Greenwashing risks: legal teams tasked with ensuring accurate ESG claims

Environmental (or green) claims can be understood, as proposed by the European Commission’s Guidance on the Application of the Unfair Commercial Practices Directive, as “the practice of suggesting or otherwise creating the impression (in a commercial communication, marketing or advertising) that a good or a service has a positive or no impact on the environment or is less damaging to the environment than competing goods or services”. When such claims are not true or cannot be verified, this practice is often called “greenwashing”. The increasing prevalence of such deceptive statements has raised concerns and brought new challenges to the forefront.

In response to greenwashing practices, several regulatory initiatives have been put in place, establishing uniform ESG requirements, reporting obligations, and deterrent sanctioning frameworks. This underscores the significant risk posed by greenwashing, one that companies should proactively avoid.

The widespread understanding that climate risks need to be integrated into companies’ business models, decision-making process, and communication is clearly illustrated by the example of the 2023 Slovenian floods. In the middle of the summer, almost two-thirds of Slovenia’s territory was flooded, with damages estimated at €500 million. A few weeks later, Autoeuropa, a car factory in the Volkswagen Group located in Palmela, Portugal, sent its workers home because it was forced to suspend its operations, as the construction of the engines depended on the provision of parts from a Slovenian supplier that had been significantly affected by the August floods.

The goal set by the Paris Agreement to halt “the increase in the global average temperature to well below 2°C above pre-industrial levels” and to pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels” has led to a high level of scrutiny by financial entities, environmental non-governmental organisations (NGOs), and consumers over companies’ impact on the environment and its performance to achieve climate neutrality. The purpose is to assure that investments are resilient and worthwhile, going hand in hand with the principle that the lower the temperature increase, the less the effects of climate change can be expected.

In Europe, the European Green Deal set forth a wide range of legislative initiatives to foster the transition to a sustainable and climate-neutral economy by 2050. Shortly after, this goal was made a binding obligation by the European Climate Law approved in 2021.

In this context, relevant legislation has been approved in the EU to ensure:

• Net-zero greenhouse gas emissions by 2050;

• The decoupling of economic growth from resource use;

• The promotion of a circular economy; and

• The preservation and restoration of biodiversity and ecosystems.

This transformation is a tremendous task in the limited time available and requires significant financial resources that no national budget alone can guarantee. In line with the need to channel private investment to the sustainability transition efforts, therefore, the legislation introduced has been aimed at making the private sector more transparent and concerned with ensuring that its investments are compliant with climate and other ESG targets through action and, above all, disclosure. These disclosure requirements function as the backbone of greenwashing deterrence.

Under the European Taxonomy, for example, only aligned activities developed in accordance with the classification established by this regulation can be considered sustainable in the EU. This contributes to the prevention of greenwashing, providing clarity for businesses and investors, and encouraging increased private sector financing for the transition to climate neutrality, and the advancement of environmental objectives.

Two other legislative initiatives fostering a more sustainable and responsible business environment within the EU are also worthy of mention; namely:

• The Corporate Sustainability Reporting Directive; and

• The Corporate Sustainability Due Diligence Directive.

The former requires large European companies to report non-financial impacts, while the latter aims to enforce mandatory corporate due diligence in addressing human rights and environmental impacts. Although these directives depend on their transposition into national law, still pending in Portugal, the Portuguese Securities Market Commission has already issued a recommendation to the companies subject to its supervision to seek their compliance with the requirements laid down by the Corporate Sustainability Reporting Directive. It remains to be seen, however, how those requirements will be ultimately subject to change under the ongoing EU ‘omnibus’ proposal aiming to simplify the European ESG legal framework.

Meanwhile, green claims requirements and infringements continue to also be addressed by legislation in the areas of consumer rights and unfair competition, which were recently amended by the Empowering Consumers for the Green Transition Directive, currently pending transposition.

Additionally, with estimations indicating that there are already more than 300 sustainability and green energy labels in the EU, with different levels of information and transparency, the European Commission has maintained the Green Claims Directive proposal in the list of pending proposals in its work programme for 2025. This directive does not apply to environmental claims, labels, or schemes that are already regulated by other EU laws (e.g., the European Taxonomy or the Organic Production and Labelling of Organic Products Directive). The intention is to complete the legislative framework for the fight against greenwashing by creating, for areas still to be regulated, a set of requirements for the substantiation of explicit voluntary environmental claims and environmental labels, ensuring their reliability, comparability, and verification across the EU, supported by a labelling certification system and a deterrent sanctioning framework.

In recent years, we have witnessed an emerging trend in environmental and climate change litigation, which is broadly categorised into three types:

• Environmental damage cases;

• Cases seeking alignment with the Paris Agreement or national climate policies; and

• Greenwashing cases.

The latter two categories are discussed below as the article explores the nuances of climate litigation and greenwashing, which have come to play a pivotal role in shaping corporate accountability and defining legal precedents.

Climate litigation involves legal proceedings aimed at addressing and mitigating the impacts of climate change. These lawsuits are often initiated by individuals, NGOs, and even municipalities seeking to hold companies accountable for their contributions to global warming. From demanding reductions in carbon emissions to challenging inadequate climate policies, climate litigation serves as a tool to enforce environmental standards and drive corporate responsibility.

A landmark case that illustrates the power of climate litigation is Milieudefensie et al. v Royal Dutch Shell PLC. The Hague District Court delivered its verdict on May 26 2021, ordering Royal Dutch Shell to reduce its CO₂ emissions by 45% by 2030, relative to 2019 levels, and to achieve net-zero emissions by 2050. This decision represents a groundbreaking moment, aligning corporate practices with the Paris Agreement and affirming the relevance of stringent climate commitments. Milieudefensie, supported by six other NGOs and 17,379 individual claimants, challenged Shell’s environmental practices, underscoring the vital intersection of legal action and climate advocacy.

However, the decision was appealed and reversed by the Court of Appeals on November 12 2024, presenting new challenges and complexities in the journey towards corporate climate accountability. Nevertheless, this case exemplifies the increasing judicial willingness to demand substantive action from corporations, which has significant implications for global climate policy.

Greenwashing litigation targets organisations that engage in deceptive practices related to their environmental claims. Companies often portray themselves as environmentally responsible to attract environmentally conscious consumers, investors, and stakeholders. These claims can range from misleading advertising to inaccurate sustainability reports and product labelling. Greenwashing litigation seeks to uphold truthfulness, holding companies accountable for false claims that can deceive the public and distort market competition.

Europe has been at the forefront of the fight against greenwashing through administrative regulations and legal reforms. In Portugal and the EU, greenwashing has primarily been regulated by administrative bodies, focusing on consumer protection, unfair trade practices, advertising standards, and the credibility of non-financial disclosures by businesses. As referred to above, the recent amendment to the Unfair Commercial Practices Directive and the Consumer Rights Directive incorporates environmental and social impact considerations, in a bid to ensure that consumers are not misled about product characteristics such as durability and repairability, and mandates effective enforcement through proportionate penalties for infringements.

In Portugal and the EU, climate litigation is underpinned by a robust legal framework aimed at achieving climate neutrality by 2050. This framework recognises the public’s right to take legal action against companies for their contribution to climate change and inadequate mitigation efforts. Upcoming legislation proposes mandatory duties for companies to include human rights and environmental due diligence in their policies and to develop comprehensive climate transition plans. Non-compliance could lead to fines and civil liability, reinforcing the requirement for businesses to prioritise sustainability.

Regarding greenwashing, the legal landscape will continue to evolve, with increasingly stringent requirements for substantiating and communicating environmental claims. This enhanced framework will bolster the basis for legal actions against companies that fail to comply with transparency standards. Current key pieces of legislation mandate accurate reporting and sustainable practices, seeking to curb misleading information and protect consumer interests.

As climate litigation and greenwashing cases become more prevalent, companies must adapt to the increasing legal scrutiny of their environmental impact and the integrity of their sustainability claims. The evolving legal landscape signals a significant shift towards greater corporate accountability and environmental stewardship, contributing to the global effort in mitigating climate change and promoting authentic, sustainable business practices.

Although Portugal is still in the process of transposing EU directives concerning greenwashing-related allegations, the aforementioned deceptive practices are already prohibited. In fact, advertisements featuring unsubstantiated environmental claims are illegal and subject to penalties. Furthermore, fraudulent misrepresentation and false advertising can lead to criminal liability, and fines under administrative enforcement actions.

Greenwashing may also involve failure to comply with environmental regulations and standards set by law. In such cases, offences such as pollution or engaging in environmentally hazardous activities must be considered.

If exaggerated ESG claims are used to artificially inflate the market value of shares or other securities, companies and individuals may face criminal and regulatory sanctions as stipulated in securities laws.

Both corporations and individuals can be held accountable for these violations, meaning that company executives may bear personal liability, particularly when they knowingly endorse or negligently permit misleading ESG claims.

Preventing criminal offences related to greenwashing requires businesses to implement robust internal processes and legal safeguards to ensure the accuracy and transparency of their ESG claims.

Companies can take key measures such as:

• Conducting thorough internal audits to ensure that any ESG claims made by the company are backed by credible, verifiable evidence;

• Ensuring that their environmental claims are clear, specific, and understandable by avoiding the use of terminology such as “green”, “eco-friendly”, or “sustainable” unless substantiated by specific data;

• Implementing training programmes for employees – particularly those in marketing, public relations, and compliance – to emphasise the importance of accurate ESG reporting, ethical marketing practices, and compliance with relevant laws;

• Monitoring changes in regulations and ensuring that corporate practices align with national and international standards; and

• Establishing effective whistleblower policies to ensure that employees feel safe in reporting fraudulent activities, without fear of retaliation.

Several of these measures are already mandatory, such as the requirement for a whistleblowing channel that specifically includes complaints related to environmental violations. Implementing these safeguards can help companies and individuals to mitigate, or entirely prevent, criminal and regulatory liabilities.

In summary, the consequences of greenwashing extend beyond reputational harm. Regulatory fines and criminal liability are increasingly becoming tangible risks for companies engaging in false or exaggerated ESG claims. To avoid legal repercussions, businesses must proactively ensure that their ESG communications are accurate, transparent, and well documented.

By reinforcing internal compliance mechanisms, keeping up with regulatory developments, and fostering a culture of accountability, companies can minimise the risks associated with greenwashing while safeguarding themselves against criminal and regulatory enforcement.

Greenwashing is a growing concern in the EU’s business environment.

The repercussions of greenwashing extend beyond reputational damage: companies are now facing tangible risks of regulatory fines and criminal liability for engaging in false or exaggerated ESG claims.

As climate litigation and greenwashing cases become more prevalent, companies must adapt to the increasing legal scrutiny of their environmental impact and the integrity of their sustainability claims. Risk assessment and a proactive preventive approach are crucial to avoid litigation.