Do Greenwashing Lawsuits Have Legs in the Current Climate?
As featured in Sustainable Investment
Allegations of greenwashing in the financial sector are increasingly hitting the dockets across legal and regulatory courtrooms worldwide, with this month's developments against DWS amping up the spotlight on asset manager ‘sustainable' fund marketing once again.
According to FRA Partner Simon Taylor, the outcomes from the attention-grabbing DWS raid last May could end up being "a game changer" for authorities taking a stand against greenwashing. But with those proceedings still ongoing, how can managers gauge the current risk of legal and regulatory action against greenwashing?
Flash forward to this month's case, and the market is only marginally more informed. DWS managed to avoid the courtroom altogether by agreeing to pull the accused "misleading" marketing materials for its Climate Tech fund. It was the fund literature's explanation of its potential coal exposure that was deemed "hardly comprehensible" by the German consumer group that filed the lawsuit. (Though DWS said in a statement that they "remain convinced the DWS advertising communications…comply with the legal requirements".)
Although this DWS case wouldn't have played out within federal or regulatory jurisdictions, being able to observe the courtroom back-and-forth could have provided clues to what future sustainable fund cases could hang on. Especially given the fines that have been doled out by the SEC have concerned more ostensible operational slip-ups than deliberate attempts at consumer deception commonly associated with ‘greenwashing'.
A UK build up
The Germans have not been operating within a vacuum and clarity couldn't come sooner to those close to the issue in the UK.
Scrutiny into the FCA's attempts to tackle potential greenwashing was naturally expected - but quite such a strong magnifying glass as the one used by the Treasury Sub-Committee for Financial Services Regulations was perhaps less foreseen.
While sustainable fund labels aren't scheduled until 2024, it is the wider ‘anti-greenwashing' rule under the SDR coming into play this summer that the committee is currently encouraging the regulator to throw its weight behind.
Questioned in an evidentiary hearing regarding the reforms, Sacha Sadan, ESG director at the FCA, disclosed that the regulator would not be pursuing potential greenwashing cases from pre-SDR. He cited the current lack of an agreed standard for fund providers to have met, or indeed breached, as why. He said: "There has not been a rule, and therefore there has not been an involvement [in greenwashing]."
Without it, the FRA's Taylor describes any attempt from the FCA to bring charges "like chasing mercury around a plate". He said: "The FCA is right. Until it's got a clear structure that firms can't wriggle out of, it makes it really difficult to enforce.
"In theory, it could [bring charges without a definition in place], but it would have challenges and could fail to nail the worst offenders. It could be counterproductive to the industry if greenwashing claims didn't land firmly and didn't send the right message to the market."
The SEC treatment
As Simon Thompson, chair of the Green Finance Education Charter, puts it, "the world does not divide neatly into ‘green' and ‘brown'" - but last year, the SEC found a spot in between the two colours, where a claim had legs.
The US regulator found grounds to fine BNY Mellon, not over the inherent green or brown-ness of its funds, its holdings or how they were marketed - but over its failure to undertake its own ESG quality reviews as promised. The SEC's sustainability standards still don't exist to point to in such instances, but one of BNY Mellon's own sufficed. The group agreed to pay a $1.5m penalty to settle the charges - a "small fine", according to Taylor.
Indeed Goldman Sachs Asset Management (GSAM) paid a $4m fine in November 2022 for failures regarding ESG research used in security monitoring and selection. The SEC, again, found the manager to have not adhered to its own ESG-related policies and procedures. As Taylor surmises, "It's hardly a slam dunk [for greenwashing], but you can show a clear promise, and you can show a failure to comply with that promise".
Enabling trust in what an organisation is telling its customers is largely what most consumer protection measures come down to, irrespective of whether its promise is green or, indeed, any other colour. It's worth remembering that the new ‘anti-greenwashing' rule under SDR will, in reality, not grant the FCA broader or stronger powers than its existing "clear, fair and not misleading" rule already does, despite explicitly tying that premise to any sustainability claims being made in fund marketing.
Taylor explains there are challenges in ‘landing' such claims regarding trust. "Whether it's a deliberate attempt to mislead, that would very much depend on the specifics. There may be some asset managers out there [doing it], but they would become fraudulent, criminal cases. It's always difficult to say, ‘you knew you were going to breach your promise from the moment you issued that prospectus'."
Given the presence of federal police at the DWS raid last May, it feels fair to assume that ‘fraudulent, criminal' charges are being sought. DWS's former sustainability head had blown the whistle on the legitimacy of the manager's sustainability reporting - alleging the firm had exaggerated numbers of ‘ESG integrated' assets in its 2020 annual report. Reuters reported prosecutors on site as saying "sufficient factual evidence has emerged".
In the UK, company directors have a legal duty under the Companies Act 2006 not to file "misleading, false or deceptive" information in any reporting, with equivalent laws in Germany and the world over - a solid rule to point to.
The SEC was also present at the DWS raid, but with their ever-delayed corporate climate disclosure rules only expected next month and its ‘Names Rule' and enhanced sustainability disclosure for funds and advisers not until the autumn - a lack of precedence for understanding future litigation risks will reign stateside too.
Class actions
If the regulators will struggle to land cases - consumers could stand to try. But to bring a claim against a fund provider for greenwashing consumers would need to demonstrate some form of a loss has occurred.
Taylor explained: "Unless you can show that you are worse off, you don't get compensated even though you were lied to. That might, to some people, seem kind of perverse, but that's the kind of state of the law at the moment."
And, for the Treasury Sub-Committees' concerns regarding consumer switching-costs, for such a claim for financial loss to be pursued, Elisa Wahnon, a commercial litigation associate at Stewarts Law said: "An investor would need to show there was some kind of breach of contract, or the fund provider owed them a tortious duty, or they misrepresented the green credentials of that fund."
Yet again, because "there isn't really a standard. So either under contract or tort, [fund providers] are not going to owe that kind of obligation to the consumer because it's just it doesn't exist yet."
Wider paths for action
Last month, environmental campaign groups in France filed a lawsuit against BNP Paribus, in what's believed to be the first climate-related legal action to target a commercial bank. The groups claim the French bank is "ignoring scientific truths" regarding climate change by continuing to support new oil and gas projects. The lawsuit hangs on France's duty of vigilance law, which requires large companies to take appropriate measures to protect both human rights and the environment across their value chains.
While there is no perfectly equivalent law that encompasses environmental considerations in the UK in the same way, Wahnon explains that the current structure for misrepresenting environmental claims could leave the door open to asset managers and their holding companies alike.
She said: "There are various environmental regulations that companies must abide by in the UK; and common law causes of actions that can be brought claiming mis-selling or breach of directors' duties, [so] it is possible that some environmental claims can be brought based on existing principles."
Taylor agreed: "We don't yet have that track record in the UK, but I do think it's coming. There are examples of claimants being successful and reaching some form of settlement even though there's some uncertainty over the law."
Rushnara Ali MP raised concerns in the parliamentary hearing as to whether asset managers are "scared enough of the regulator to act if necessary".
According to Taylor, greenwashing claims tend to only be successful if the "right case" is found, and it would need to be "pushed all the way past the court of appeal to the Supreme Court and get a definitive ruling on what an investor needs to demonstrate."
"It is really important that the regulator does step in and brings those cases and is successful in them so that it sends the right messaging to encourage the rest of the market to follow suit.
"There's a big job for the regulator to do, that's for sure."
DWS had not responded to a request for comment at the time of publishing.
Sian Barnett Wike is deputy editor of Sustainable Investment
