In recent years, consumers, investors and regulators have become increasingly aware of the climate crisis and accompanying risks, leading to increased demand for transparency and accountability from corporations about their business practices and sustainability footprints. This, in turn, has led to a wave of greenwashing litigation.[1] Greenwashing occurs when a company engages in harmful environmental practices, but uses advertising, securities filings or other public statements[2] to falsely tout its positive impact on the environment.[3]

The emergence of Environmental, Social, and Governance (“ESG”) disclosure or “sustainability” reporting has increased the risk of greenwashing litigation.[4] ESG is a metric-driven approach to corporate accountability that aims to help consumers and investors make better purchasing and investment decisions.[5] ESG disclosures can have significant legal consequences: False and misleading ESG claims can lead to lawsuits under consumer protection statutes, securities fraud claims under federal law, and enforcement actions by regulators.[6]

Greenwashing Litigation: Two Key Paths

Greenwashing claims generally fall into two legal categories: consumer protection litigation and securities litigation.[7] Consumer claims arise under state consumer protection laws, which allow consumers to sue companies for deceptive environmental marketing. Investors can bring claims under federal securities laws if misleading ESG disclosures affect their investment decisions.

Consumer Greenwashing Litigation

At the federal level, the Federal Trade Commission (“FTC”) enforces Section 5 of the FTC Act, which prohibits unfair or deceptive practices in commerce, including false environmental claims.[8] The FTC’s “Green Guides” offer non-binding guidance on how businesses can avoid making misleading environmental statements.[9] The Green Guides serve as a reference point for both FTC enforcement actions and state-level consumer protection lawsuits.

Consumers can bring class actions under state laws, challenging deceptive environmental claims in labelling, marketing, and advertising. In consumer protection claims, plaintiffs argue that a company’s environmental marketing misled them into making purchases they otherwise wouldn’t have made if it weren’t for the false and misleading advertising. These claims can be brought under state laws that mirror federal consumer protection statutes, such as the California Unfair Competition Law (“UCL”)[10] or New York’s General Business Law (“GBL”).[11] Importantly, many states have incorporated the FTC’s Green Guides into their own laws, often referred to as “Mini FTCs,” providing consumers with a pathway to hold companies accountable for misleading environmental claims.[12]

Enforcement actions for consumer fraud against companies accused of greenwashing can also occur at the state level. A recent high-profile example is the New York attorney general’s lawsuit against the world’s largest beef producer, JBS, in February 2024.[13] Also, in September 2023, California’s attorney general filed a lawsuit against ExxonMobil for misleading consumers about its role in plastic pollution, highlighting the growing trend of state attorneys general taking action against corporate greenwashing.[14]

Securities Greenwashing Litigation

For securities litigation, federal securities fraud claims related to ESG-disclosure greenwashing generally involve two provisions: (1) Exchange Act §10(b)[15] and (2) SEC Rule 10b-5 promulgated thereunder.[16] The Securities and Exchange Commission (“SEC”) enforces Rule 10b-5 under the Securities Exchange Act of 1934, which prohibits fraudulent or misleading statements in connection with the sale of securities.

Investors must prove that the business disclosed a false or misleading statement about its ESG performance and that these statements affected the value of its stock. To establish a claim under §10(b) of the Exchange Act, there are five elements that plaintiffs must show: “(1) fraud or deceit (2) by any person (3) in connection with (4) the purchase or sale (5) of any security.”[17] Claims under Rule 10b-5 also require plaintiffs to prove fraud or deceit along with the elements of common law fraud – materiality, reliance, causation, and damages. An alleged misrepresentation is material if there is a substantial likelihood that a reasonable person would consider it important whether to buy or sell shares of stock.[18]

When pleading scienter, plaintiffs must satisfy Rule 9(b) of the Federal Rules of Civil Procedure and state with particularity the facts constituting the alleged fraud.[19] The Private Securities Litigation Reform Act of 1995 (“PSLRA”) expanded the requirement on alleging fraud, particularly concerning the inference of scienter, and imposed heightened pleading standards.[20]

The PSLRA “safe harbor” provision is especially relevant for ESG and climate-related disclosures that contain future projections and long-term commitments, such as net-zero pledges. That provision covers any future-oriented statements related to a company’s financial projections, economic performance, and objectives.[21] To qualify for the safe harbor, these statements must be accompanied by adequate cautionary language that identifies important facts that could cause actual results to differ from those in the statement. This is a powerful tool used as a “shield” by the defendants when arguing in securities class actions that contest forward looking statements.

Despite the challenges, ESG-related securities fraud claims are on the rise.[22] The SEC has proposed new rules on climate-related disclosures, which, if implemented, could expand the scope of information available to investors and potentially create new avenues for litigation.[23] However, in 2024, the SEC’s climate-related disclosure rules were voluntarily stayed,[24] and the agency subsequently dismantled its ESG Task Force, which had been responsible for enforcing greenwashing claims.[25] While this slows down federal enforcement, it has not stopped state attorneys general and private plaintiffs from pursuing greenwashing claims under state laws.

Synergies Between Consumer and Securities Greenwashing Litigation

A key question for both regulators and plaintiffs is whether there are synergies between consumer protection and securities greenwashing litigation. The answer appears to be yes, as there are overlaps in the legal frameworks and remedies available in both realms, and these overlaps can be leveraged to create a more cohesive regulatory landscape.[26]

One area of synergy is the overlapping jurisdiction of the FTC and SEC in regulating sustainability claims. The FTC’s Green Guides, while focused on consumer protection, also influence how companies disclose environmental information to investors. Similarly, SEC rules on ESG disclosure can affect the claims companies make in their marketing materials, potentially activating consumer protection laws.[27]

Another point of intersection is the use of ESG data. Companies often use the same data to prepare public disclosures and advertising materials, which can create different legal risks under consumer protection and securities laws. For example, a company that falsely states in its advertising and securities filings that it has made carbon offsets might face claims from both consumers and investors.[28]

The Future of ESG Greenwashing Litigation

The landscape of greenwashing litigation is evolving. The FTC is revising the Green Guides, for example.[29] Also, aside from the SEC proposed rules, the European Union has been at the forefront of climate legislation influencing U.S. legislation and litigation trends.[30] Additionally, the California Legislature approved two bills that impose mandatory climate-related reporting requirements for large public and private companies doing business in the state.[31]The FTC has more tools to regulate greenwashing than the SEC.[32] However, integrating enforcement efforts between these two agencies could create a more comprehensive framework for addressing misleading ESG claims.

For businesses, a clearer regulatory landscape could help them navigate the complex web of ESG disclosure requirements and avoid litigation. By aligning their disclosures with both consumer protection laws and securities regulations, companies can better protect themselves from greenwashing claims while promoting a more sustainable future.

As greenwashing litigation evolves, we are likely to see greater integration between consumer and investor claims, driven by overlapping regulatory frameworks and shared data. This integration can provide more robust remedies for plaintiffs while creating a clearer, more cohesive regulatory environment for businesses. Ultimately, a collaborative approach among regulators, consumers, and investors will be essential in advancing sustainability.

ENDNOTES

[1] See Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 545 (2024).

[2] In this post we focus on the “E” in ESG disclosure in relation to environmental greenwashing claims, which are mostly linked to carbon pledges and sustainability claims. Nevertheless, ESG encompasses social and governance components that may also give rise to greenwashing claims. See, e.g., Lee v. Fisher, 70 F.4th 1129, 1135 (9th Cir. 2023) (describing plaintiff’s claim against a company for false and misleading statements about diversity in the boardroom as a social component of ESG).

[3] See Magali A. Delmas & Vanessa Curel Burbano, The Drivers of Greenwashing, 54 CAL. MGMT. REV. 64, 66 (2011) (defining greenwashing as “misleading consumers about firm environmental performance or the environmental benefits of a product or service”).

[4] See generally Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 576, 592 (2024).

[5] Colin Myers & Jason J. Czarnezki, Sustainable Business Law? The Key Role of Corporate Governance and Finance, 51 Env’t  L. 991, 997 (2022) (defining ESG as a “metrics based approach intended to increase corporate accountability”).

[6] In this post we focus on the “E” in ESG disclosure in relation to environmental greenwashing claims, which are mostly linked to carbon pledges and sustainability claims. Nevertheless, ESG encompasses social and governance components that may also give rise to greenwashing claims. See, e.g., Lee v. Fisher, 70 F.4th 1129, 1135 (9th Cir. 2023) (describing plaintiff’s claim against a company for false and misleading statements about diversity in the boardroom as a social component of ESG).

[7] However, there are other forms of greenwashing, such as the private right of action under the Lanham Act and ESG litigation arising from retirement fund beneficiaries suing fund providers for divesting, or not divesting, funds in fossil fuel companies. See Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 545 (2024).

[8] 15 U.S.C. §§ 41–58.

[9] 16 C.F.R. pt. 260 (2024).

[10] CAL. BUS. & PROF. CODE §§ 17200–17210 (West 2024).

[11] N.Y. GEN. BUS. LAW § 349(h) (McKinney 2024).

[12] See generally Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 545 (2024).

[13]  See People v. JBS USA Food Co., No. 450682/2024 (N.Y. Sup. Ct. filed Feb. 28, 2024), https://ag.ny.gov/sites/default/files/court-filings/jbs-complaint.pdf

[14] See People v. Exxon Mobil Corp., No. T-23-1342 (Cal. Super. Ct., filed Sept. 15, 2023), https://oag.ca.gov/system/files/attachments/press-docs/Complaint_People%20v.%20Exxon%20Mobil%20et%20al.pdf

[15]  See 15 U.S.C. § 78j.

[16]  See 17 C.F.R. § 240.10b-5.

[17] See 17 C.F.R. § 240.10b-5.

[18] See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (stating that, in order for an omitted fact to be material, there must be “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available”).

[19]  See FED. R. CIV. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.”).

[20] Pub. L. No. 104-67, 109 Stat. 737 (codified as amended in scattered sections of 12, 15, and 18 U.S.C.).

[21]  See 15 U.S.C. § 78u-5(c); see also id. § 78u-5(i)(1) (defining a “forward-looking statement”).

[22] See generally Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 545 (2024).

[23] See The Enhancement and Standardization of Climate-Related Disclosures for Investors, 89 Fed. Reg. 21,668, 21,699–70 (Mar. 28, 2024) (to be codified at 17 C.F.R. pts. 210, 229, 230, 232, 239, 249).

[24]  On April 4, 2024 the SEC ordered to stay the climate-related disclosure rule pending judicial review. See Order Issuing Stay, Securities Act Release No. 11280, Exchange Act Release No. 99908 (Apr. 4, 2024), https://www.sec.gov/files/rules/other/2024/33-11280.pdf

[25]  SEC Abandons ESG Enforcement Group Amid Broader Backlash (1), Bloomberg Law (Sep. 12, 2024), https://news.bloomberglaw.com/esg/sec-quietly-dissolves-climate-and-esg-enforcement-task-force

[26] See Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 545 (2024).

[27] See generally Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 576, 592 (2024).

[28] See Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 545 (2024).

[29] See Press Release, Fed. Trade Comm’n, Federal Trade Commission Extends Public Comment Period on Potential Updates to Its Green Guides for the Use of Environmental Marketing Claims (Jan. 31, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/federal-trade-commission-extends-public-comment-period-potential-updates-its-green-guides-use

[30] See Council Directive 2022/2464, 2004 O.J. (L 322) (EU).

[31] See CAL. HEALTH & SAFETY CODE §§ 38532, 38533 (2024); see also Climate Corporate Data Accountability Act, S.B. 253, 2023–2024 Leg., Reg. Sess. (Cal. 2023), 2023 Cal. Stats. 382; Greenhouse Gases: Climate-Related Financial Risk, S.B. 261, 2023–2024 Leg., Reg. Sess., 2023 Cal. Stats. 383; S. RULES COMM., OFF. S. FLOOR ANALYSES, S.B. 261, 2022–2023 Leg., Reg. Sess. (Cal. 2023).

[32] See Barbara Ballan & Jason J. Czarnezki, Disclosure, Greenwashing & The Future of ESG Litigation, 81 Wash, & Lee L. Rev. 545 (2024).

This post comes to us from Barbara Ballan and Jason J. Czarnezki at the Environmental Law Program, Elisabeth Haub School of Law at Pace University. It is based on their recent article, “Disclosure, Greenwashing, and the Future of ESG Litigation,” published by the Washington and Lee Law Review, available here.