Matthew Shankland, Head of Sidley Austin’s London-based Disputes Resolution Practice, outlines how investors can mitigate against the increased risk of greenwashing-related issues in company advertising.
As part of the transition to a low carbon economy, businesses are increasingly seeking to highlight their environmental credentials to consumers via advertising and marketing communications, including informing consumers of their net zero targets. In turn, they are facing an increased level of scrutiny from regulators and non-governmental organisations seeking to hold them accountable for making environmental claims that may mislead consumers.
In an effort to improve businesses’ understanding of how to comply with the requirements of the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (the CAP Code), the Committee of Advertising Practice (the CAP) recently published an update to its guidance – The environment: misleading claims and social responsibility in advertising (the Guidance) – to include specific advice on making carbon neutral and net zero claims in UK advertising.
The CAP Guidance update follows recent publication by the UK Competition and Markets Authority (CMA) of the Green Claims Code and its Guidance on environmental claims on goods and services (the CMA Guidance), intended to help businesses comply with their consumer protection law obligations when making green claims, principally under the Consumer Protection from Unfair Trading Regulations 2008 (CPUT).
Under English law, there is no specific cause of action for, or law governing, greenwashing. Instead, regulators and claimants use a combination of advertising, consumer and business protection laws and regulations, as well as other guidelines and codes to bring enforcement action or complaints, including:
- CPUT, which contains the key legal requirements governing business-to-consumer advertising and marketing in the UK. It prohibits misleading actions and omissions, and imposes criminal liability on traders for engaging in certain commercial practices. The CMA has the power to bring enforcement action under CPUT through the courts and is conducting a review into green claims, focusing on sectors such as fashion and fast-moving consumer goods. The CMA has indicated that it intends to target the travel and transport sector.
- The CAP Code, which applies to non-broadcast marketing communications in the UK, including online, via social media, and in print, and contains a number of general rules, and rules specific to environmental claims. The CAP Code’s sister organisation, the Advertising Standards Agency (ASA), is primarily responsible for enforcing the CAP Code, and consumers and interested groups can complain to the ASA when they believe there has been a breach of the CAP Code. Although the ASA cannot impose fines, its rulings are public and can therefore cause reputational damage to businesses that are subject to adverse findings.
The UK legal and regulatory framework applicable to environmental advertising and marketing claims is fast-developing. The UK government will shortly bring forward the new Digital Markets, Competition and Consumer Bill and is expected to empower the CMA to enforce UK consumer law through administrative proceedings and fine companies up to 10% of their global turnover for breaches rather than the CMA having to take enforcement action through the courts.
Further, the Financial Conduct Authority has recently completed a consultation on a package of new rules to address greenwashing; the package is likely to be finalised later this year, including a general “anti-greenwashing” rule.
The CAP Code Guidance Relating to Net Zero Claims
The CAP developed the Guidance based on the CAP Code and previous ASA rulings, and the Guidance does not constitute new rules or bind the ASA. However, investors, businesses and marketing agencies will welcome the Guidance as a useful means of better understanding the requirements of the CAP Code as they relate to carbon neutral or net zero claims.
The Guidance draws on the principles contained in the CMA Guidance and provides that to reduce the risk of misleading consumers in making carbon neutral and net zero claims, businesses should seek to:
- avoid using unqualified carbon neutral, net zero or similar claims, and include information explaining the basis for such claims;
- include accurate information about whether (and the degree to which) they are actively reducing their own carbon emissions or relying on carbon offsetting;
- base claims relating to future carbon neutrality or net zero goals on a verifiable strategy to deliver the goal;
- ensure that claims based on carbon offsetting comply with standards of evidence for objective claims as set out in the Guidance, and include information about any offsetting schemes used; and
- specify the scope of the claim, and any related qualifying information, sufficiently clearly for consumers to be able to see and understand the scope and qualifications easily. For example, the Guidance states that a claim that an electric vehicle generates “zero emissions” may be acceptable “if the ad makes clear that the claim relates to driving only.”
The Guidance further notes that the independent statutory body that advises the UK and devolved governments on emissions targets, the Climate Change Committee, has emphasised that to meet net zero targets, consumer behaviour must change. The ASA could therefore consider complaints under the social responsibility rules contained in the CAP Code in light of the “increased focus on the role of consumer behaviour change to achieve net zero targets.
Practical Steps for Investors
As outlined above, UK regulatory focus on carbon neutral, net zero, and similar claims by businesses in their advertising is increasing. The ASA also intends to monitor the impact of the Guidance on such claims and will take proactive action to address unqualified claims being made by some organisations of which it is already aware.
To mitigate against the increased risk of greenwashing-related issues in advertising, there are several practical steps investors may wish to take in relation to any carbon neutral and net zero claims made in portfolio companies’ marketing communications and generally:
1. Conduct an audit of portfolio companies’ current advertising and marketing communications for any carbon neutral, net zero, or similar claims or targets, including by identifying how the business substantiates them (including any reliance on carbon-offsetting schemes).
Where companies make claims regarding carbon neutral or net zero targets, they should ensure that the claim accurately and clearly conveys the scope and basis of a commitment, and provides any necessary qualifications (including in relation to offsets). They should consider whether the scope of any claims relate to, for example, the company as a whole or are limited to a particular product or service. Claims which omit information about either the company’s own contribution to greenhouse gas emissions or its financing of other carbon-intensive businesses may be problematic in certain circumstances.
In addition, to the extent that an advertising or marketing communication entails any comparison to a benchmark, the benchmark used should be appropriate and clear and the comparison should be supported by necessary evidence (see further point 2 below).
2. Work with portfolio companies to ensure net zero or similar claims are properly substantiated by appropriate evidence. The CAP Code contains a general requirement to substantiate properly advertising claims and the CMA Guidance contains the same principle regarding environmental claims. The CAP Code also makes clear that unqualified claims must be supported by a higher level of substantiation. Where there may be issues substantiating net zero claims or targets by reference to evidence, companies should consider whether to make the claim at all. Companies should also consider developing a verifiable strategy for forward-looking claims and ensuring appropriate internal governance to monitor the status of existing net zero or similar claims.
3. Consider integrating scrutiny of net zero claims in any existing due diligence processes. Investors should consider conducting due diligence of any net zero claims made by companies in which they intend to invest, including the extent to which the target intends to use carbon offsets to reach its net zero goals.
The legal and regulatory framework regarding net zero or similar claims in advertising and marketing communications is fast-developing and complex. It differs among jurisdictions and may also differ among sectors. Companies must therefore be alive to the legal risks which lie on the road ahead.
This article was written before the UK Government’s introduction of the Digital Markets, Competition and Consumers Bill on 25 April 2023. This article was co-authored by Nicolas Lockhart, Partner at Sidley Austin, and David Smith, Managing Associate at Sidley Austin.