The UK Competition and Markets Authority (“AMC”) recently announced that it had launched surveys of a number of fashion retailers to determine “whether companies’ eco-claims are misleading customers”. This latest development follows news from the US that Swedish retail giant H&M has found itself the victim of a class action lawsuit as it is accused of involvement in greenwashing. (and more specifically to false advertising), by using “inaccurate and misleading” information in the marketing of offers from its “Conscious Collection”.
Fashion retailers have become aware of the need to be – or at least appear – “green” in order to increase or even maintain their market share. However, exploiting this new market is not without risk. By going “green”, fashion retailers have exposed themselves to additional scrutiny and accusations of greenwashing. The issue of greenwashing is not unique to this sector and, in fact, the CMA’s announcement should be seen as a wake-up call for all companies marketing ‘green’ or ‘sustainable’ products.
The business case for “sustainable” products
Where a product comes from is increasingly seen as a determining factor in what we buy and from whom. Until recently, “price” was the key factor for consumers making purchasing decisions. Today, consumer behavior has partially changed. While price remains a factor, the change in behavior has come as consumers become more interested and aware of the negative impact of the apparel industry on the climate front and overconsumption. While the law of demand still exists, the changing purchasing power of generations has seen the demand for sustainable products become increasingly inelastic. Products that claim to be ‘sustainable’ are likely to command a premium over those that don’t have the same ‘green provenance’. Or to put it another way, there is less consumer price sensitivity for durable products. As such, the obvious appeal for retailers to bring sustainable product lines to market is clear.
Products marketed as sustainable without clear evidence to support these claims or where the evidence is somewhat contrary can be seen as indicative of information asymmetry – a form of market failure. Indeed, the absence of data prevents customers from making informed decisions due to a lack of information or the provision of inaccurate information. Tackling this potential consumer harm is a clear driver for regulators.
Greenwashing and the supply chain
The need for verifiable and timely data is a common thread running through the six key principles of the CMA’s Green Claims Code. Strong data is also key to mitigating 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 vendors. Where there are deficiencies – in data and/or performance – that could negatively impact a product’s claimed sustainability credentials, action should be taken to address them. With increased consumer awareness and interest, it seems that companies can no longer afford to claim a product’s sustainable credentials without intimate knowledge of every step of that product’s supply chain.
Identifying weaknesses in supply chains is not always straightforward, nor does it bring about substantial change. Getting suppliers to drive change first requires an analysis of the root cause of a problem. Particular attention should be given to latent and emerging risks associated with regulatory and geopolitical changes.
Buyers should proceed with caution before commencing an investigation into a supplier’s sustainability practices and/or before triggering relevant provisions in a supply contract. Legal advice should be sought as soon as possible and retained throughout the investigation. Where appropriate, an investigation could be expedited by coordinating with a supplier and reaching mutual agreement on the scope of matters within the scope of the investigation.
For companies wishing to avoid the perception of greenwashing, the introduction of “ESG” clauses in supply chain contracts, although useful, is not a solution in itself. Standard penalty clauses and/or the 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 most effective) option over punitive action. In order to unlock change, both parties to a contract can benefit from tailor-made “ESG” clauses. The obvious advantage of bespoke writing is the ability to accurately reflect the unique characteristics and challenges inherent in a specific supplier/buyer relationship. This valuable context can then pave the way for a detailed examination of appropriate contractual mechanisms and frameworks to foster open dialogue between stakeholders with a clear focus on resolving material issues with pragmatic and sustainable solutions. This approach is much more likely to bring change and maintain or improve the relationship between a buyer and a supplier.
The Changing Landscape
The announcement of the CMA’s new powers and tougher enforcement stance, coupled with an increasingly educated and climate-conscious clientele, have inflated the risk of greenwashing to the point that companies ignore it at their peril. and perils. The situation is further aggravated by ongoing movements within the EU that have the potential to fundamentally redefine the boundaries of corporate liability in supply chains.
For example, the European Commission presented its proposal for a Sustainable Development Due Diligence Directive (“CSDD”) in February. In short, the CSDD seeks to change corporate behavior by making certain European and non-European companies accountable for activities up and down their supply chains. Affected companies will be required to identify actual – and potential – adverse impacts on human rights and the environment and, where appropriate, take steps to prevent, mitigate and/or terminate the activities at risk. origin of the damage. The requirements set out in the CSDD will apply not only to the activities of a company (and those of its subsidiaries), but also to organizations within a value chain where there is an “established business relationship”.
The CSDD represents a step change from a relatively passive approach involving transparency through disclosure to something that will require proactive intervention. Companies will soon need to be vigilant and act quickly to address any significant social and environmental impacts that may arise from their own operations or those in their value chain. The wording of the CSDD reflects the political preference of the European Commission to target large companies. The rationale for this choice is that large organizations are well placed to effect change by leveraging their existing influence.
The CSDD is currently going through the EU legislative process where it may be subject to amendments. It should be noted that the draft proposal enjoys strong support both within the European Parliament and among influential members of the EU. As such, it is likely to emerge from the “trialogue” more or less intact.
The explanatory memorandum to the CSDD suggests that around 4,000 entities from third countries will be affected. Of these 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 basin, as companies not directly affected could come under commercial or contractual pressure to provide data to customers themselves subject to the provisions of the CSDD. Alternatively, some companies that may not yet be directly or indirectly impacted could take the change in the EU as a warning and consider it “better to jump than be pushed” and see the voluntary adoption of CSDD requirements or “CSDD-lite” as a prudent course of action to both provide assurance on the performance of their supply chains and guard against possible accusations of greenwashing.
Part two of this series will explore another aspect of greenwashing, particularly at the level of the investee company and will explore the risks posed to all investors when misallocation of capital is driven by inaccurate or inaccurate “ESG” information. misleading.