Climate risk governance and greenwashing risks

Use our guidance to spot greenwashing claims and advise boards on sound climate governance.

Guide

13 Oct 2023

17 minutes read

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Introduction

Summary

This guide provides general information in relation to solicitors providing advice to companies on climate risk governance and greenwashing risks.

It also covers how these risks might impact upon solicitors' and directors' duties.

This guide is applicable to both in-house and private practice solicitors.

It aims to:

help solicitors advise directors and companies on good climate risk governance and mitigating greenwashing risks
inform solicitors as to their duty to advise companies on their duties under the Companies Act 2006 and climate-related disclosures

Some areas of this guide will not be relevant to all companies and some companies will need to take into account a broader range of considerations.

This guidance should be read with our guide on the impact of climate change on solicitors in the context of solicitors’ professional duties.

What is good climate governance?

With the deepening climate and ecological crises, companies’ governance regarding climate-related risks is increasingly in the spotlight.

Climate risk governance concerns the structure of rules and processes adopted by companies to respond to the risks and opportunities related to climate change (see annex I below).

Sound climate governance includes:

the board’s oversight of climate-related risks and opportunities, to reduce a company’s exposure to potential liability, litigation and reputational damage
ensuring compliance by the company and board with various statutory and common-law duties in relation to climate change
ensuring that climate-related risks and opportunities are identified and managed

Good governance regarding climate risk can be achieved through board and business strategy, formulation and delivery.

It can also be supported through having a culture and leadership in place which champion, and take account of the impact of, the transition to Net Zero in line with the UK’s statutory commitment to achieve Net Zero by 2050.

Solicitors, both in-house and in private practice, can use their role of legal and strategic advice to play an important part in promoting climate risk governance frameworks within companies.

Definitions

Greenwashing

There is no harmonised legal definition of greenwashing. The concept differs between regulator, jurisdiction and the nature of the product or service.

However, greenwashing generally concerns misrepresentation, misstatement and false or misleading practice in relation to the environment.

Greenwashing has been defined by the UK Financial Conduct Authority (FCA) as “marketing that portrays an organisation’s products, activities or policies as producing positive environmental outcomes when this is not the case”.

Climate risks

Climate risks are the related negative impacts that may arise as a result of a rising global temperature.

The World Economic Forum registered climate action failure, extreme weather events and biodiversity loss and ecosystem collapse as the top three global risks ranked by severity over the next 10 years in its Global Risks Report published on 31 January 2023.

The Climate Change Committee also listed 61 key risks and opportunities related to climate change facing the UK in 2021.

Climate change risks for solicitors to be aware of are outlined in our guidance on the impact of climate change on solicitors (Part B, section 2).

Net Zero

Net Zero refers to a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere.

The term Net Zero is important because – for CO2 at least – this is the state at which global warming stops. The Paris Agreement underlines the need for Net Zero.

It requires states to "achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century".

The University of Oxford provides additional information on what is Net Zero and provides practical tools and progress tracking to help businesses and policymakers.

Structure of this guidance note

Questions framework – list of climate-related issues to be covered in best practice advice by private practice or in-house legal teams to the executive team and the board
Legal advice on greenwashing – list of relevant regulation and greenwashing risks to identify when advising organisations
Guidance to solicitors on conduct – guidance regarding standards of conduct and potential exposure for advice on climate-related risks

1. Questions framework

When assessing the obligations of a company and its board and broader disclosure requirements, where appropriate, solicitors should consider whether and the extent to which they are able to provide advice on climate risk governance areas.

Solicitors should be mindful that climate-related risk is one of many risks that may be relevant to various aspects of law and compliance.

These aspects may include, but may not be limited to the following (to the extent applicable to the company in question):

compliance by directors with the duty under section 172 of the Companies Act 2006 and reporting in the section 172 statement required by section 414CZA
reporting on climate-related financial disclosures, whether under sections 414CA to 414CB of the Companies Act 2006, under the FCA’s Listing Rules, pursuant to investor or stakeholder guidance or corporate governance codes or under the FCA’s ESG Sourcebook
compliance by directors with the requirement under section 393 of the Companies Act 2006 not to approve company accounts unless they give a true and fair view of the assets, liabilities, financial position and profit or loss of the company, in particular considering statements by the FRC that companies should reflect the current or future impacts of climate change on their financial position
reporting under the Streamlined Energy and Carbon Reporting regime and the UK Emissions Trading Scheme
reporting generally on the principal risks and opportunities facing a company

Details on climate-related risks can be found in our guide on the impact of climate change on solicitors (Part B, section 2).

The framework of questions below outlines potential areas of advice by private practice or in-house legal teams to the executive team and the board.

The position of in-house lawyers means that they are trusted advisers to the board on matters related to good governance, reputation and integrity, including in the context of climate change and ESG (environmental, social and governance) issues.

In-house lawyers should therefore seek to raise awareness of the board of the need for an organisation to develop and adopt sound management of climate-related risks.

The suggested questions below are provided to help in-house lawyers to raise climate-related issues for discussion within their organisations.

Complying with specific regulatory or legal requirements may require a different or more detailed approach.

Although not all solicitors will be, nor are expected to be, experts on the law relating to climate change and ESG (as it may be outside their retainer and/or expertise), they ought to be acutely attentive to the climate-related and ESG issues:

on which they may be expected to advise (being principal matters of legal and regulatory compliance); and
on which a company and its board should seek specialist financial, technical, environmental, governance or other advice (including from specialist ESG lawyers)

Solicitors who do not possess expertise on ESG or climate-related legal issues should refer to sections 3.5 and 4.4 of our guide on the impact of climate change on solicitors.

In many cases, it will be sufficient (and, indeed, appropriate) for a solicitor to note the need for the board to consider a particular matter but not to participate actively in relation to pursuing or implementing that matter.

The in-house lawyer’s role is to advise on the legal and regulatory requirements and risks. It is for the board to decide if and how to act upon such advice.

Solicitors should be aware of, and carefully define the extent of, their duty to advise and when it is appropriate to advise a client to seek specialist advice.

A solicitor who seeks to provide advice on non-legal specialist matters or legal matters beyond their field of expertise, or who fails to advise a client to seek specialist advice, runs the risk of exposing themselves to a claim in negligence.

Questions framework for board

1. Directors’ duties

a) Are climate risks and opportunities incorporated into the board’s understanding of directors’ duties?

2. Climate risk embedded

a) Does the board consider climate risks and opportunities alongside other relevant factors when taking decisions, particularly significant decisions, such as:
- approving and monitoring delivery of strategy?
- formulating disclosures?
- entering into financing, mergers and acquisitions, major infrastructure and other significant transactions?

3. Governance framework

a) Is the board and the company’s governance framework (including all board committees) suitable and coordinated to deliver a coherent response to climate risk and opportunity and a holistic view of the company’s activities, responsibilities, risks and responses concerning climate change?
b) For subsidiaries, how does this fit with the governance framework of the wider corporate group?

4. Delegation to specialists

a) Has the board delegated climate risk, opportunity identification and evaluation to a clearly-identified individual and/or committee with relevant expertise?
b) If so, is there effective oversight by the board? Is there a mechanism for regular reporting by such individuals or committee at board level on climate-related risks?

Business strategy formulation

5. Adequacy

a) Does the company’s overall business strategy include all elements appropriate to the business and which will be required for the transition to a Net Zero economy by 2050?
b) Is the company factoring Net Zero, climate and other environmental considerations into its strategy formulation, business-planning and financial planning more broadly?

6. Risks and opportunities

a) Are the directors considering options for managing relevant risks (including any corporate emissions reductions targets) and taking advantage of associated opportunities?

People

7. Know-how

a) Do the CEO, CFO, board members and executive management have, or have access to, advisers with appropriate skills and experience relating to climate risk?
b) Has the board ensured that any knowledge or competence gaps are identified and addressed?

8. Remuneration

a) Has the company considered whether remuneration policies and structures (at board and executive level) actively encourage and incentivise consideration of climate risks and opportunities and transition to Net Zero, or (conversely) whether they might discourage or impede this?
b) Do any incentives favour short-term objectives over longer-term climate considerations? For example, by favouring capital expenditure or investment in assets that are at risk of being stranded

9. Culture, diversity and inclusion

a) Does the board and the executive team challenge standing assumptions and methodologies with a view to ensuring that the company’s culture encourages diversity of thought and leadership, and that its employment practices address reputational or legal risks and remain fit for purpose in the context of Net Zero transition?

Future planning and risk management

10. Risk assessment

a) Does the company ensure that its exposure to climate-related risks is regularly assessed by appropriately qualified staff or external providers, including its legal risk exposures such as potential litigation and regulatory enforcement?
b) Has the company identified relevant external frameworks appropriate to its business that it uses to measure its progress in identifying, managing and resolving climate-related risks?

11. Forward-looking scenario analysis and stress-testing

a) Is the company commissioning regular scenario analysis and stress-testing to establish its particular exposure to material climate-related risks under various future climate scenarios and time horizons (short, medium and long-term)?
b) Where applicable, how does the company intend to link these time horizons to those covered by its going concern and longer-term viability statements and, in the future, to its resilience statement?

Processes and systems

12. Decision-making

a) Has the company embedded climate considerations into its decision-making processes, for example, by adopting an Enterprise Risk Management approach?
b) Does the company translate long-term transition planning strategy into a clear decision-making process for all board committees to embed into the business?
c) Does the organisation institute compliance processes, including lifecycle processes, for material contracts and procurement?

13. Disclosure and reporting

a) Does the company ensure its exposure and management of climate-related risks are fully disclosed in its annual reports (both narrative and financial statements); and other disclosure documents (such as half-yearly and other periodic reports and disclosure requirements and under any applicable market abuse legislation) as appropriate.
b) If so, are these disclosures line with any applicable mandatory requirements and investor association and proxy adviser guidelines?
c) Does the company’s reporting align with good practice guidance for its business or sector?

14. Stakeholder management

a) How does the company engage with its stakeholders (including financiers, investors, employees, suppliers, customers and community members) in relation to these risks and how does it manage them?

15. Updating

a) Has the board established processes and systems to ensure that its understanding of the range of climate-related risks to which the business is exposed remains current in a dynamic environment?
b) Does the board update its plans, forecasts and analyses from time to time to include new information as it becomes available?

2. Relevant legislation

In the UK, environmental claims made to consumers are governed by the Consumer Protection from Unfair Trading Regulations 2008 (SI 2008/1277) (CPRs).

(These are soon to be relocated to the Digital Markets, Competition and Consumers Bill 2023.)

The CPRs make it unlawful for a business to engage in "unfair commercial practices". These are defined broadly but include making misleading statements about:

a product or service (including by omitting material information) if it is likely to affect consumers’ purchasing decisions (regulations 5 and 6)
the environmental impact of a product or service in marketing materials or on product packaging

Similar rules exist for business-to-business environmental claims under the Business Protection from Misleading Marketing Regulations 2008 (SI 2008/1276) (BPRs).

The BPRs prohibit "misleading advertising", which is defined in regulation 3 as advertising:

that is likely to deceive another business and affect its economic behaviour, or
which, for those reasons, is likely to injure a competitor

‘Advertising’ is defined broadly to include any form of representation used to promote products or services (regulation 2).

Environmental claims are also governed by many regulatory codes, in particular the Competition and Marketing Authority's (CMA) Green Claims Code and the Advertising Standards Authority's (ASA) CAP Code (Rule 11).

These codes apply to both business-to-consumer (B2C) and business-to-business (B2B) environmental claims, and broadly reflect the position under existing UK consumer protection law.

They are designed to help businesses understand and comply with their consumer protection law obligations when making environmental claims.

The Green Claims Code (GCC) is based on six overarching principles:

claims must be truthful and accurate
claims must be clear and unambiguous
claims must not omit or hide important information
claims must consider the full life cycle of the product or service
claims be substantiated
comparisons must be fair and meaningful

Rule 11 of the CAP Code, and the ASA’s accompanying advertising guidance (ASA Guidance), reflect a similar set of principles.

In recent years, there has been increasing regulatory scrutiny by the CMA and ASA of misleading environmental claims or greenwashing.

In addition, the FCA has proposed an anti-greenwashing rule requiring all regulated firms to ensure that sustainability-related claims, naming and marketing of products are clear, fair and not misleading, and consistent with the sustainability profile of products.

European Union

In the EU, misleading green claims are governed by the Unfair Commercial Practices Directive 2005/29/EC (UCPD) (the EU directive from which the CPRs stem).

The rules are therefore currently similar to those in the UK, although future amendments could see the rules in the EU and UK diverge.

Potential liability arising from greenwashing and environmental claims

ESG disclosures may pose challenges for organisations, especially until good governance and reporting practices around ESG risks mature.

In the meantime, solicitors may have a duty to warn organisations about the risks of overstating the ‘sustainable’ or ‘green’ claims of their products and services and advise them accordingly.

Inaccurate or misleading disclosures may lead to regulatory action as well as possible civil and/or criminal liabilities that may apply in relation to such failures. For further information, see our guide on the impact of climate change on solicitors sections 1.5 and 3.2.

Potential areas for legal advice on greenwashing

With an increase in litigation and regulatory activity around environmental claims, businesses, and the solicitors advising them, will need to review claims carefully to check they comply with consumer protection law and other relevant legislation.

This section highlights three key issues or types of claim to warn your client or organisation of. New areas may arise as regulatory and market conditions develop.

1. Broad claims and ‘buzzwords’

Broad claims such as 'green', 'sustainable', 'environmentally friendly' and 'eco' are generally interpreted as absolute claims that indicate a business, product or service has no negative environmental impact across its full lifecycle (from manufacture to disposal).

Such absolute claims require a high level of substantiation.

Unless a business has robust documentary evidence to substantiate a claim of this kind across its full lifecycle, these claims are likely to be considered misleading by the regulators (GCC paragraphs 3.113 to 3.114; CAP Rule 11.3 to 11.4/ ASA guidance).

Where broad claims cannot be substantiated, businesses may need to consider making them more specific and limiting them to only those elements of the product or service where it has sufficient evidence to support the claim (GCC paragraphs 3.114 to 3.118; ASA guidance).

Generally, substantiation will be considered more robust where it is based on accepted scientific methodologies and has been independently verified or certified (although these are not a strict requirement) (GCC paragraphs 3.125, 3.130 to 3.133).

Importantly, the information to substantiate a claim must be available at the time the claim is made (GCC paragraph 3.129; CAP Rule 3.7; ASA guidance).

2. ‘Net Zero’ and ‘carbon neutral’ claims

Claims that a product, service or business is ‘Net Zero’ or ‘carbon neutral’ are potentially misleading if they do not include additional information to help consumers understand the claim being made (GCC paragraph 3.72; ASA guidance).

This follows market research conducted by the ASA in 2022, which found high levels of consumer confusion about the scope of these claims.

In particular, claims must not ‘cherry-pick’ information to give the impression that a business’s climate impact is better than it actually is.

Further, where ‘Net Zero’ and ‘carbon neutral’ claims are based on offsetting, this should be made clear to consumers, including by providing details of the offsetting scheme used (GCC paragraph 3.73; ASA guidance).

Any such supporting information must be sufficiently close to the main claim so consumers can easily see it before making a purchasing decision.

The further away this information is, the more likely the claim will be misleading (GCC paragraph 3.74; ASA guidance).

Finally, ‘Net Zero’ and ‘carbon neutral’ claims should be substantiated with robust documentary evidence calculated in accordance with recognised scientific frameworks (ASA guidance).

Businesses may want to consider partnering with independent external consultants to support this process.

3. Future climate commitments

Claims relating to future climate goals (such as Net Zero targets) should only be made where they are based on a clear, verifiable and internally documented strategy to deliver them (GCC paragraph 3.49; ASA guidance).

Such claims will be less likely to mislead if they are based on specific, short term and measurable commitments and are in proportion to the business’ actual efforts (GCC paragraph 3.50).

Claims about future climate goals should also make it clear whether (and the degree to which) they are based on the business’s own active reduction of GHG emissions or whether they are based on offsetting (GCC paragraph 3.72; ASA guidance).

When setting future climate goals, businesses may want to consider using one of the various frameworks available for setting science-based targets in line with the 1.5°C goal in the Paris Agreement 2015.

3. Standards of conduct and potential exposure for advice

Solicitors have a bird’s-eye view of considerations for businesses.

Legal advice to the organisation or board in relation to greenwashing and climate-related risks may include advice on:

directors’ duties
analysis of emerging policy
legislative and regulatory issues
liability
reputational risks

Climate-related risks and ESG are increasingly pervasive issues.

Being aware of these risks and opportunities when advising boards is not only important in helping directors understand their legal duties in terms of climate risk, the Companies Act 2006 and disclosure requirements, but also in terms of a solicitor’s own competency duties under the SRA Code of Conduct for Solicitors and the duty of care they owe to their client.

Solicitors that advise boards should consider their potential legal duty to advise boards of these matters.

This could impact their duty of care, duty to warn and competency to advise on such risks (see our guide on the impact of climate change on solicitors, section 3).

Solicitors should be mindful that their role is to advise on legal, regulatory and compliance risk and to recommend that the board seek specialist advice on other areas of expertise, such as finance, accounting, governance and technical aspects where appropriate (see section 3.5 of our guide on the impact of climate change on solicitors).

The nature and extent of a solicitor’s duty to advise on these issues will depend on their engagement with an organisation.

For example, at one end of the spectrum, an in-house solicitor is likely to hold a greater and deeper degree of familiarity with an organisation’s business and strategy and so may be under a duty to advise on these matters regularly and in connection with other day-to-day matters on which they are providing advice.

By contrast, a solicitor who is engaged on an isolated piece of work or a one-off transaction may only be under a duty to advise on climate-related legal issues, or recommend seeking specialist advice, in the context of that particular piece of work, recognising that the scope of their engagement may not include climate-related advice.

For more detail, see our guide on the impact of climate change on solicitors sections 3.2 and 4.6.

Notwithstanding this, awareness of these kinds of issue will place a solicitor in a position of opportunity to advise their client on climate-related issues more broadly and to provide value and greater assistance to their client.

Above all, it is critical for solicitors to understand and, where possible, define the point at which their role as legal advisers ends and their client should seek advice from other professional advisers.

A solicitor who attempts to advise on areas outside their area of expertise, or on non-legal matters, may expose themselves to the risk of a claim for professional negligence and may find they are operating outside the scope of their or their firm’s professional indemnity (PI) cover. See sections 3.4, 4.4 and 4.5 of our guide on the impact of climate change on solicitors.

Likewise, a solicitor who fails to advise a client that they should seek specialist financial, accounting, tax or other technical advice, or to clearly define the scope of instructions, runs the risk of committing professional negligence.