Greenwashing - recognizing and avoiding risks

CONTENT

• Social responsibility as a USP
• Risks of greenwashing
• Avoiding risks - seizing opportunities
• Application of the Taxonomy Regulation
• Transparency
• Implementing regulations
• Use management systems
• Risk analysis and risk assessment
• Greenwashing risks - a conclusion
• DQS - What we can do for you

Social responsibility as a USP

Unlike in the past, more and more consumers, as well as private and institutional investors, want their financial investments to be sustainable in a comprehensive sense. In other words, they want to take on some social responsibility themselves. The market is increasingly taking this into account with corresponding products and services, which are advertised on seals or logos with terms such as "climate neutral", "sustainable", "organic" or "fair".

However, the unconsidered use of such terms by companies and the possible presumption of mere greenwashing of a product harbours certain risks, including directly for the management of an organization. In order to avoid being misled in the context of greenwashing, every organization should have a basic knowledge of the regulatory aspects that may need to be taken into account. These topics are briefly outlined below.

Greenwashing risks

Risks from unfair competition

Section 1 of Germany's Unfair Competition Act (UWG) is intended to protect competitors, consumers and other market participants from unfair business practices. This refers to any conduct by a person for the benefit of their own or another person's company before, during or after a business transaction that is directly and objectively related to the promotion of the sale or purchase of goods or services or to the conclusion or performance of a contract for goods or services.

According to Section 3 UWG, unfair commercial acts are prohibited. Commercial acts that are directed at or reach consumers are unfair if they do not comply with entrepreneurial diligence and are capable of significantly influencing the economic behavior of the consumer. In addition, the annex lists a total of 36 (sic!) commercial acts that are always unlawful.

Likewise, according to the UWG, anyone who violates statutory provisions that are also intended to regulate market behavior in the interests of market participants and the violation is likely to significantly impair the interests of consumers, other market participants or competitors is acting unfairly (Section 4).

The performance of a misleading commercial act that contains untrue or deceptive information about the circumstances listed in Section 5 (2) numbers 1 - 7 or misleads a consumer / market participant by withholding material information is also considered an unfair act.

Therefore, if a product is advertised with inaccurate information on its sustainability, qualified bodies (see Section 8 (3) No. 3) can be sued for injunctive relief for misleading advertising. The legal consequences against these infringements include damages (Section 9), profit absorption (Section 10), contractual penalty (Section 13a), punishable advertising (Section 16) and fines (Sections 19, 20).

Risks from warranted characteristics in the contract

A characteristic is deemed to be warranted if the contractual partner indicates that they are legally responsible for the actual existence of the characteristic of a product or service. Whether this is actually the case with claims such as "sustainable" or "climate-neutral" will have to be assessed according to the respective circumstances. The legal consequences could then be the rescission of the contract ("Wandelung"), the reduction of the originally agreed price or compensation for non-performance.

Indirectly, of course, possible consequences from loss of reputation would also have to be considered.

Risks due to fraudulent misrepresentation - Section 123 BGB

Such deception occurs when someone deliberately causes another person to make a mistake ("Irrtum") in order to induce them to make a declaration of intent ("Willenserklärung"). The deception can be caused by misrepresentation of false facts, but also by simple concealment of a fact. Fraudulent misrepresentation can also occur in the case of so-called statements in the blue - i.e. making incorrect statements, for example about certain characteristics, without any factual evidence.

Such a contract (e.g. the incorrectly stated declaration of intent) would be voidable and the contract would therefore not have been concluded. If necessary, the mutual services would have to be returned and the deceived party would also be entitled to compensation.

Risks due to fraud - Section 263 StGB

According to this provision, anyone who, with the intention of obtaining an unlawful pecuniary advantage for themselves or a third party, damages the assets of another person by creating or maintaining an error through false pretenses or by distorting or suppressing true facts is liable to a custodial sentence of up to five years or a monetary penalty. This is particularly relevant in connection with "green" financial products, but can also apply to all other products or services.

Risks from investment fraud in accordance with Section 264a StGB

In addition to criminal liability for fraud, which may take precedence, criminal liability for investment fraud may also be considered in the case of greenwashing of investments. The first official investigations into the possible criminal relevance of false statements made by organizations about their products, activities and services are currently underway. An example of this is the search at the publicly listed DWS Group at the end of May 2022 on suspicion of investment fraud through "greenwashing".

In this context, it should be noted that a conviction for one or more criminal offenses can result in a prison sentence of at least one year, which means that the person concerned can no longer be a managing director of a German public limited company ("GmbH") or a member of the management board of a stock corporation (see Section 6 (2) GmbHG*and Section 76 (3) AktG*).

It is also relevant for the corporate risk assessment that Section 264a StGB* is an official offense, meaning that anyone is entitled to report suspicions. This means that environmental associations and NGOs in particular have the option of filing criminal charges if there is suspicion of "greenwashing" in the capital investment market.

Risks from § 823 paragraph 2 BGB in conjunction with § 264a StGB

Due to the classification of Section 264a StGB also as a protective law within the meaning of Section 823 (2) BGB, the fulfillment of the criminal offense of investment fraud also leads to civil law claims for damages, i.e. to cumulative risks that are likely to be relevant, among other things, in the entrepreneurial risk assessment at the level of the amount of damage.

How can greenwashing be prevented?

The issue of the legal consequences of greenwashing goes hand in hand with the question of how companies can avoid the above-mentioned risks when advertising products or services, or at least minimize them to an acceptable net risk. This directly affects the areas of environmental, social and governance (ESG) in terms of setting a strategic course. So how can greenwashing be prevented?

Avoiding the risks of greenwashing - applying the criteria of the Taxonomy Regulation

The Taxonomy Regulation of the European Union (EU) 2020/852 classifies within the EU which economic activities are to be classified as environmentally sustainable, under which conditions and to what degree.

This is the case if the environmental damage caused by the respective economic activity exceeds its benefit for the environment. (see recital (40).

According to Article 3, this is the case if this economic activity

• makes a significant contribution to the achievement of one or more of the environmental objectives set out in Article 9 in accordance with Articles 10 to 16; (climate change mitigation/adaptation - Articles 10 and 11, the sustainable use and protection of water and marine resources - Article 12, the transition to a circular economy - Article 13, pollution prevention and control - Article 14, the protection and restoration of biodiversity and ecosystems - Article 15 and enabling activities - Article 16)
• does not result in significant harm to one or more of the environmental objectives set out in Article 9, as defined in Article 17;
• is carried out in compliance with the minimum protection set out in Article18; (and)
• technical assessment criteria adopted by the Commission in accordance with Article 10(3), Article 11(3), Article 12(2), Article 13(2), Article 14(2) (N.B. and) Article 15(2).

Transparency

The transparency requirements set out in Article 6 (Transparency in pre-contractual information and periodic reports for financial products promoting environmental characteristics), Article 7 (Transparency in pre-contractual information and periodic reports for other financial products) and Article 8 (Transparency in non-financial statements of companies) are further aspects to be considered in the context of avoiding greenwashing.

The Regulation applies directly to all companies subject to the obligation to submit a non-financial statement (sustainability report) and to financial market participants that provide financial products (Article 1 (2)). However, it is also an important source of information and guidance for all organizations that do not fall under the direct scope of the regulation with regard to the extent to which a product / activity / service can be classified and described as environmentally sustainable.

It is worth noting that the new Corporate Sustainability Reporting Directive (CSRD) (EU) 2022/264, which was adopted in November 2022 and came into force in January 2023, will profoundly change both the scope and type of sustainability reporting and the group of companies subject to the obligation. The directive must be transposed into national law by July 6, 2024. In Germany, this is expected to take place, among other things, through amendments to the German Commercial Code (HGB), which already contains corresponding regulations in Sections 289a et seq.

Implementing regulations

Several implementing regulations have now also been issued for the Taxonomy Regulation. In order to answer the question of which economic activities are to be classified as environmentally sustainable, under what conditions and to what extent, Regulation (EU) 2021/2139 sets out technical assessment criteria under which conditions it can be assumed that an economic activity makes a significant contribution to climate change mitigation/adaptation.

Other implementing regulations regulate details of the disclosure requirements in connection with the submission of the non-financial statement (sustainability report).

Due to the taxonomy regulation, its implementing regulations and the expected transposition of the CSRD into national law and the possible consequences of inadequate implementation of these requirements, it can also be assumed that a risk must be taken into account as part of an early risk detection system in accordance with Section 91 AktG*, Section 1 StaRUG* and Section 317 HGB*.

Use management systems

In addition to the existing obligations and measures to fulfil them in this context, consideration should also be given to the use of established and internationally recognized management systems such as ISO 9001 (quality management), ISO 14001 (environmental management) or ISO 26000 (sustainability). For example, in the assessment of corporate or personal sanctions such as a corporate fine, self-cleaning efforts by the company after the offense has been discovered (such as the introduction of comprehensive compliance measures and a whistleblower system) may also be relevant.

Companies that use one or more of the ISO standards mentioned to manage their organizational and operational structure should be familiar with the relevant standard chapters from the Harmonized Structure, through which such aspects become part of the processes within the organization.

Risk analysis and risk assessment

This concerns, among other things Risk analysis and risk assessment in which (with optional use of the methods described in ISO 31010 [Risk management - Risk assessment procedures]) the above-mentioned risks are to be determined and evaluated on an organization-specific basis with regard to the probability of occurrence and the extent of damage, taking into account the expectations of interested parties and the regulatory requirements listed above. Aspects of risk accumulation (e.g. legal consequences under both criminal law and private law) may also have to be taken into account.

Depending on the result of the determined gross risk, risk-minimizing measures may then have to be derived in order to achieve a level of acceptable net risk or acceptance risk. In turn, regulatory aspects such as penalties or fines, licensing requirements, official intervention options such as prohibition, etc. must be taken into account, as these already specify the social acceptance risk as a binding obligation.

Based on the measures identified in this way, responsibilities for the implementation and monitoring of these measures should then be defined. The use of a RASCI matrix (Responsible, Accountable, Support, Consulted, Informed) is recommended in order to identify and define all roles and responsibilities of the individual parties involved in the implementation of the measures.

Greenwashing risks - a conclusion

Due to the increased willingness to assume social responsibility on the part of large sections of civil society and the economy, there is also an increased interest in and awareness of reliable statements on the sustainability of products, activities and services, not only in Germany. As organizations are currently already implementing many good sustainable measures and projects and justifiably want to make this known, these activities should be subjected to a differentiated examination in light of the above-mentioned aspects in order to avoid the risks resulting from greenwashing accusations well in advance.

With the consistent application of established international management system standards such as ISO 9001 or ISO 14001, it is possible to deal appropriately with the risks described.

*German legal codes referenced: 

GmbHG:  Limited Liability Companies Act 

AktG: Stock Corporation Act

StGB: Criminal Code 

StaRUG: Act on the Stabilisation and Restructuring Framework for Businesses

HGB: Commercial Code

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