ANALYSIS: Stakeholders to Supplement Agency Greenwashing Efforts

Looking to understand the environmental impacts of your purchasing or investment decisions? If so, there’s good news and bad news.

The good news: Companies are looking for ways to make their products or companies more appealing to environmentally conscious stakeholders.

The bad news: Many stakeholders fear that companies have gone too far with their eco-friendly representations.

Two pending federal actions could provide partial relief in the coming year regarding these concerns: the FTC’s updates to the Green Guides and the SEC’s proposed climate rule.

But these pending agency actions won’t go far enough to produce the adaptable greenwashing regime stakeholders are looking for.

The realms of environmental marketing and disclosures are rapidly changing, as companies create new ways to promote their eco-friendly efforts. Stakeholders who can continuously adapt to evolving business models and marketing tactics—a feat that legal and procedural constraints often prevent regulators from achieving—will be the ones determining when company environmental representations step into the realm of greenwashing.

Consumers Bring Greenwashing Claims

The Green Guides aren’t binding on the Federal Trade Commission or the public, but rather set forth the agency’s position on environmental marketing to help companies avoid making representations that are unfair or deceptive under Section 5 of the Federal Trade Commission Act. The FTC is currently considering updates to the Green Guides, which it hasn’t revised in over a decade.

Consumer-initiated greenwashing lawsuits are often brought under state laws that are modeled after provisions included in the Guides. According to keyword searches of Bloomberg Law dockets, there have been at least 27 environmental marketing claims involving terms covered by the Green Guides included in federal fraud complaints this year.

There have been no enforcement actions under the Guides so far this year, according to the FTC’s website.

These federal cases indicate that in spite of the Guides and corresponding state laws, company environmental representations are still crossing the line into what stakeholders consider greenwashing.

A likely explanation for the recent bump in environmental marketing claims are the changes to company environmental marketing tactics over the past decade, which aren’t captured by the Guides.

These tactical changes are reflected in the makeup of environmental marketing claims over the past few years: The number of claims alleging misleading natural, sustainable, clean, or climate-related environmental marketing representations has steadily increased over the last three years, increasing from 11 claims in 2020 to 37 in 2022.

The FTC considered natural and sustainable environmental marketing in its last rendition of the Guides in 2012, but the agency indicated that it lacked “sufficient evidence on which to base general guidance” for these representations.

The likely issue? Sustainability and natural marketing comes in many iterations. But while the FTC lacked sufficient evidence to include these terms in their 2012 guidance, stakeholders—at least in the last few years—have been ready to bring lawsuits alleging that certain sustainability and natural marketing phrases amount to misleading environmental representations.

Stakeholders are also increasingly taking issue with “clean” representations—particularly in the beauty industry (e.g., Boyd v. Target and Finster v. Sephora)—and “climate positive” representations (e.g., Lizama v. Venus).

Consumers Are Adaptable

Based on the consumer complaints from the last few years, one problem with FTC greenwashing guidance is certain: The current Green Guides don’t address the entire scope of consumer concerns.

But even if the Guides are revised to eliminate this problem and to revisit the new ways existing terms are used, the Guides aren’t updated frequently enough to keep up with changes in company marketing tactics. A perfect version of the Green Guides would need to be updated each time environmental marketing evolves—an impossible feat.

However, consumer litigation doesn’t suffer from the same constraints. Consumers can bring a lawsuit when companies use new environmental terms (or old terms in new ways) in a manner that allegedly violates state competition, business, or marketing laws.

After the FTC updates its Green Guides, consumers may have more support for their legal claims, but they won’t be relying on the FTC’s enforcement power to ensure that companies are making accurate environmental marketing representations.

Investors Launch Environmental Objectives

In March 2022, the SEC released its proposed rule for climate-related disclosures, which aims to provide investors with information on climate-related risks and opportunities (including greenhouse gas emissions).

The rule was the result of a mandate in 2021 from former Acting SEC Chair Allison Heren Lee to the SEC’s Division of Corporation Finance to reassess its 2010 disclosure guidance on climate-related risks. The proposed rule received a staggering number of comments and has been delayed a number of times.

In the last two years, investor environmental objectives have focused largely on carbon, emissions, and climate efforts—but these efforts have been scaled back in 2023, a likely result of the continuously “imminent” SEC rule.

Investor activists will likely pivot after the SEC releases its final rule.

Investors Make Changes from Behind Company Walls

The SEC rule will ultimately enable investor activists to push for transparency on how companies plan to comply with the rule’s mandates and to mitigate the risks of enhanced climate disclosures, but activists are also ready to bring broader environmental changes at target companies from within.

Activists can target misrepresentations and install governance structures internally to set the company on a course toward achieving environmental goals and preventing future misrepresentations.

Investor activists often seek board seats as part of their campaigns, which can be particularly crucial for environmental representations such as climate targets that take decades to achieve.

Once the SEC’s proposed rule becomes finalized, activists will likely home in on the specific elements of public filings that pose greenwashing risks—in addition to revisiting familiar themes that were on pause while the SEC revisited climate disclosures—but won’t be depending on SEC enforcement actions to combat all of their greenwashing concerns.

Stakeholders as the Driving Force in US

Consumers and activists approach the issue of greenwashing from distinct angles, but their relationships with the FTC and SEC, respectively, have some commonalities.

Both groups aim to pull back company representations when they run the risk of greenwashing. Both are willing to take costly measures to remedy greenwashing.

Neither is going to rely solely on agency action—either through enforcement or revised guidance and rules—to resolve greenwashing in 2024.

Access additional analyses from our Bloomberg Law 2024 series here, covering trends in Litigation, Transactions & Contracts, Artificial Intelligence, Regulatory & Compliance, and the Practice of Law.

Bloomberg Law subscribers can find related content on our ESG Practice page, Practical Guidance: ESG Stakeholders, Frameworks & Regulation, and Practical Guidance: Shareholders resources. Investor activism data accessible on the Bloomberg Terminal at BI ACT <GO>.

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