The UK’s Competition and Markets Authority’s (“CMA”) has recently announced that it has launched investigations into a number of fashion retailers to determine “whether the firms’ green claims are misleading customers.” This latest development comes hot on the heels of news from the U.S., that Swedish retail giant H&M has found itself on the receiving end of a class action complaint as it is alleged to have engaged in greenwashing (and more specifically, false advertising), by making use of “inaccurate and misleading” information in marketing the offerings of its “Conscious Collection.”
Fashion retailers have woken up to the need to be – or at least appear to be – “green” in order to grow, or even retain, their market share. However, tapping into this new market is not without risk. In going “green,” fashion retailers have exposed themselves to additional scrutiny and accusations of greenwashing. The problem of greenwashing is not exclusive to this sector, and in fact, the CMA’s announcement should be taken as a wake-up call to all businesses marketing “green” or “sustainable” products.
The Business Case for “Sustainable” Products
The provenance of a product is increasingly viewed as a key determining factor in what we buy and from whom (at least in theory). Until recently, “price” was the key factor for consumers making purchasing decisions. Today, consumer behavior has partially shifted. While price is still a factor, the change in behavior has come about as consumers are increasingly interested in and aware of the negative impact of the apparel industry on the climate front and of over-consumption. While the law of demand still exists, changes in generational spending power have seen the demand for sustainable products become increasingly inelastic. Products that purport to be “sustainable” are likely to command a premium over those that do not have the same “green provenance.” Or to put it another way, there is less consumer price sensitivity for sustainable products. As such, the obvious attraction to retailers in bringing sustainable product lines to the market is clear.
Products that are marketed as sustainable without clear evidence to support these claims or where the evidence is somewhat contrary can be said to be indicative of information asymmetry – a form of market failure. In effect, the absence of data prevents customers from making informed decisions due to a lack of information or the supply of inaccurate information. Tackling this potential detriment to consumers is a clear driver for regulators.
Greenwashing and the Supply Chain
The need for verifiable and timely data is a common thread that runs through all six of the key principles in the CMA’s “Green Claims Code.” Robust data is also vital to mitigating against the risk – and avoiding the perception – of greenwashing. Often, in long and complex supply chains, this data will be generated by a number of third-party suppliers. Where there are deficiencies – in data and/or performance – that could adversely impact the claimed sustainable credentials of a product, remedial action must be taken. Given increased awareness among consumers and regulators, alike, it appears that businesses can no longer afford to make claims as to a product’s “sustainability” credentials without an intimate knowledge of each step in that product’s supply chain.
Identifying weaknesses in complex, multi-national supply chains is not always straightforward – and neither is delivering substantive change. Getting suppliers to incite change first requires an analysis of the root cause of an issue. Particular consideration should be given to latent and emerging risks associated with regulatory and geopolitical change.
Purchasers should proceed cautiously before commencing an investigation into the sustainability practices of a supplier and/or prior to triggering relevant provisions in a supply contract. Legal advice should be sought at the earliest possible opportunity and retained throughout the investigation. Where it is appropriate to do so, an investigation could be expedited by coordinating with a supplier and reaching mutual agreement on the scope of matters falling within the purview of the investigation.
For those businesses wishing to avoid the perception of greenwashing, the introduction of “ESG” clauses into supply chain contracts, while useful, is not a solution in and of itself. Boilerplate penalty clauses and/or right to suspend or terminate a contract will have little positive effect in practice. Given the considerable investment in supply chains, positive reinforcement is likely to be the preferred (and more effective) option over punitive action. In order to unlock change, both parties to a contract can benefit from bespoke “ESG” clauses. The clear advantage of bespoke drafting is the ability to accurately reflect the singular features and inherent challenges in a specific supplier/purchaser relationship. This valuable context can then pave the way for detailed consideration of the appropriate contractual mechanisms and frameworks to foster open dialogue between with a clear focus on addressing material issues through pragmatic and sustainable solutions. This approach much more likely to deliver change and maintain or enhance dealings between a purchaser and supplier.
The Evolving Landscape
The announcement of new CMA powers and the hardening of its enforcement posture, paired with a customer base that is increasingly educated and climate-focused has inflated the risk of greenwashing to the point where businesses ignore it at their peril. The situation is further compounded by moves that are afoot within the EU that have the potential to fundamentally redraw the boundaries of corporate responsibility in supply chains.
For example, the European Commission set out its proposal for a Corporate Sustainability Due Diligence Directive (“CSDD”) in February. In brief, the CSDD is looking to modify corporate behavior by increasing responsibility on certain EU and non-EU businesses for the upstream and downstream activities in their supply chains. In-scope businesses will be required to identify actual – and potential – adverse human rights and environmental impacts and where necessary, take steps to prevent, mitigate and/or bring an end to the activities giving rise to the harm. The requirements set out in the CSDD will apply not only to a business’s own operations (and those of its subsidiaries) but also to organizations within a value chain where there is an “established business relationship.”
The CSDD represents a seismic shift from a relatively passive approach involving transparency through disclosures to something which will require proactive intervention. Businesses will soon be expected to exercise vigilance and move swiftly in addressing any material social and environmental impacts that may arise from their own operations or those within their value chain. The drafting of the CSDD reflects the EU Commission’s policy preference for targeting big business. The rationale behind this choice is that large organizations are well suited to bring about change by leveraging their existing influence.
The CSDD is currently going through the EU’s legislative process where it may be subject to amendments. It is worth noting that the draft proposal enjoys significant support from both within the European Parliament and among influential EU members. As such, it is likely to emerge from the “trilogue” more or less intact.
The explanatory memorandum to the CSDD suggests that approximately 4,000 third-country entities will be in-scope. Of this 4,000, it is reasonable to assume that a significant proportion will be based in the UK. The impacts are likely to be felt beyond this immediate pool, as businesses that may not be directly involved, might face commercial or contractual pressure to provide data to customers who are themselves subject to the provisions in the CSDD. Alternatively, some businesses that might not yet be directly or indirectly impacted might heed the change in the EU as a warning and consider that it is “better to jump than be pushed” and see voluntary adoption of CSDD or “CSDD-lite” requirements as a prudent course of action to both provide assurance on the performance of their supply chains and guard against possible accusations of greenwashing.
The second part of this series will explore another side of greenwashing, specifically, at the investee-company level and explore the risks posed to all investors where a misallocation of capital is driven by inaccurate or misleading “ESG” disclosures.