Note: The following article was written by Mark Henriques and first published by Directors & Boards. It is republished here with permission.
Directors must be clear on ESG-related claims made by their companies and willing to push back on dubious messaging.
Increasingly, directors are under pressure to implement various ESG initiatives. While these undertakings can align the board with customer and community stakeholder expectations, they also give rise to additional risk. Recent years have seen a surge in class action litigation involving ESG-related statements made by companies. The SEC has also increased its regulatory oversight, and companies in violation face substantial penalties. What starts as salutary commitments to sustainability, social responsibility and good governance can end up in expensive and time-consuming litigation.
Companies that take steps to address climate change, social injustice and poor governance practices are working toward laudable goals. However, they often face lawsuits on the grounds that they engaged in “greenwashing” — making false or misleading claims about environmental or social performance. Some greenwashing is unintentional, resulting from a lack of knowledge or understanding on the part of management. In other cases, however, greenwashing occurs intentionally through marketing efforts. Greenwashing is such a problem that United Nations Secretary-General António Guterres announced, “We must have zero tolerance for net-zero greenwashing” and appointed an expert group to study the issues.
A Variety of Claims
One recent example of such litigation involved Exxon Mobil, which was accused of misrepresenting its efforts to reduce greenhouse gas emissions. The company had made a series of public statements about its commitment to sustainability and reducing its carbon footprint, but it was later revealed that Exxon’s actual emissions reduction efforts fell far short of what had been promised. As a result, the company faces litigation by the attorney general of Massachusetts (and others). Exxon’s motion to dismiss was denied, and the case is expected to proceed to trial.
It's not just energy companies that are being sued. A class of consumers and Sierra Club sued Coca-Cola Co., alleging that the company engaged in greenwashing by advertising its single-use plastic water bottles as “100% recyclable,” when in fact they are not. The class alleged that the “100% recyclable” labels violate California’s Consumers Legal Remedies Act and false advertising law, and constitute fraud, deceit and negligent misrepresentation. Plaintiffs are seeking to prevent Coca-Cola from selling plastic water bottles unless the bottles’ packaging and marketing are modified to remove the misrepresentation “100% recyclable” and/or disclose the omitted facts about their true recyclability. The case is pending.
H&M shoppers filed a class action lawsuit accusing the company of illegally preying on shoppers’ desire to buy sustainable clothing by advertising expensive “recycled” garments as part of H&M’s “Conscious Choice” collection. The shoppers argue that the collection’s clothing, made of recycled polyester, is primarily sourced from plastic bottles, stating that, while plastic bottles have the potential to be recycled many times, once they are turned into clothing, they are destined for landfills.
A recent example in which board members were named as individual defendants involves Danimer Scientific, a biodegradable plastics company that claimed its proprietary product, a biodegradable plastic substitute, was 100% biodegradable, renewable and sustainable. After The Wall Street Journal published an article raising questions regarding the biodegradability of this plastic substitute product, an investor filed a securities class action lawsuit asserting securities fraud. The defendants included the company, its CEO and CFO, and seven members of the company’s board of directors.
ESG Claims Pose Substantial Risks
ESG-related class actions, as well as governmental and regulatory actions, represent a substantial risk to the corporation. Because there may be hundreds of thousands of class members, even small individual damages can aggregate to a number that can threaten the existence of the company. While some of the cases can be dismissed or class-certification denied, even these procedures can involve substantial defense costs. Furthermore, the company may need to provide extensive documentation in response to discovery requests, as well as making key company personnel and board members available for time-consuming depositions. Finally, regardless of the outcome of the litigation, media coverage can damage the company’s reputation and destroy value. Preventative measures taken before any suit is filed are much cheaper and less intrusive than scrambling to defend a lawsuit once it is filed.
How Directors Can Manage the Risk
Directors need to start defending ESG claims before they even get filed. They can do so by requiring rigorous support for any ESG-related claims before they are published. Directors should follow these points in assessing ESG claims and the support presented by management:
Is the claim clear? Directors must have a clear understanding of what is being claimed. Details can make your claim easier to support and defend. “70% organic cotton” is a testable claim. “Made with organic cotton” is open to interpretation and litigation.
Does the data support the claim? Directors should ask to review the data underlying the claim, and the company should preserve it so that it can readily be presented if the claim is challenged. Third-party certification from sources such as the Carbon Trust, Forest Stewardship Council, Rainforest Alliance or Energy Star can be a great way to boost confidence in the underlying data and analysis.
Be cautious about comparisons. Directors should ensure any comparisons are “apples to apples.” Comparisons with competitors can invite other legal claims, like defamation or unfair advertising. Check with legal counsel about potential exposure. In light of the impact of the COVID pandemic, when your company plans to make climate claims, carefully evaluate what “base year” to use for comparison.
Check images on ads and packaging. The Federal Trade Commission has issued “green guides,” which caution about misleading advertising, including the use of the color green or images from nature to imply that products are eco-friendly. If the product is not eco-friendly, directors should ask marketing to consider other colors or designs.
Be honest about your company. Make sure your company information speaks to consumers about how green your individual products are, as well as your organization’s overall sustainability practices. When discussing plans or goals, be specific about your targets and timelines so consumers can hold you accountable.
Directors who follow these principles can defeat ESG claims before they are filed, saving the company’s resources and reputation for mission-critical endeavors.