D.a SEC is getting to work and heating up the discussion about reliable information behind the promises of sustainability. Just a case for American companies? Far from it: the prosecutor’s office recently moved in along with several officials from the Federal Criminal Police Office to secure evidence rumored to be linked to the allegation of capital investment fraud. In the background were financial products suspected of not meeting the stated ESG criteria (environmental, social, governance).
“Greenwashing”: new requirements for internal investigations
But what does the term “greenwashing” actually mean? “Greenwashing”, also translated as “green dye”, essentially describes two groups of cases in the local context:
- Marketing and communication measures by companies to customers where the products offered are advertised as “green” or “sustainable” without the nature of the product offering a valid justification for this
- the writing of inaccurate information within the non-financial reporting of companies, for example on environmental issues such as water consumption2– Compensation, recycling processes or air pollution associated with company operations
The term has been around for a long time: the Süddeutsche mentioned “greenwashing” in 2009 in connection with a report on an event organized by the Bavarian Consumer Protection Agency.
But what makes this topic so relevant right now? In addition to the changed regulatory perspective, it is no longer “just” a question of corporate culture, but also a compliance task. It seems plausible that the topic could entail significant (liability) risks for companies; but what questions does this topic raise in the context of an internal investigation requires an in-depth study and expertise not only in the area of classic clerical crimes, but also in relation to rather atypical topics such as environmental crime, measurement technology, materials science, etc.
Regulatory framework and legislative efforts
After the United States Securities and Exchange Commission (SEC) announced in March 2021 that it would establish a “Climate and ESG Task Force” to proactively identify ESG-related misconduct in financial reporting, the SEC proposed a regulation on disclosure of information related to climate information. Under this, domestic and foreign companies registered with the SEC must, among other things
- climate-related risks identified,
- the underlying processes for assessing these risks e
- Information on the climate goals that the company has set itself, along with information on how to achieve those goals,
disclose. This has given the issue of “greenwashing” a new dynamic, since the sustainability objectives, from a regulatory point of view, represent binding information in financial reporting.
For some time also the European Union has paid greater attention to aspects of sustainability within company activities. Examples are the “Regulation on Sustainability Disclosure Requirements in the Financial Services Sector” (Disclosure Regulation) or the “Regulation on Establishing a Framework to Facilitate Sustainable Investments” (Taxonomy Regulation), which sets out the criteria for to classify an economic activity as ecological or sustainable. Furthermore, the new proposal for the Corporate Sustainability Reporting Directive (CSRD) intends to oblige significantly more companies to report on sustainability than before. The standards against which reporting is to be measured must also be standardized.
There are also numerous national regulations that deal at least indirectly with “greenwashing”, for example the reporting obligations for companies under §§ 289 et seq. HGB, which include aspects such as the respective company’s water consumption or greenhouse emissions as non-financial reporting content within the annual management report or within a separate non-financial report. In the event of incorrect information within the non-financial reporting, board members may be subject to penalties and risks of criminal liability in accordance with sections 331 and following of the HGB. Also from the point of view of competition law, “greenwashing” through false information on products can lead to violations of the law against unfair competition (UWG), which, in addition to its own sanctions, can subsequently also justify requests for injunctive measures or requests for compensation for damages against the company. False information on ESG factors in relation to securities prospectuses may also be criminally relevant in the context of equity investment fraud.
For example, “greenwashing” can involve not only the payment of penalties to the company itself for a predicate offense such as fraud or violation of the supervisory obligation, but also the company management and the other parties involved are exposed to liability risks. civil and criminal.
But (not) without consequences?
It can be said that “greenwashing” is not sanctioned directly, that is, there is no direct criminal responsibility or the possibility of intervention by a regulator; However, this makes it even more dangerous to be lulled into a false sense of security: if whitewashing leads to false and therefore misleading or deceptive information for “good representation”, companies expose themselves to potential criminal proceedings as well as indirect liability risks that affect both the company itself and the corporate bodies can meet.
In addition to legal risks, reputational risks also play a key role in practice. Due to the increased awareness of society for topics related to environmental protection and sustainability in connection with the hysteria that has become the norm in social media, the consequences of negative media reports in this context are fatal. To create an effective communication strategy with the goal of protecting your reputation, determining the facts is a fundamental guide. A communication strategy that accompanies the survey shows the public both transparency and awareness of the problem, thus creating the opportunity to have a controlling influence on the formation of public opinion.
Orientation of the internal investigation in case of suspicion of “greenwashing”
Although companies often receive information on compliance violations from internal whistleblowers or internal audit results, also due to the increasingly better protection of whistleblowers in Europe, the situation is generally different in the case of “greenwashing” allegations. Due to the public interest meanwhile for products or services declared “sustainable” or “environmentally friendly”, negative media reports from investigative journalists, bloggers or even influencers who are concerned with the quality of the product or service of services that fall into these categories, turning and fulcrum of a compliance emergency. Timely validation of allegations can be more difficult than with inside information, which often already contains concrete indications of the business processes involved, possible weaknesses and actors involved. It begins with the identification of the business unit concerned, the internal and external bodies involved and the delimitation of the area of responsibility.
At the outset of the investigation, it is therefore important to develop an investigation strategy that is appropriate to the suspected offenses and the objective of the investigation regarding the use of the results. When it comes to the issue of “greenwashing”, the assertion of compensation claims by the company against bodies, employees or third parties also plays a role, but the core is the duty to clarify and prepare a defense strategy against complaints and (supervisory) procedures initiated by the authorities.
Attention should be focused on the company’s interest in clarifying the matter as quickly and completely as possible.
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