Could greenwashing-related compensation claims be enforced through a class action?
THE ‘GREENWASHING’ PHENOMENON - In light of the growing sensitivity to the topic of environmental sustainability across virtually each and every existing industry, companies seeking capital are increasingly eager to address ESG issues and enhance their reputation by improving their sustainability credentials. ‘Greenwashing’ is commonly defined as an attempt to make people believe that a business (or an investment) is doing more to protect the environment than it really is. Awareness of the risks involved in this process is thus critical. Making inaccurate or misleading statements regarding green or environmental credentials of an impact financing product may result in mis-selling allegations and in claims from investors and shareholders.
GREENWASHING-CONNECTED DISPUTES - As proof of this, other industries have already brought to light the first cases of litigation linked to the of greenwashing phenomenon. As for the Italian landscape, as better discussed further below this was the case of a textile company based in north-eastern Italy, ordered in 2021 by the Court of Gorizia to stop marketing certain microfibre products deceptively presented as 100% recyclable and capable of reducing CO2 emissions by 80%. Another example: the Italian Competition Authority inflicted a €5 million fine on a leading energy multinational for attempting to present biofuels as environmentally friendly and the fine was confirmed by the Regional Administrative Tribunal of Latium in January 2020. While to date there is yet no accountable greenwashing-related financial litigation in Italy, an increasing volume of lawsuits may be expected in the near future and prospective claimants might pursue several legal paths to bring claims.
PRECONTRACTUAL LIABILITY CLAIMS - On the one hand, under art. 94 of Italian Legislative Decree 58/98, investors may seek to claim damages vis-à-vis a financial product issuer when the prospectus contains false or misleading information on the product. This provision could be invoked in greenwashing scenarios to claim prejudice ensuing from misleading statements regarding ‘green’ or environment-friendly credentials of an impact financing product. Possibly qualified as a form of precontractual liability, in this type of action the burden of proof of the issuer’s harmful behaviour, of the damages incurred, of the issuer’s fraud or negligence, and of causation, all lie on the claimant.
CLAIMS FOR BREACH OF CONTRACT - On the other hand, breach of contract under article 1218 of the Italian Civil Code may be claimed when a statement or representation made in an agreement turns out to be untrue. This rule could be invoked by an investor in relation to the sustainability credentials of an impact financing product. The investor’s burden of proof would be limited to filing the executed contract incorporating the untrue statements and substantiating the damages incurred. Issuers, intermediaries and other sellers should thus be aware of the above when making any ESG-related statement about a financial product.
REPORTING-CONNECTED CLAIMS - Companies’ economic performance may also entail litigation risks, especially when it comes to environmental reporting. Shareholders might potentially seek to sue for damages ensuing from irregularities or omissions in the information reported in the ‘Non-Financial Declaration’ (amounting to a ‘Sustainability Report’ and reporting on the company’s environmental and social performances and results) which certain large companies must mandatorily draft under Legislative Decree 254/16 implementing the EU Directive 2014/95 on disclosure of non-financial and diversity information by certain large undertakings and groups.
GREEN CLAIMS IN COMMERCIAL COMMUNICATION – Although it is arguable that Greenwashing is unfair or deceptive advertising or marketing, the normative framework in this domain includes ISO, EMAS (Eco-Management and Audit Scheme) and UNI standards and the Made Green Italy voluntary labelling scheme to ensure easy accessibility of a product’s environmental footprint. Also, false or inaccurate statements trigger liability under the Italian Consumer Code (Leg. Decree 206/2003 based on EC Directive 2005/29) which applies to product advertising and marketing, specifically the provisions on unfair and misleading commercial practices vis-à-vis consumers. Misleading statements are also of relevance under the civil law provisions sanctioning unfair competition vis-à-vis competitors (article 2598(3) of the Italian Civil Code). Finally, the Italian Code of Marketing Communication Self-Regulation refers to ‘green’ ad claims that in order not to be sanctioned as misleading, must be truthful, relevant and scientifically verifiable, and must clearly identify the aspect of the advertised product or service characterised by the claimed benefits.
The new Italian class action framework: new risks for defendant banks?
ITALIAN CLASS ACTION REFORM: A BROADER SCOPE - Following the recent reform enacted by Law no. 31 of 12 April 2019, the scope of applicability of Italian class actions has been significantly expanded. On the one hand, class actions can now be initiated by anyone seeking to enforce ‘individual homogeneous rights’ (and are thus no longer limited - as was the case in the past - to the protection of rights whose holder can formally be qualified as a ‘consumer’ or ‘user’ according to the relevant Italian Consumer Code provisions). Further, a class action may now be initiated for any kind of ‘individual homogeneous right’, regardless of the related cause of action.
GREENWASHING, CLASS ACTION AND BANKS – The above suggests that banks and financial institutions accused of having undertaken Greenwashing practices may now also be collectively sued by a group of professional investors as well as by minor investors acquiring financial products for non-professional investment purposes. Following the recent Italian reform, class actions are now structured both to address B2B controversies and collective disputes whereby non-professional investors, without significant individual economic power on their own, will be able to exert pressure on financial institutions by pooling their efforts and minimising the costs of their individual rights’ judicial enforcement, possibly also in the sustainable finance arena.
POTENTIAL RISKS - The above considerations could suitably apply to single, small or medium-sized investors acting as potential claimants in relation to the ‘green’ credentials of a bank’s impact finance products. A significant aspect of the class action reform is the opportunity for opters-in to join the class action even after issuance of the ruling that certifies the class action. By such ruling to the court must set a 60/150-day deadline for further opters-in who had not previously taken part in the class action to seek compensation as well. For the defendants, this is doomed to become the most unsettling element in the entire reform setup, as it prevents them from calculating in advance the liabilities they will have to face if they lose the case and forces to await until about five months after the ruling before becoming aware of the overall liabilities they will have to endure.
Hence, even when a class action is brought by a relatively small group of claimants, the duty to publish the ruling and the promotional activities carried out by trade/consumer associations could induce an unforeseeable number of additional claimants to join the class action at a later stage, driving potential damages into sky-rocketing figures. On the flip side of the coin, these procedural provisions could push holders of ‘homogeneous individual rights’ to adopt an opportunistic attitude, waiting for a favourable ruling before taking part in the class action while remaining free to bring an individual action on their own behalf if the class action is dismissed.
The European context
EU REGULATIONS - In assessing the significance of Greenwashing-related litigation risks, legal uncertainty is being progressively superseded in light of recent European regulations. The Disclosure Regulation 2019/2088/EU intends to provide harmonized disclosure requirements for investment products promoting environmental or social objectives. The Taxonomy Regulation 2020/852/EU sets out a classification system for environmentally-sustainable economic activities with the aim to create a common language to be used when assessing if economic activities have positive impact on the environment.
The Final Report on draft Regulatory Technical Standards, adopted in early 2021, offers further details. The general requirements of the Disclosure Regulation are substantiated by concrete contents and methodologies of sustainability-related disclosures for ultimate implementation. Various organisations have sought to bring further clarity into this area: the International Capital Market Association (ICMA) has published a set of Green Bond Principles and Green Loan Principles and Sustainability Linked Loan Principles, aiming to implement disclosure transparency.
MINIMISING GREENWASHING RISKS - The above rules and guidelines can help European companies and financial institutions to identify sustainable business activities and correctly provide information to investors to minimise the risk of accidental Greenwashing and, where needed, to overcome Greenwashing allegations. In a litigation perspective, this means preventing potentially devastating class actions from being filed in Italy and elsewhere, either by ordinary consumers or by professional investors.
GREENWASHING AND EUROPEAN CONSUMER PROTECTION – In Europe, Greenwashing has increasingly become a main focus in the consumer protection arena.
In the UK, the Green Claims Code (2021) issued by the Competition Marketing Authority sets key principles to be met in terms of ‘green’ statements and the UK Advertising Standards Authority is frontline in sanctioning Greenwashing practices.
In the EU, the European Commission has recently presented a legislative proposal to amend the Unfair Commercial Practices Directive (2005/29/EC) and the Consumer Rights Directive (2011/83/EU) so as to empower consumers for the ‘green’ transition through better protection against unfair commercial practices and better information, to be completed by an upcoming initiative on substantiating ‘green’ claims so as to make them reliable, comparable and verifiable across the EU and reduce Greenwashing.
Within the EU Member States, in February 2022 German case law has set rigorous standards for ‘green’ claims and statements, whilst in August 2021 France enacted a law on climate and resilience adding the environment dimension to the definition of misleading commercial practices instances, with case law finding that the term ‘greener’ is an unfair Greenwashing practice.
Tips and takeaways
In consideration of the foregoing, simple practices might be adopted by financial institutions to mitigate the risks of collective claims and legal disputes in the area of impact financing: (1) incorporating sustainability principles in one’s business model and financial product/services supply chains; (2) being accurate in providing information to investors at all stages of a financing transaction or of a financial product implementation; (3) monitoring case law developments and following all available rules and guidelines on what constitutes a ‘green’ (financial) product before indicating it as such; (4) seeking opinions from qualified independent experts; (5) effectively assessing legal risk and seeking legal advice where needed.
Authored by Filippo Chiaves, Enrica Ferrero, and Pietro Orlandi.
