Pressure from consumers, investors, and regulators to provide climate, environmental, and sustainability disclosures is increasing, but it is important for companies to ensure such disclosures are accurate, verifiable, and not misleading to avoid claims of “greenwashing” – making false or unsupportable claims regarding how a company and its products are environmentally friendly or have a greater positive environmental impact than they actually provide.
Investor Demand for Climate Information and Initial Company Responses
Beginning in the early 2000s, the Carbon Disclosure Project (“CDP”) requested climate and environmental information, including emissions data, from companies on a voluntary basis. Pressure grew from institutional investors and investment managers, including large institutions like BlackRock, who requested climate-related information to support their assessment of climate change as a risk to their portfolios and to satisfy investor interest in sustainability.
Some of these institutional investors formed initiatives, such as The Climate Action 100+, to collectively urge companies to provide better information about the impact that climate change has had or is likely to have on their businesses, and to urge governments and companies to take steps to reduce investors’ exposure to climate risks by providing climate risk disclosure aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (“TCFD”), which are structured around four pillars – governance, strategy, risk management, and metrics and targets.
As companies began to respond to the CDP and TCFD initiatives, they posted data and reports on their websites that detailed greenhouse gas (“GHG”) emissions. Over time, as the information requests became more substantial and the pressure to appear environmentally friendly and sustainable grew, those reports evolved into separate, stylized sustainability reports that included GHG emission data and reduction targets and highlighted company initiatives to lessen environmental impacts. Companies also included more environmentally friendly and sustainable language in their marketing and promotional materials to appeal to environmentally conscious consumers.
Greenwashing Claims
Due to the proliferation of announcements touting “net zero” or “carbon neutral” pledges, particularly those short on actionable details, and the increased focus on sustainability in marketing materials, concerns arose about overstating “greenness.” Claims of greenwashing began to come from governmental regulators, investor groups, and environmental activists. In December 2022, members of the U.S. House Committee on Oversight and Reform sent a letter accusing the large oil companies of making misleading promises over decarbonization. Similarly, the Securities and Exchange Commission (“SEC”) has charged affiliates of large financial institutions with making misleading statements about the consideration of environmental, social, and governance (“ESG”) principles in their investment decisions for so-called “ESG Funds.”
Plaintiffs also brought claims under state consumer protection laws. Two utility companies faced similar claims that their marketing materials depicted natural gas as a clean and efficient fuel while failing to discuss the detrimental effects of methane leaks and emissions. The case against one utility ultimately was dismissed because the court concluded that the consumer protection laws explicitly exempted gas companies subject to state public service commission authority. However, the case against the other is still pending.
The use of carbon offsets to promote claims of “carbon neutrality” also have been the subject of legal challenges against the commercial airline industry. Plaintiffs in one case allege that the airline defendants rely on the use of carbon offset credits to support their carbon neutrality representations unjustifiably because of fundamental issues with the voluntary carbon offset market, including inaccurate accounting and the speculative nature of emissions reductions that will occur over decades. In another case, two airline defendants also faced claims related to their promotion of “sustainable aviation fuel,” alleging that although aviation fuel made from biomaterials may result in lower GHG emissions than fuel made from fossil fuels, it is not “sustainable” because the production and use of biofuels results in CO2 and non-CO2 emissions. Plaintiffs also alleged that the airlines’ emphasis on biofuels is misleading because in each case, their use represents a very small portion, much less than 1%, of their total fuel use.
Other greenwashing claims involve the use of plastics and whether claims of recyclability are accurate if the products cannot be recycled in all jurisdictions. One consumer goods company paid $10 million to settle a lawsuit claiming its statements that its products were recyclable were misleading because the products were not, in fact, recyclable in many places. As part of the settlement, the company agreed to provide a disclaimer on its products and in advertising – “Check Locally – Not Recycled in Many Communities.”
Regulatory Response
In response to investor demand for increased climate-related disclosure and concerns over greenwashing, in March 2024, the SEC adopted rules requiring additional climate-related disclosure. The final rules require disclosures about climate-related risks, transition plans, climate-related risk governance, Scope 1 and Scope 2 GHG emissions, and financial statement effects of severe weather events. Specifically with respect to the issues that have been alleged around carbon offsets, the rules require that if carbon offsets or renewable energy credits (“RECs”) are a material part of a company’s emission reduction strategy, that company needs to disclose additional information relating to the offsets or RECs it uses, including their nature and source, a description and location of the underlying projects, and any registries or other authentication. Though the final rules were scaled back from the original proposed rules, legal challenges were filed almost immediately. Pending resolution of the litigation, the SEC agreed to voluntarily stay the effectiveness of the rules.
In recognition of the issues relating to the integrity of the voluntary carbon markets, in
May 2024, the Biden administration issued a joint policy statement and set of principles for voluntary carbon markets that recommends measures to increase the integrity of carbon markets, including greater transparency and disclosure around the nature and environmental impact of the credits.
The SEC rules are not the only disclosure mandates that could potentially affect companies. In 2023, California enacted two climate disclosure and financial reporting laws that are collectively referred to as the Climate Accountability Package and which impose significant reporting requirements on large U.S. public and private companies doing business in California. Under the Climate Accountability Package, covered companies will be required to publicly disclose their direct and indirect GHG emissions (including Scope 3 emissions) and climate-related financial risks. Reporting under the Climate Accountability Package is currently set to begin in 2026. In related legislation intended to combat potential carbon offset greenwashing, California also adopted the Voluntary Carbon Market Disclosures Act that will require substantiation of claims about emissions reductions and carbon offsets. The Climate Accountability Package is being challenged in court and California’s governor recently announced proposed amendments that would, among other things, delay the implementation of the rules by two years.
Although there has been some anti-ESG pushback on the SEC and California climate-related disclosures, several other states (including New York and Illinois) have introduced bills to require climate-related disclosures like California’s. It is unclear whether further state requirements will be adopted or where the SEC and California rules will end up following the litigation, but considering investor concerns, it is safe to assume that some additional level of climate-related disclosure will be required within the U.S. Moreover, outside the U.S., public and private companies in the U.K. (including large subsidiaries of U.S.-based multinationals) already are required to make greenhouse gas emission and climate-related risk disclosures and, in the European Union, the Corporate Sustainability Reporting Directive requires disclosure across a range of ESG topics, not just climate.
What this Means – What’s Next
Despite the pause in the implementation of the SEC requirements, the potential modification of the California rules, and the impact of upcoming elections, because of continued investor demand it is reasonable to assume that companies will provide some level of climate and sustainability disclosure – either on a voluntary basis in response to investor requests or pursuant to modified state or federal disclosure requirements. However, due to the increased focus by regulators and environmental activists on greenwashing, companies should be extremely cautious when preparing and distributing climate and sustainability information – whether through sustainability reports, online, or through promotional materials.
Companies are advised to use a heightened sense of care in preparing climate and sustainability information. For public companies, this means the same level of care that would be used for information that is intended to be filed with the SEC. Companies should have procedures to ensure that climate and sustainability information is accurate and verifiable. Where possible, the company should maintain file copies of reports that are annotated to show where the information was obtained. This will not only help in case the statements are ever challenged, but also will help when it comes time to update the reports. In addition, companies should review promotional materials that tout environmental or sustainability benefits to make sure they are not misleading. If the statements would require additional context, caveats, or conditions to be complete and accurate, include such context, caveats, or conditions directly. Finally, all climate and sustainability information should be reviewed to ensure consistency of the data and the messaging across all platforms and modes, including, if applicable, publicly filed SEC reports.