Greenwashing: are directors ultimately liable?

Greenwashing: are directors ultimately liable?

Stevens & Bolton selected to support the evaluation of the EU Environmental Liability Directive

Major Dutch airline KLM has been under the spotlight recently for allegedly misleading marketing. We look in a bit more detail at the problems that companies and directors can face when they engage in alleged greenwashing. 

“Greenwashing” is a term used to describe actions by a company where it uses advertising and public messaging to appear more climate friendly and environmentally sustainable than it really is. It is getting much more difficult for businesses to make unsubstantiated claims of being eco-friendly without being called out on it, and it runs the risk of the business becoming embroiled in costly shareholder activist litigation. It also poses risks for directors who may face enforcement action from regulators policing misleading claims.

What claims did KLM make?

It claimed that the airline was on the path to more sustainable flying in a series of “Fly Responsibly” adverts released in 2019. This campaign highlights the role consumers can play in mitigating the harmful impacts of flying, by buying carbon credits and planting trees. 

Why were these claims potentially unlawful?

In the context of increasingly dramatic signs of climate change, campaigners such as ClientEarth questioned the whole concept of sustainable flying and suggested that KLM’s marketing campaign gave a false impression that the aviation industry could continue to grow without adverse impact on the planet. Carbon offsets can be controversial. In theory planting trees can remove carbon from the air, but there is no clear data on how successful such projects are. ClientEarth and other advocacy groups claim that carbon offsetting should be seen as a distraction from the urgent business of re-imagining air travel in a way that does not further inflame the climate emergency. 

What does the lawsuit allege? 

It argues that the “Fly Responsibly” campaign breached the Dutch implementation of the EU’s Unfair Commercial Practices Directive by giving customers the false impression that its flights would not worsen the climate emergency. It claims that the offset product that KLM promoted to customers, through which they could donate towards reforestation schemes and sustainable aviation fuels, was unlawful marketing, since the expert evidence report submitted with the court filing found that KLM could not validly claim that such gestures made any meaningful compensation for the climate impact of flying. 

Both the ASA and CMA have increased their focus on socially irresponsible or misleading environmental claims, with the ASA recently (June 2022) stating it expects an increase in its enforcement action against greenwashing. If you would like to read more about the ASA’s update, please see our article here. Last year, the CMA announced its intention to investigate misleading environmental claims following the publication of its “Green Code” guidance on making environmental claims in respect of goods and services and, in January 2022, began its review of environmental claims with a spotlight on the fashion industry first.

What should directors consider in relation to their statutory duties?

Directors owe duties to the company under the Companies Act 2006. By failing to adequately address climate risk, directors are exposed to the risk of breach of duty claims, potentially brought by activist shareholders on behalf of the company in so-called “derivative claims”. Directors’ duties under the UK Companies Act include:

  • the duty to act in a way the directors consider will best promote the success of the company for the benefit of its members, and in doing so to take account of a range of factors including its impact on the environment (section 172)
  • the duty to exercise reasonable care, skill and diligence in the exercise of their duties (section 174)

Have directors been challenged in the UK courts on greenwashing?

ClientEarth, in March 2022, announced that it was preparing to take action against Shell’s board of directors for setting a target to become a net-zero emissions energy business by 2050 and then failing to reflect such plans in the detail of its operating plans or budgets.  ClientEarth argued that the directors were breaching their Companies Act 2006 duties under section 172 and 174 by failing to adopt and implement a climate strategy that truly aligns with the Paris Agreement goal to keep global temperature rises to below 1.5 degrees by 2050. It claims that this is the first attempt to hold a company’s board of directors liable to properly prepare for the net zero transition and represents a wake up call for directors. 

Now, more than ever, companies should be cautious when making environmental claims to ensure they are in fact correct, not misleading and they comply with relevant guidance such as advertising standards and the Green Code. Directors should be aware that they risk claims alleging breach of their duties if they fail to act in the best long-term interests of the company by paying lip service to the challenges posed by the climate crisis. Companies also risk action for a misleading commercial practice where greenwashing claims are considered to have influenced consumers into making purchasing decisions they would not otherwise have made. The potential for this two-pronged attack means directors cannot afford to be hands off from their marketing teams when promoting green credentials. The reputational cost of being named and shamed in the public domain could be substantial with long term loss of brand loyalty and trust.

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