What You Need to Know
- Key takeaway #1The EU is currently in the process of finalizing and adopting a number of new laws on so-called greenwashing and social-washing. Some, but not all, of these new EU laws will likely directly apply to certain banking and financial service products.
- Key takeaway #2EU law regulating green and social claims in the banking and financial services sector is particularly complex. The banking and financial services sector should not ignore either the existing, or the new, EU law regarding green and social washing.
- Key takeaway #3The new EU laws on green and social washing are likely to lead to: (1) more action from EU enforcement authorities against banks, financial service providers and companies (including investigations, penalties and direct-action such as blocking or taking down websites or pages); (2) more litigation – both inside and outside the EU; and (3) reputational harm and other indirect loss – for those inside and outside the banking and financial services sector.
The amount of litigation regarding environmental and climate change issues is, perhaps unsurprisingly, growing worldwide.[1] A significant portion of that litigation relates to so-called ‘greenwashing’, ‘climate-washing’ or ‘social-washing’ disputes. In other words, legal cases where people or organisations (often NGOs and consumer groups) accuse companies, banks, financial institutions or others, of making untrue statements. They argue these companies or financial institutions are pretending their products, services or operations are more environmentally-friendly, sustainable, or ethically ‘good’ for society – than is really the case. Perhaps more interestingly, of all the litigation in the environmental and climate change space – complainants bringing greenwashing and social washing cases have, according to some of these reports, statistically the most chance of winning. So, in a nutshell, not only is greenwashing and social washing litigation on the rise, companies and financial institutions are most likely to lose cases in this area.
That general trend looks set to continue – particularly in the EU. That is because the EU is currently adopting new EU laws to further clamp down on green and social claims. These new laws will, amongst other things, essentially reverse the burden of proof. Soon the legal onus will be on companies to prove a green or social claim they make is valid – not on a litigant to prove the claim is invalid. Companies defending greenwashing and social washing actions – may therefore be on the backfoot from the outset. Any sense that green and social claims are not verifiable or verified, or are overstated or exaggerated – is going to bite banks and financial institutions making these statements – not merely in terms of perhaps litigation, but also in terms of, for example, enforcement actions, investigations, and reputational damage. Retail banks and financial service providers – should therefore watch-out. But others in the wider banking and financial services industries, including the insurance and re-insurance industry – need to be clear that this is a definite and growing risk – which should be taken seriously.
EU law on green and social washing impacting the banking and financial services sectors
EU law on green and social washing regulating the banking and financial services sectors – is complex. Indeed, of all the different products and service providers required to adhere to EU law on green and social washing – it is perhaps the banking and financial services sector which has the most complex EU legal rules regarding green and social washing. And the new EU law coming-in regarding greenwashing and social washing, does not look like it will make things any less complex.
One of the new pieces of EU law – which will specifically address and regulate greenwashing – is the so-called Green Claims Directive (draft GDC). The draft GCD has not yet been finalized or agreed. At the moment, it looks set to be finalized and agreed by the start of next year (2025). As the text itself has not yet been finalized, its scope – and the products and services it covers – is still unclear. However, on the basis of the draft proposals, the draft GCD is unlikely to regulate financial products sold to consumers per se.[2]
Presuming that banking and financial service products fall outside the scope of the draft GCD, those products will therefore be regulated primarily under a panoply of other EU law such as, for example: the Directive on Markets in Financial Instruments II (MiFID II), the Mortgage Credit Directive, the Consumer Credit Directive 2, the EU Taxonomy Regulation, etc. This is not to mention, the broader EU consumer-protection law and EU environmental law, [3] relevant Member State national law,[4] international law,[5] and soft-law mechanisms such as EU and national standards.[6]
Also, although the draft GCD may not, strictly speaking, cover these products – given the similarities in the legal requirements codified under the GCD, and those codified in this other law relevant to financial products – including requirements to ensure communications are, for example, “fair, clear and not misleading” – it stands to reason that Guidance and case-law relevant to the GCD may well apply by analogy to at least some financial products.
In short, EU law on greenwashing and social-washing vis-à-vis the banking and related sectors is particularly complex and unclear – and will likely to remain so in the short term. Nonetheless, what is clear, and what can be said with some certainty, is that a number of financial products will fall within the scope of the recently adopted EU Directive on “Empowering Consumers for the Green Transition” (ECGT Directive). This Directive, which is fully finalized and adopted – and currently being transposed by EU Member States into national law – essentially prohibits certain types of green and social washing. It is particularly likely to apply to financial products and services intentionally aimed at consumers.
Interestingly, the prohibited and “blacklisted” types of marketing and sales involving green and social claims to be prohibited under the ECGT Directive – still seem relatively commonplace in the retail banking and financial services sector. The prohibited forms of green and social washing include, for example: (1) claims which are vague, unclear, non-verifiable or not verified and supported with scientific or “primary” evidence, and (2) statements which are over-exaggerated or over-stated, which, for example, make out a whole organization or product has a green credential – where, in reality, the claim only relates to a certain aspect of the organization or product.
Moreover, EU law here banning greenwashing and social-washing does not merely apply to explicit, written green and social claims. Instead, it also covers, in addition: (1) claims and statements made orally, and (2) images, logos, symbols, pictograms – and even colours – which give the impression of a relevant green or social credential or benefit.
Likelihood of more litigation inside and outside the EU
One of the interesting dichotomies for banks and the financial services sector – relates to how these EU new laws on greenwashing and social-washing interact and interconnect with other EU laws.
At the moment, many banks and financial service providers are under an increasing number of legal requirements to disclose, report and make publicly available – information on ESG issues. Those legal requirements include, for example, the Corporate Sustainability Reporting Directive (CSRD) but also national Member State laws. One of the core concerns here is that, when disclosing this information and data, it may undermine or even conflict with green and social claims currently being made by banks and financial service providers in the EU. Also, these laws requiring transparent disclose by banks and service providers – in the EU, may undermine or contradict claims and statements made outside the EU. The core concern is that this may therefore lead to litigation inside the EU. At the same time, it may also lead to more litigation in jurisdictions outside the EU – like the US and the UK – where class-action type lawsuits can be more the norm. There are also a number of other related concerns.[7]
‘Greenwashing’ and the banking and financial services sector
Problems regarding green and social washing in the banking and financial services are already well-known.
Perhaps the most high-profile case involved a German asset manager within which a well-known European investment and financial services bank holds a stake. In that case, an individual primarily responsible for ESG issues at the asset manager, raised a concern and compliant about the true amount of investments which were subject to ESG criteria at the asset manager – as compared to the number the asset manager itself claimed was managed under ESG criteria. Following an investigation by both the German authorities and the US Securities and Exchange Commission, the asset manager agreed to pay a multi-million-dollar settlement, and reported a substantial fall in assets specifically identified as ‘green’, ‘sustainable’ or ‘ESG-compliant’.
There are also other cases pending in the EU concerning greenwashing and the banking sector. One concerns a case involving a large European bank where three NGOs have brought an action. The claim is based on national Member State law, which requires that companies, including banks, establish a plan to prevent the violation of environmental damage that may occur in the course of their business. The claimants allege multiple shortcomings in the bank’s plan that relate to greenwashing, including lack of clarity and insufficient information on the bank’s financing and investments.
What should banks and financial service providers do now?
It is imperative for banks and financial service providers to understand how the existing EU regulatory framework, and currently proposed EU laws, will impact their operations. Increased enforcement actions, investigations but also litigation – mean organisations must be pro-active in addressing and mitigating greenwashing and social-washing risk. All statements (written or oral, and including images) made in relation to a product, service or offering must be verifiable and verified in accordance with EU law. Institutions should, as a minimum, take steps to:
- identify blacklisted greenwashing, climate-washing and social-washing practices – and remove any such claims, statements and imagery asap;
- put in place systems and policies to limit risk vis-à-vis green and social claims of potential concern; and
- ensure a consistent approach with regards to: (i) claims made and (ii) data to be disclosed under ESG reporting and other EU, and non-EU, requirements.
For further information, please contact:
Marcus Navin-Jones, Crowell & Moring
mnavinjones@crowell.com
[1] This is according to a number of reports. See, for example, the UNEP Global Climate Litigation Report 2023, The UNEP ‘Turn off the tap’ Report, the Grantham Research Institute on Climate Change and the Environment Reports, etc.
[2] Preamble Paragraph 10 of the draft GCD and the accompanying provisions.
[3] Including, for example, Article 38 of the Charter of Fundamental Rights, EU law concerning collective redress etc.
[4] Certain EU Member States have extensive national law regarding consumer protection and environmental issues.
[5] Including the UN SDGs and UN Conventions.
[6] E.g. ISO standards, EU Ecolabel Regulation, etc.
[7] See, for example, the United Nations Working Group which has noted, amongst other things, a general lack of understanding in the banking and investment community that ESG data and information requires undertakings to provide information and data on the “S” – including, therefore, on human rights issues: https://www.ohchr.org/sites/default/files/documents/issues/business/workinggroupbusiness/wg-business-cfis/2023/investros-esg/investorsesghumanrights-low.pdf\ A/HRC/47/39/Add.1, para 46, and A/HRC/47/39/Add.2
