An increasingly comprehensive web of disclosure obligations has been spun in the field of sustainability reporting in many jurisdictions. This applies not only to Germany but to the wider EU and beyond. Companies are now required to make comprehensive disclosures on their sustainability endeavours, strategies and goals through to the sustainability of their products. With such disclosures, there is always a risk of misinformation, typically by ‘glossing over’ information to avoid disclosing non-compliance with internal targets, deliberately false statements to gain competitive advantages, or by providing false information negligently.
Often, sustainability-related data is collected and subsequently distributed and used by different departments of a company in its external communications. If, however, for any reason misinformation was provided in mandatory or voluntary reports, advertising brochures or sales pitches, this can have far-reaching consequences for the company. In such cases, it is necessary for the company to investigate internally whether, how and by whom such false information was published.
For this reason, it is advisable to familiarise oneself at an early stage with the various legal requirements for the publication of sustainability-related data and the challenges when investigating potential misstatements in order to be as well prepared as possible.
Overview of regulations on the disclosure of sustainability-related data and other ESG aspects
There are increasingly comprehensive obligations for companies, requiring them both under EU law and national law to report on several aspects of their activities and products with regard to ESG and sustainability factors:
- At European level, the Regulation on sustainability-related disclosures in the financial services sector (Offenlegungs-Verordnung, Regulation (EU) 2019/2088 of 27 November 2019) provides for reporting obligations requiring financial market participants and financial advisers to make pre-contractual and ongoing disclosures to end investors on sustainability and ESG factors. The focus here is on disclosing the extent to which sustainability risks are incorporated into the processes and investment decisions of asset managers and institutional investors. Those disclosure requirements are further supplemented by the Regulation on the establishment of a framework to facilitate sustainable investment (Taxonomie-Verordnung, Regulation (EU) 2020/852 of 18 June 2020).
- At national level, the German Commercial Code (Handelsgesetzbuch, HGB) requires the publication of a non-financial report for certain large companies, including information on environmental matters. In addition, the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG) requires companies to submit a report, for which they must not only determine the human rights and environmental risks in their own business area, but also those of their suppliers. It is to be expected that the national requirements will be significantly intensified with the implementation of the Corporate Sustainability Reporting Directive (CSRD, Directive (EU) 2022/2464 of 14 December 2022) and the planned Corporate Sustainability Due Diligence Directive (CSDDD).
However, there are also regulations that apply to voluntary disclosures, which are intended to prevent the publication of incorrect information on sustainability:
- At national level, the German Unfair Competition Act (Gesetz gegen unlauteren Wettbewerb, UWG), in particular, contains provisions aimed at preventing unfair and misleading commercial behaviour.
- At European level, there is an increasing focus on preventing false environmental claims. For example, the planned Green Claims Directive (see our blog posts here and here is intended to ensure that voluntary environmental claims made by companies about their products or retailers in a business relationship with a consumer are reliable and communicated transparently.
- In addition, all disclosures must comply with the general legal requirements. There is especially potential for criminal liability for (capital investment) fraud due to false claims in this context.
Risks and challenges of internal investigations on greenwashing
We are entering a period of increasingly comprehensive regulatory oversight of sustainability reporting, reflecting the public attention on the sustainability of business activities and products. Therefore, if there are indications of breaches of the regulatory framework or even indications of deliberately false or incomplete sustainability statements, these must be adequately investigated internally in order to minimise the associated liability and reputational risks. The following should be borne in mind when conducting such internal investigations into greenwashing allegations:
- Rapid response to external accusations: When it comes to greenwashing allegations, there is an increased risk that accusations will be raised externally with direct publicity and, hence, require rapid action on the part of the company. Against the backdrop of increasingly comprehensive publicly available data, there are growing opportunities for external parties to review and challenge any sustainability-related information disclosed by a company due to both technological developments and citizen interest. Especially NGOs and several interest groups have taken on the task of checking sustainability-related information from companies and scrutinising its validity.
- Multiple use of sustainability-related information: Investigating the potential existence of greenwashing swiftly is made more difficult by the fact that sustainability-related data is often used not only once but in multiple external communications. The same information on the sustainability of a product could, for example, be used in management reports, advertising, capital market prospectuses, investor communications and disclosures required by the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG).
This inevitably leads to the fact that, in the event of incorrect information, legal violations especially in the above mentioned legal areas must be taken into consideration. This also leads to the involvement of the relevant supervisory authorities. At the same time, however, this also poses a challenge for the internal investigation: as a result of multiple uses of the data, there are also a variety of potential knowledge holders within the affected company. They must be identified quickly in order to secure important documents and subsequently evaluate how, and on the basis of what certificates, the data was collected and also where, how and by whom it was used.
- Recourse to third-party data: Furthermore, greenwashing allegations and the underlying disclosures are often not only based on the activities of the company itself. In many cases, product information is based on information from suppliers (for example on the environmental footprint of raw materials) and analyses from certification bodies. The auditing of third-party data, which are directly incorporated into the company's own reporting, poses particular challenges for internal investigations.
In view of the increasing regulatory requirements and the challenges of dealing with greenwashing allegations, companies should prepare well to minimise the risks and to be able to investigate issues quickly and effectively. This includes:
- maintaining an up to date central overview of the development of the regulatory framework in jurisdictions where the company operates;
- centralised recording of all sustainability-related statements and communications made by the company;
- maintaining an up to date central overview of all certificates and other verification of sustainability statements and claims (including those provided by suppliers);
- maintaining an up to date overview of all departments and individuals responsible for, or engaged with, sustainability disclosure and communications across the business
- formation of a dedicated team with the relevant expertise responsible for the rapid and efficient investigation of greenwashing-related allegations.
For further insight, see other blogposts on greenwashing:
- FCA consults on anti-greenwashing guidance
- Combatting greenwashing – existing toolkit, EU developments and the role of trade marks
- ASA and CMA crack down on greenwashing
- UK advertising regulator takes action on greenwashing (again) with clampdown on ads that overstate significance of sustainability initiatives
- Greenwashing and litigation risks in Germany - the case of financial institutions