5 Steps to Mitigate Greenwashing Risks (and Why You Should Pay Attention)
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5 Steps to Mitigate Greenwashing Risks (and Why You Should Pay Attention)

A host of legal risks exist for companies that misrepresent or fail to disclose material environmental, social, and governance issues.

April 22, 2022

marc ross
 
Ross

As the U.S. business sector heightens its focus on tracking environmental, social, and governance (ESG) metrics, a growing number of cannabis companies are beginning to factor sustainability and other social goals into their business plans. Unfortunately, in their race to gain ESG bona fides, some are engaging in “greenwashing,” a mistake commonly made by consumer-facing companies across a variety of industries.

Greenwashing is typically defined as making exaggerated marketing claims about a company’s sustainability ethos or distributing misleading information about the environmental impact of the company’s products or services. The definition has recently been expanded to include a broader set of false or misleading statements, and activist investors and state and federal agencies are taking notice—and action.

Greenwashing in the cannabis industry often involves companies branding corporate social responsibility (CSR) programs as ESG initiatives without any real understanding of what an effective ESG program entails. In some cases, companies simply name a diversity and inclusion officer their de facto head of ESG. Claims of “sustainable packaging” based on misrepresentations and misinformation are another common example.

If your company is putting out an “ESG report” with flowery language about its community work and philanthropy or about how it recycles and uses LED lights in its nursery, but it fails to include any real data, benchmarking, third-party assurance, and reporting to regulatory agencies, you might be guilty of greenwashing.

On top of massive reputational risks, there is a host of legal risks for companies that misrepresent or fail to disclose material ESG issues to investors and government entities. State and federal consumer protection laws often pose ESG legal risks to offenders, and the Federal Trade Commission (through its Truth in Advertising and Green Marketing guides) and the Securities Exchange Commission (SEC) have been clarifying disclosure requirements over the past few years.

One of the most spectacular recent greenwashing cases (in terms of profile and penalties) involved Volkswagen, which was charged by the SEC and Environmental Protection Agency for making deceptive claims about the environmental impact of its “clean” diesel cars. Meanwhile, the company was raising billions of dollars through the sale of bonds to unsuspecting investors. This matter alone resulted in billions of dollars of fines for the company.  

Corporate commitments to achieving net-zero emissions have also led to increased prioritization of ESG claims. Recent investigations found the numbers rarely add up, leading the SEC to follow its EU counterparts in mandating new climate disclosure rules for all publicly traded companies. To cut down on greenwashing, the SEC rule would also require that companies that make net-zero claims provide a detailed, mathematically sound plan to achieve those goals. If utilizing “offsets” to meet those goals, the veracity of those offsets must be supported by evidence and solid science, as well as third-party assurance for the largest companies making such claims.

Allegations of ESG greenwashing are not limited to manufacturers. Investment vehicles, banks, other financial institutions, and private equity firms are also drawing the attention of regulators. Just last month, the Department of Justice accused Deutsche Bank of overstating its investments in ESG funds by hundreds of billions of dollars.

Increased federal oversight of these issues has led to an uptick in enforcement actions, with more expected to come as the SEC adds staff and enforcement, in the area of ESG investment funds, where ESG claims have been found to be overstated.

As the cannabis industry matures and the prospect of federal legalization grows, companies must begin to take ESG seriously and prepare for those efforts to be scrutinized by regulators and the public. That means avoiding (or getting out of) the practice of greenwashing.

Below are five key steps cannabis companies can take to mitigate ESG greenwashing risks:  

1. Develop a broad, cross-functional team to evaluate any ESG claims.

ESG oversight committees are mandatory. Reports should not be written and issued by a marketing department without direct collaboration and input from the executive leadership team, operations, human resources, finance, and most importantly, legal counsel.

2. Be transparent in reporting.

Companies making claims around ESG metrics need to be able to back up those claims with measurable facts. Facts need to be supported by data. As the adage goes, you need to “measure what matters” and then be prepared to report it—good and bad.

3. Seek third party assurance of your data.

This is a growing area that, due to the data often being tied to financial data, is being serviced by the accounting industry. Just as a company’s financial reports often need independent auditing, so does a company’s ESG reports.

4. Reconcile data before publishing.

Before publishing an ESG report, you will want to ensure the data that could be useful to reasonable investors is included in the company’s filings with the SEC. If it’s in an ESG report and could impact the business in the future (good or bad), it’s fair game for the SEC or investors to claim that they should have been on notice about the data.

5. Seek legal assistance.

Engage legal counsel with knowledge of ESG issues to ensure your company doesn’t run afoul of state and federal laws concerning consumer protection and securities laws. You don’t want to issue an ESG report only to find that the disclosures you made in it run afoul of other reporting requirements.

Marc Ross is head of Impact and ESG and co-chair of the Environment, Health and Safety practice at Vicente Sederberg LLP. He also serves as vice chair of the Environmental Stewardship and ESG Committee at the U.S. Cannabis Council.