A growing number of companies are choosing not to publicize details of their climate change targets to avoid scrutiny, accountability, and potential lawsuits. The strategy labelled “green hushing” is a reaction to a series of greenwashing allegations and legal challenges businesses have faced, but it comes with its own risks.
The impact of greenwashing
The term “greenwashing (opens a new window)” has been coined to describe the act of over-stating or mis-representing a company’s environmental credentials or the achievability of forward-looking targets. High profile court cases have shown that improper reporting and misleading advertising can leave businesses vulnerable to governmental scrutiny, litigation, reputational damage, and loss of revenue in an increasingly climate conscious world. Incorrect reporting, or failure to uphold stated aims and goals can leave directors open to personal claims of false or misleading statements.
This type of litigation is particularly focused on the financial sector. A recent US survey by The Conference Board, a think tank, showed (opens a new window) 37% of financial and insurance industry respondents had experienced some type of backlash against their environmental, social, and governance (ESG) plans. That far outpaced the next most impacted sector, business and professional services, at 8%. According to an analysis of Sustainalytics data for 15 large banks (opens a new window), the number of litigation incidents related to the environmental and carbon impact of products increased twelvefold between 2020 and 2023.
The green hushing trend
To avoid these risks, many firms are reassessing their strategies and have decided to tone down the disclosure of environmental ambitions and credentials. Nearly half of 1,400 companies (44%) surveyed by consultancy South Pole (opens a new window) said it had become more difficult to communicate their climate goals compared with around a year earlier due to a lack of clarity and changing regulation. The majority of surveyed companies - nine of the 14 major sectors - are actively reducing their climate communications, according to the research.
A specific example is asset management. During the first half of 2023, 44 sustainable funds chose to remove the “sustainable” label from their brand names (opens a new window) in the EU, according to data from consultancy firm Broadridge. This contrasts with the previous year when 99 funds added “sustainable” to their names. Market observers have interpreted the trend as a reaction to a lack of specific and consistent methodology for the classification of sustainable investments under the Sustainable Finance Disclosure Regulation (opens a new window), as well as the publication of an EU consultation regarding sustainable fund names.
The consequences of green hushing
At first sight, green hushing seems a safe option, but there are a few issues that businesses need to be aware of and perhaps address if they are opting for this route.
As a result of disclosure practices often being linked to regulation, which can vary from country to country, multinational companies’ disclosures may be inconsistent in terms of the quality of information. Best practice in communicating ESG plans, and strategy is to remain consistent across all jurisdictions and stakeholders (e.g. not just shareholders). Ideally, companies would direct all parties to one official ESG / sustainability page on the company’s website.
Nevertheless, a company may be able to tone down its approach to environmental sustainability even if there are mandatory disclosure rules. The recommendations from the Task Force on Climate-Related Financial Disclosures (opens a new window) (TCFD) created by the Financial Stability Board (opens a new window) (FSB) for example are somewhat subjective and there is not a prescriptive approach. However, a company must avoid any misstatements or misleading disclosures. Furthermore, favoring disclosures to one group of stakeholders over another creates additional risks. Both practices are a major concern for directors' and officers' (D&O) liability insurers as they can result in costly legal challenges.
Green hushing is likely to trigger fewer claims than greenwashing because companies following such a strategy are ultimately delivering on legitimate targets (i.e. “doing the right thing”). However, any obfuscation in communicating ESG strategies could attract scrutiny.
Recommendations:
The Chartered Banker Institute has put together a few tips to avoid both green hushing and greenwashing (opens a new window):
Get your definitions right: become familiar with the definition of greenwashing in your jurisdiction to gain confidence that your green claims fall within regulations. Make sure your green claims are specific and proportionate.
Collaborate with your peers: this gives all market participants greater clarity and confidence over which claims are appropriate and which aren’t. It requires businesses to be open and transparent about their sustainability measures and the veracity of their green claims.
Embrace the opportunities in going green: instead of perceiving sustainability-related obligations as potential impediments to business growth, consider investing in net-zero as a great commercial opportunity.
To ensure that your D&O liability insurance will respond to claims related to greenwashing and green hushing, consider the following steps:
Regularly review your D&O policies: Ensure that they cover ESG-related risks, including greenwashing and green hushing claims.
Collaborate with your broker: Seek advice from your broker to understand the extent of coverage under your D&O policies for ESG-related risks.
Work with insurers: Engage with insurers to understand their stance on ESG risks. Collaborate with them to tailor coverage to your specific needs.
D&O liability insurance is a critical safeguard for directors and officers. By proactively addressing ESG risks and ensuring appropriate coverage, you can protect directors and officers, and the organization from potential claims related to greenwashing and green hushing.
For further information, please access Lockton’s Global Financial Institutions page (opens a new window).
