What is “greenwashing” and what legal risks does it pose?

Greenwashing is a phrase which is increasingly used, but its applicability to the real estate industry may not be immediately clear. However, increasing legislation and regulation aimed at encouraging greenhouse gas (GHG) emissions reduction mean that all stakeholders in the real estate sector could inadvertently face a greenwashing claim.

There is currently no legal definition of greenwashing in the UK, but it most commonly includes making untrue/misleading statements about a company’s environmental performance or impact. Such statements may be made in any form but are often included in marketing materials on a website or brochure, annual reports and filings, communications to clients or other public statements. Tender and pitch documents also often contain Environmental Social and Governance (ESG) sections (especially in the public sector).

Companies (particularly those operating in the built environment) are under increasing pressure to say how they are reducing GHG emissions, but it is easier to make sweeping statements about net zero targets than it is to implement an effective emissions reduction program. The problem arises if there is a difference between what a company is actually doing to reduce emissions and what it claims to be doing. This difference between claim and reality can result in reputational damage, fines for misleading advertising or inaccurate filings and greenwashing claims ranging from misrepresentation and breach of contract claims to fraud/deceit/false reporting claims from investors, shareholders or customers.

What is the relevant law and legislative framework?

Increasingly, companies are adhering to voluntary reporting guidance to boost their ESG credentials, for example from the Task Force on Climate-related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB). For larger companies, legislation such as the EU’s Non-Financial Reporting Directive (NFRD) and Corporate Sustainability Reporting Directive (CSRD), and the UK Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 require the reporting of climate-related risks and mitigation.

In the real estate industry alone, we have also seen benchmarking initiatives such as the Real Estate Environmental Benchmark (REEB) and the GRESB Real Estate Assessment, which allow stakeholders to assess their portfolios against similar properties and identify areas for improvement. However, while these voluntary initiatives and assessment tools have an important function, the more they are adopted, the greater the risk of greenwashing. 

How can greenwashing claims impact the real estate industry?

Whilst greenwashing cases often hinge on specific facts, they invariably follow common themes of behaviour that are as equally relevant to oil companies as they are to the real estate industry. We consider some of these below.

1. Insufficient information

Reporting on GHG emissions reduction and achievements often requires lots of data. Companies can usually report  Scope 1 and 2 emissions with relative ease and confidence, but information on emissions arising from suppliers and customers (i.e. Scope 3) is more difficult to gather and precise reporting requires accurate and regularly collected data.

Companies that are unable to collect accurate data may become vulnerable to criticism of their emissions claims when reported. For landlords and tenants, this risk can be mitigated by including data sharing provisions in leases. These can range greatly in detail and strictness. As a minimum, parties should consider the categories of data required, the format in which data should be delivered and how frequently the data should be provided, as well as any practical limitations they have in complying with such obligations.

2. Style over substance

Companies subject to greenwashing claims are often accused of making grandiose claims in respect of green targets but failing to properly implement strategies to achieve them.

The concept of ‘green’ lease clauses has become commonplace in modern leases, especially for assets with outstanding energy efficiency credentials and landlords seeking to secure favourable green finance products. Companies need to be wary of reducing such clauses to feeble obligations that are overly subjective and vague in favour of them being agreed quickly. Green clauses leaning too far towards the ‘light green’ end of the green clause spectrum can easily be criticised as being of little substance and use. This  can quickly lead to an accusation of greenwashing, especially where such clauses are included as a condition of financing arrangements. Property owners and tenants should therefore consider their own green lease strategies to ensure that appropriate sustainability provisions can be included in their leases where required. Policies should also be futureproofed to ensure that any such obligations can be complied with throughout the lease term.

3. Holistic reporting

Statements on sustainability credentials should present an accurate and holistic image of a company’s operations. This is to ensure that readers are not misled as to the overall ‘greenness’ of a company to the extent that they may be induced into engaging with them. For example, investors and developers with property portfolios should be cautious of saturating publications with information on highly performing assets without giving proportionate attention to less eco-friendly properties. This practice is known as ‘green lighting’ and can lead companies promoting their greatest green achievements to be at risk of greenwashing claims, even when done innocently.

Time to reflect

Sanctioning bodies have been clear that no industry is exempt from greenwashing criticism. Companies in the real estate sector are therefore on notice to closely audit their sustainability publications and ensure that their claims are accurate and free from greenwashing risk. Going forward, companies may wish to consider implementing appropriate contract and marketing policies to help achieve their green goals and take appropriate advice to ensure they are effective in doing so.

Published by Estates Gazette.