The Impact of Greenwashing on the Legal Industry
In an era of heightened environmental awareness, there is increased scrutiny of organisations’ environmental practices. While many demonstrate a genuine effort to reduce their environmental footprint, a concerning practice known as greenwashing has emerged. Although there is no single, harmonised legal definition of greenwashing, at its core it is about the ‘misrepresentation, misstatement and false or misleading practices in relation to environmental, social and governance credentials’. It allows for companies to continue profiting off of ‘well-intentioned, sustainably minded customers’ whilst continuing or expanding their unsustainable practices. This article focuses on the litigation risks associated with greenwashing and its impact on the legal industry with regards to the regulatory compliance advice law firms provide and how technology can be leveraged to enhance legal services. It also seeks to evaluate the role the legal industry plays in preventing greenwashing.
What is greenwashing?
Environmental groups coined the term as a way to criticise the ‘optics’ strategies of organisations seeking to improve their image in the corporate world while neglecting to implement meaningful, substantive changes to their business practices. A prioritisation of strategic marketing to construct a better company image has seemingly taken precedence over genuine efforts to align business operations with sustainable principles and address systemic issues. This has enabled many organisations to capitalise on the surge in public demand for environmentally conscious products and sources. Greenwashing is a prevalent issue across various industries, including fashion, personal care products, and manufacturing. With this in mind, as society continues to progress positively towards sustainable practices, it is necessary to combat the rise in greenwashing to ensure consumer trust is maintained and environmental goals are genuinely achieved.
How the Law seeks to protect consumers against greenwashing:
Adopted in 2022, the Corporate Sustainability Reporting Directive (CSDR) enforced detailed sustainability disclosure requirements for both large EU and non-EU companies that operate within the EU. The legislation aims to drive accountability and transparency of companies to promote sustainable practices and investments. It imposes a requirement on companies to share information on how ESG issues are monitored and their impact on the planet, marking a significant change in detailed reporting rules concerning sustainability focused impacts, opportunities, and risks.
The CSDR imposes various obligations on 50,000 companies including the requirement for data to align with the European Sustainability Reporting Standards (ESRS). Having been adopted by the European Commission in July 2023, the ESRS has faced pushback from EU lawmakers where 44 members of the European Parliament submitted a resolution to reject the Standards. The resolution proposes the argument that the European Commission’s disclosure requirements place a ‘high administrative burden for companies due to the high complexity of sustainability reporting standard’ that may disproportionately impact smaller businesses. The MEPs contended that the ESRS lacks ‘effective Key Performance Indicators’ and called for substantial amendments to the established standards. This fails to establish consistent standards for all companies and hence, ‘businesses and SMEs need support and guidance to seize the opportunities of this transition.’ Despite scrutiny from centre-right political parties, Parliament voted in favour of the Standards, rejecting the resolution which sought to suppress its impact. Support was demonstrated from Global Reporting Initiative CEO who saw the Standards as a ‘game changer’ for corporate accountability, both at the EU and global levels. He endorses the Standards as a ‘transition from political debate to practical implementation’ demonstrating the EU’s practical approach in utilising legislation to combat greenwashing to protect consumers.
Impact on the legal industry:
The rise of greenwashing has had a significant impact on the legal landscape, namely regulatory compliance, litigation, and the overall ESG framework. Law firms face both challenges and opportunities for growth as the ESRS continues to face scrutiny. Certainly, clients will rely on assistance from legal service providers to ensure regulatory compliance and avoid the risk of litigation from ‘impacted parties, reputational damage, and also, increasingly, regulatory interest.’ These business risks are usually costs of damages, fines, and legal costs. When categorising incidents of greenwashing, 2023 figures demonstrate the majority of classifications as being low to moderate given how in ongoing cases, it is often unclear whether there is legal standing for a claim. However, due to the lack of a unified global approach, litigation cases arising from green-washing claims have increased and subsequently, placed pressure on law firms to provide regulatory advice to clients adequately to ensure compliance.
With the introduction of various regulatory disclosure regimes for sustainability across the European Union, law firms have an opportunity for greater use of technology to enhance legal services. Tech-based regulatory compliance tools and platforms aid the transition to mandatory disclosures by automating required due diligence and data capture and accounting for the sustainability of third-party procurement. This streamlines ESG processes for firms and promotes efficiency. Document automation also encourages seamless, cloud-based drafting of contracts to reduce printing and can ensure that internal governance of contracts is fair, transparent and accessible. Hence, law firms must illustrate an active inclusion of technology-focused solutions to aid legal services as they adapt themselves to an inconsistent, everchanging ESG landscape.
The Legal Industry’s Role in Preventing Greenwashing:
Through addressing greenwashing, a culture of corporate accountability and integrity can be established. To do so requires a multifaceted approach involving more rigid regulatory frameworks, public awareness of genuine versus misleading marketing tactics and transparent corporate responsibility. Greenwashing has many implications including unfair competition, violation of consumer rights and the discrediting of corporate social responsibility. Here, the legal industry can play an instrumental role.
Firstly, the legal industry can contribute to preventing greenwashing through addressing the imperfections in current regulatory frameworks. While frameworks vary across jurisdictions, there is a clear need for more stringent measures. Certainly, a lack of developed regulatory legislation has contributed to the growth of greenwashing practices. To combat this, the legal industry can develop and implement stricter regulation which prioritises transparent reporting. This can be established through clear guidelines on environmental reporting, allowing the legislation to tackle this systemic issue within the corporate world. Alongside developing the regulatory framework, lawyers can also encourage companies to include third-party verification of environmental claims to enhance transparent reporting practices. Through ensuring reports comply with recognised standards, such as the Global Reporting Initiative (GRI) or the Task Force on Climate-related Financial Disclosures (TCFD), the legal industry can tackle deceptive reports being made by companies to better their public image.
Secondly, the legal industry can contribute by playing a crucial role in consumer education. Consumer education is key to acting as a deterrent to greenwashing. Through collaboration with consumer advocacy groups, the legal industry can help educate the public on typical greenwashing tactics. This will in turn empower individuals to make educated and informed choices when procuring goods or services and increase support for organisations that are making genuine efforts to act more environmentally conscious.
Thirdly, in-house counsel can encourage businesses to be more innovative and promote ESG and climate change initiatives. They may mitigate the risk of greenwashing by collaborating with teams across the company to ensure awareness of this trend is consistent company-wide to ensure the effective adoption of healthy business practices. Arguably, the most effective way to decrease the risk of greenwashing is through the genuine embrace of environmentally conscious practices and becoming part of a global effort to fight climate change. To support this, in-house counsel should make the benefits of sustainability clear. The Harvard Business Review presented a case for sustainability and suggested a business’ efforts to become greener positively affect company performance. Supporting this is the LexisNexis report which argues there is a strong correlation between a company's ESG rating and long-term financial health. Companies that demonstrate a genuine effort to be environmentally conscious and drive positive change should publicise this to inspire other businesses to follow their lead. By sharing best practices, companies can foster a collective movement towards sustainability and set industry standards. This can create a ripple effect to motivate other industry leaders to adopt similar practices. Healthy reporting is key not only to amplify the impact of a company’s efforts but also to establish a competitive advantage in an increasingly sustainability-focused market.
To conclude, the lack of a harmonised approach to combating greenwashing has created a rise in litigation claims. However, the EU framework demonstrates a progressive attitude towards promoting consistent sustainability practices to allow for transparent corporate reporting and protection of consumer rights. This deceptive behaviour not only affects consumer trust and purchasing intentions but also undermines genuine sustainability efforts and informed decision-making. Hence, the legal industry can contribute to tackle the challenges of greenwashing in several ways, demonstrating the efforts of the corporate world to be more environmentally conscious.
Husna Hussain
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