The legal and reputational risks associated with greenwashing

Sustainability is no longer just a nice-to-have feature of a product, particularly with younger consumers. According to McKinsey & Co., “When consumers are asked if they care about buying environmentally and ethically sustainable products, they overwhelmingly answer yes.” In fact, “More than 60% of respondents said they’d pay more for a product with sustainable packaging. See 2020 McKinsey U.S. consumer sentiment survey.

People are drawn to “eco-friendly” products that deem their purchase validated. Highlighting the efforts undertaken to make more sustainable choices and sell products that are environmentally friendly can help differentiate a company from the competition. However, if a firm makes false or misleading sustainability or environmentally friendly claims, the consequences can be significant — both in terms of legal exposure and reputational damage.

The term “greenwashing” refers to the phenomenon of companies advertising products as either sustainable or good for the environment when there is little to no evidence that the product actually has any environmental benefit. It doesn’t refer to one sustainability trend in particular but can affect all trends.

The Federal Trade Commission first offered guidance to industry on permissible sustainable claims with its “Guides for the Use of Environmental Marketing Claims” in 1992. The Green Guides — as they’re more commonly called — were designed to help companies avoid making deceptive environmental marketing claims under Section 5 of the FTC Act or other laws.

In addition to clarifying what can be advertised as “organic” or “recyclable,” the Green Guides influence state consumer protection laws. Maine, Minnesota, New York and Rhode Island have adopted the Green Guides to help define their own laws against fraudulent consumer marketing, and California has incorporated compliance with them as a valid defense for companies sued over their marketing.

The Green Guides are an important tool that can assist companies with establishing an honest and transparent sustainability marketing strategy. But they were last updated in 2012, and the past decade has seen substantial changes in sustainability and climate marketing.

FTC has initiated a review of the Green Guides and is expected to publish updates sometime later this year. These updates should address some of the thornier environmental marketing claims that the agency has not yet weighed in on, including claims regarding climate change, sustainability and what makes a product “eco-friendly.”

Legal risks associated with unsupported sustainability claims

More aggressive marketing of socially responsible products has led to an increase in both FTC enforcement actions and class action lawsuits alleging false advertising. FTC recently brought actions against Kohl’s and Walmart, charging both companies with advertising home products as made from bamboo when they were actually made of rayon. The companies entered into separate settlements pursuant to which Kohl’s agreed to pay $2.5 million and Walmart agreed to pay $3 million in civil penalties.

In a recent noteworthy case, Keurig Green Mountain Inc. agreed to pay $10 million to settle claims that it falsely advertised its K-cup coffee pods as recyclable. See Smith v. Keurig Green Mountain Inc., 2023 WL 2250264 (N.D. Cal. Feb. 27, 2023). Burt’s Bees and CoverGirl also found themselves defendants in class action lawsuits. Burt’s Bees was sued for marketing their products as 100% natural, while CoverGirl was challenged for claiming that their products were, “Safe for use” and “sustainable” while allegedly containing man-mad “forever chemicals,” or PFAS (perfluoroalkyl and polyfluoroalkyl substances). See Bruno v. Burt’s Bees Inc., 2:22-cv-2306; Solis v. CoverGirl Cosmetics and Coty Inc., 3:22-cv-00400.

Not all suits alleging greenwashing have been successful. In 2022, the Superior Court of the District of Columbia dismissed a lawsuit against The Coca-Cola Co., alleging the company falsely represents itself as “a sustainable and environmentally friendly company, despite being one of the largest contributors of plastic pollution in the world.”

A few weeks later, Cola-Cola scored a second victory, this time in a case filed by the Sierra Club. The lawsuit alleged Coca-Cola engaged in false advertising when it advertised its water bottles as “100% recyclable,” because most plastic bottles are not recycled and end up in landfills or incinerators. In rejecting the Sierra Club’s claims, Judge Donato, of the U.S. District Court for the Northern District of California held that “recyclable” means a product is capable of being recycled, and the Sierra Club’s interpretation of the word ran counter to common sense, FTC’s Green Guides and California law.

This decision is good news for any company that wants to advertise a product as “recyclable.” But even when companies “win” in litigation, they often “lose” in terms of money spent on lawyers and time taken away from core business functions. Avoiding legal jeopardy altogether is the true “win.”

Reputational damage associated with greenwashing

Aside from legal repercussions from greenwashing, there’s also a risk to a brand’s reputation. Consumers, particularly Gen Z and Millennials, want to support brands that align with their values, which include environmental and social responsibility.

According to a 2022 sustainability report from FMCG Gurus, 52% of consumers in North America stated they have made changes to their diets in the past two years to lead a more sustainable lifestyle. These consumers will be more likely to purchase a brand if it aligns with their core values, and just as quick to abandon it if it does anything to damage their trust in the brand.

To make matters worse, these days consumers (especially younger ones) may be more likely to take to social media to share their greenwashing findings, encouraging others to boycott the brand. Whether it’s demanding accountability for beverage companies’ plastic pollution or calling out food brands contributing to agricultural and transportation emissions, creators are not shy about calling out brands that are misleading or do not deliver on their brand promises. Like it or not, this type of content strongly resonates with consumers, and one viral post can unexpectedly impact a company’s bottom line.

Consumers are ultimately looking for brands that deliver on their promises and claims. That responsibility is on the manufacturers to uphold their end of the deal. This means selecting reliable suppliers with traceability and ethical practices. Sourcing from suppliers that don’t have complete transparency in their supply chain can lead to huge risk.

For example, a few major food companies have faced reputational backlash related to unethical practices in cocoa supply chains. It made headlines in major media companies as recently as August 2023. It’s a timely coincidence that Mondelez and Hershey — two of the largest chocolate companies in the world — experienced a drop in stock price of around 15% from September 2023 to October 2023 when attention was brought to their cocoa sourcing. This was right before Halloween, a time when sales should be booming, and the stock prices of confectioners had historically shown an uptick at the same time in previous years.

Not only did these companies face litigation and impacts to their stock prices, but the issue of cocoa gained mainstream attention as an entire episode on John Oliver’s show, “Last Week Tonight,” where he elucidated to his viewers that “these are companies, not charities … and they will only care about the problem exactly as much as they are forced to.” This pressure can come from a number of places, including litigation, legislation or consumer demand.

But there are some ways to mitigate reputational and legislative risk. To start, firms should evaluate their supply chains and ingredients, ensuring they are selecting partners that can answer their questions and provide documentation, records and audits as needed. Manufacturers can also seek out third-party credentials like Fairtrade, Upcycled Certified and Regenerative Organic Certified, just to name a few.

Since these front-of-pack certifications can be confusing to some consumers, companies should select one that aligns closely with their brand. CPG (consumer packaged goods) manufacturers should pay particular attention to ingredients that are more impacted by human rights and deforestation issues like palm oil, cocoa, stevia and coffee. This is not an easy process, but outside expertise can prove hugely beneficial if companies don’t know where to start.

Conclusion

In order to minimize legal risk, companies should scrutinize their marketing to ensure they are not inadvertently making false or misleading claims. Among other things, this includes qualifying environmental marketing claims where feasible, particularly claims that a product is “recyclable,” “degradable,” “organic” or “sustainable.” This can involve implementing internal protocols to minimize the use of vague or aspirational language and maximize the use of disclaimers in product marketing.

Sustainability positioning is now a necessity for CPG businesses. A product that displays sustainability messaging can be the deciding factor for a consumer with multiple options.

Companies should be proud of — and communicate — their efforts to make their businesses part of a better world. However, consumers are increasingly reactive to greenwashing. That means a manufacturer must also be responsible for protecting its brand image and messaging, and perhaps most important of all, delivering on its promises.