws and regulations may eventually demand full disclosure of green goals by companies, particularly public companies and those in the energy sector where energy security and decarbonisation policy programs are accelerating the energy transition. However, until then, corporates are best advised to pay particular attention to the relevant laws and contracts affecting them and seek counsel’s advice if necessary because this space is only becoming more complicated domestically and internationally.           

[i] Competition and Markets Authority, Global sweep finds 40% of firms’ green claims could be misleading (Web Page, 28 Jan. 2021) <https://www.gov.uk/government/news/global-sweep-finds-40-of-firms-green-claims-could-be-misleading>.

[ii] Alice Hancock, ‘Half of green claims used to sell products in EU are misleading, Brussels finds’, FT (online 12 Jan. 2023) https://www.ft.com/content/5dde3181-3112-4280-8357-9b7881b7ae4c>.

[iii] For example, the US Inflation Reduction Act contains around $369 billion in subsidies for green energy, as well as tax cuts for US-made electric cars and batteries, and the EU recently approved the German government’s €28 billion support scheme for renewable energy, primarily aimed at wind and solar power.

[iv] Leslie Hook, ‘Glencore shareholders demand more clarity on coal plans’, FT (online, 5 Jan. 2023) <https://www.ft.com/content/ba8d8d18-d44f-4600-9ef3-27813b849f2f?shareType=nongift>.

[v] South Pole, Going green, then going dark – One in four companies are keeping quiet on science-based targets (Web Page, 18 Oct. 2022) <https://www.southpole.com/news/going-green-then-going-dark>.

[vi] South Pole, Net Zero and Beyond (Web Page, 2022) <https://www.southpole.com/>.

[vii] See for example Rule 3.1 of the ASX Listing Rules (Aust.) and Rule 7.1 of the AIM Rules (U.K.).

[viii] Private companies that are regulated entities, whether for financial services or otherwise, may have disclosure and reporting obligations to investors and regulators depending on where the company is registered and/or operating.

[ix] South Pole, Going green, then going dark – One in four companies are keeping quiet on science-based targets (Web Page, 18 Oct. 2022) <https://www.southpole.com/news/going-green-then-going-dark>.

[x] International Compliance Association, What is green hushing? (Web Page, 14 Nov. 2022) <https://www.int-comp.org/insight/2022/november/14/what-is-green-hushing/>.

[xi] Marco Alvera, The Hydrogen Revolution; The Future of Clean Energy, (Hodder Studio, 2022) 41.

[xii] Small99, Greenhushing (Web Page, 8 June 2021) <https://small99.co.uk/net-zero/greenhushing/>.

[xiii] Marco Alvera, The Hydrogen Revolution; The Future of Clean Energy, (Hodder Studio, 2022) 38.

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