There is a growing risk for directors in the UK of being held to account for “greenwashing”. This is a term for when a company uses advertising and public messaging to appear more climate friendly and environmentally sustainable than it really is.

It is getting much more difficult for businesses to make unsubstantiated claims of being eco-friendly without being called out on it, and it runs the risk of the business becoming embroiled in costly shareholder activist litigation. It also poses risks for directors, who may face enforcement action from regulators policing misleading claims.

Directors in the UK may have been lulled into a false sense of security about repercussions for greenwashing. After all, high profile claims against companies and their directors tend to be made elsewhere, as in the case of ExxonMobil in the US and Shell in the Netherlands. Until 2022, there were few, if any, climate actions filed in the UK.

The case against Shell

That changed earlier this year, when ClientEarth announced that it was preparing to take action against Shell’s board of directors for setting a target to become a net-zero emissions energy business by 2050 and then failing to reflect such plans in the detail of its operating plans or budgets.

ClientEarth argued that the directors were breaching their Companies Act 2006 duties under sections 172 and 174, by failing to adopt and implement a climate strategy that truly aligns with the Paris Agreement goal of keeping global temperature rises to below 1.5 degrees by 2050.

ClientEarth claims that this is the first attempt to hold a company’s board of directors liable when it comes to properly preparing for the net zero transition. It represents a wake-up call for directors.

What are the main areas of risk for UK directors on greenwashing?

Breach of statutory duties

This is the most obvious area, as directors owe duties to the company under the Companies Act 2006. By failing to adequately address climate risk, directors are exposed to the risk of breach of duty claims, potentially brought by activist shareholders on behalf of the company in so-called “derivative claims”. These are claims brought by a shareholder on behalf of the company, seeking to hold a director to account for any loss caused by breach of duty.

Directors’ duties under the UK Companies Act include:

• the duty to act in a way the directors consider will best promote the success of the company for the benefit of its members, and in doing so to take account of a range of factors including its impact on the environment (section 172); and

• the duty to exercise reasonable care, skill and diligence in the exercise of their duties (section 174).

Reporting liability

In theory, directors could be held liable for failing to make adequate disclosures in their annual accounts on climate-related risk. In practice, such claims are difficult to bring, partly because of a need to prove reliance by a particular investor in the case of a misrepresentation claim.

The risks are greater for directors of listed companies. Statutory claims under section 90A of the Financial Services & Markets Act (FSMA) may be brought in relation to misleading statements or dishonest omissions in published information, but it is the company that is on the hook to compensate anyone who has suffered loss, rather than the directors.

Directors can be liable for information contained in a prospectus, because misleading information contained in such a document may lead to liability under section 90 FSMA if it is made negligently (or recklessly, under a proposed consultation) and investors thereby suffer loss by purchasing shares based on incorrect information on climate risk.

Enforcement by regulators

Advertisements within the UK may pique the interest of the Advertising Standards Authority (ASA) or the Competition and Markets Authority (CMA). The enforcement action that may be taken by either regulator varies, with the CMA’s sanctions potentially including criminal action against directors of a company, ranging from a fine to up to two years’ imprisonment.

Both the ASA and CMA have increased their focus on socially irresponsible or misleading environmental claims, with the ASA stating this summer that it expects an increase in its enforcement action against greenwashing.

Last year, the CMA announced its intention to investigate misleading environmental claims. This followed the publication of its “green code” guidance on making environmental claims in respect of goods and services. In January 2022, the CMA began its review of environmental claims, with a spotlight on the fashion industry first.

Now, more than ever, companies should be cautious when making environmental claims to ensure they are in fact correct, not misleading, and that they comply with relevant guidance, such as advertising standards and the Green Claims Code.

Directors should be aware that they risk claims alleging breach of their duties, should they fail to act in the best long-term interests of the company by paying mere lip service to the challenges posed by the climate crisis.

Companies also risk action for a misleading commercial practice where greenwashing claims are considered to have influenced consumers into making purchasing decisions they would not otherwise have made.

The potential for this two-pronged attack means directors cannot afford to be hands off from their marketing teams when promoting green credentials. The reputational cost of being named and shamed in the public domain could be substantial, with long term loss of brand loyalty and trust.

Kathryn Saunders is senior knowledge lawyer and Jessica Burton is a paralegal, both at Stevens & Bolton.