Image: Stella McCartney

To date, companies, including many big-name fashion industry entities, that are very-publicly-touting their “net-zero goals” – or pledges to absorb as much carbon as they emit – “typically [have] not faced real punishment” in the event that they miss those targets, Bloomberg reported last month on the heels of Chanel revealing that it missed an interim renewable energy target for 2021. “Instead of meeting 97 percent of its electricity needs from renewable sources, it only reached 92 percent,” per Bloomberg, “which is relevant to investors as the company raised 600 million euros ($613 million) in 2020 through a bond and tied its interest payments, called coupons, to successfully meeting climate targets.” This comes as the industry, as a whole, is falling behind in the push to cut emissions in order to align with the Paris climate agreement.  

While companies’ climate claims may have been met with relatively lax regulation in the past, that may not prove to be the case going forward in light of rising attention to – and scrutiny of – such climate plans by a growing pool of investors, regulators, and lawmakers, alike. The U.S. Securities and Exchange Commission, for instance, has proposed a rule mandating that publicly-listed companies disclose emissions that are “material” or that are relevant to companies’ emissions targets, among other things, thereby, potentially upping the stakes for companies to make good on their pledges. Meanwhile, the Federal Trade Commission (“FTC”) is revisiting its “Green Guides,” which are aimed at helping marketers to avoid making misleading environmental claims, in a move that is expected to provide more emphasis on things like carbon neutrality and carbon offsets. 

Even before the various agencies’ new rules/revisions come into force, it is worth noting that falsified and/or misleading claims, including about net-zero strategies, fall within the purview of regulators, such as the FTC. “Section 5 of the FTC Act gives the agency authority to regulate unfair and deceptive trade practices, including [misleading] advertising claims … [that are] material to the consumer’s purchasing decision,” according to DLA Piper’s Andrew Sacks, Deanna Reitman and Brandon DeLano. Additionally, they note that the FTC “requires advertisers to possess a ‘reasonable basis’ for their affirmative claims” – including claims related to net-zero initiatives – “prior to the claims’ dissemination in advertising, which should typically consist of ‘competent and reliable’ scientific evidence in the context of environmental claims.” 

In case increasing attention from regulators and their seemingly rising appetite for enforcement when it comes to sustainability-centric marketing and climate-related claims, private plaintiffs are beginning to take on companies over their ESG and climate claims. “Private-party suits against companies making climate-related, sustainability, and other ESG claims appear to be increasing,” Winston & Strawn’s Jonathan Brightbill and Jennifer Roualet assert, noting that plaintiffs are pursuing companies on claims relating to misrepresenting and breach of warranty, unfair business practices, and securities fraud. 

Researchers at the London School of Economics and Political Science echoed this sentiment, finding that the amount of newly-filed lawsuits centering on climate and broader Environmental, Social, and Governance (“ESG”) issues has more than doubled since 2015, bringing the total number of cases to over 2,000, with roughly one-quarter of these cases filed since the start of 2020. As TFL revealed last month, not only are climate change-related lawsuits on the rise, the number of cases being filed against governments and companies, alike, is expected to “carry on growing,” especially as companies rush to take public stances on climate issues. (In particular, the report points to two noteworthy cases, one of which being Australasian Centre for Corporate Responsibility v. Santos, in which Australian natural gas company Santos’s “net zero” plan is coming under fire for not being clear or credible.)

And not only are these cases growing in number, they are playing out for longer. “Whereas in prior years, few such cases were surviving motions to dismiss,” Brightbill and Roualet claim that “the more-recent greenwashing cases are reaching discovery.”

Against this background, “Committing to net-zero without reasonable grounds to support the express and implied representations contained within the commitment may amount to misleading or deceptive conduct, and directors could be personally liable if they are found to have breached their duties of care,” Clayton Utz’s Claire Smith, Brendan Bateman, Olivia Back and Joy Chen contend, noting that claims of “greenwashing” could also become “a source of risk for companies who lack the reporting and data to justify their pledges.” At the same time, companies face risk should their net-zero claims turn out to be false, in which case the FTC could initiate an enforcement action, resulting in “significant investigative and litigation costs, large financial penalties, and negative publicity,” per Sacks, Reitman and DeLano.

In the event that a company comes to the unfortunate realization that its net-zero predictions may not pan out, Sacks, Reitman and DeLano state that “immediate action is necessary to minimize FTC exposure: Any advertising with these claims should be corrected or stopped, and if necessary, materials should be recalled.” In some cases, they claim that companies “may wish to go beyond merely removing or correcting the claim,” such as if there is a “compelling business reasons for a company to issue a public statement explaining the changed circumstances that require a modification to [its] advertising.” 

And in order to defend such claims (including by way of an argument that reasonable consumers would not necessarily believe that predictions of future events always come true), companies will want to be sure to “preserve and maintain [their] records of the original basis for the [net-zero] prediction, and [show] that the failure to reach [such a] goal was not due to conduct or decisions within the company’s control.”

Viewed as a whole, the stakes for companies are higher than ever, as they are forced to balance consumer and investor demands for public stances on issues related to ESG and the climate crisis (and peer pressure as a growing number of companies across industries are making public climate pledges) with the rising risk that they might face legal ramifications should they not be able to substantiate their claims and/or not meet their targets. This is only compounded by the fact that “we are getting beyond [the point] where companies can just make some lofty claim” on the climate front, Gilman Callsen, founder and CEO of Rho Impact, an ESG planning, consulting and reporting company, told S&P Global. “People are more and more looking at that as greenwashing and actually expecting companies to have some actual data behind it.”