Expanded climate reporting will likely tempt marketing teams to try to capitalize on favorable climate performance as disclosed in reporting. But be warned: Disclosure language meeting the SEC’s reporting requirements does not necessarily meet the guidelines of the Federal Trade Commission (FTC).
Picture this: Acme Widgets decides to launch an advertising campaign highlighting its efforts to be more environmentally friendly. Thinking it would be low-risk, the marketing team pulls climate-related language from the annual report running it verbatim as ad copy:
“All of the packaging used by Acme Widgets is recyclable, and Acme Widgets has set a goal of using recycled materials only in its products by 2030.”
This ad copy is then sandwiched between two romance-copy statements on Acme Widgets product labels:
“At Acme Widgets, we care about the environment. All packaging used by Acme Widgets is recyclable, and Acme Widgets has set a goal of only using recycled materials in its products by 2030. Each purchase of an Acme Widget product helps ensure a cleaner planet for future generations.”
Weeks after the first batch of products with this new label text hits store shelves, Acme Widgets receives a warning letter from FTC alleging that the company’s marketing claims are unlawful.
What went wrong?
Just because disclosure language satisfies reporting requirements under SEC regulations, that does not necessarily mean the same language is acceptable as an environmental marketing claim under FTC regulations. Even though the text is unchanged, the context in which it is presented and the purpose for which it is used determines whether the SEC or the FTC has jurisdiction.
It is unlikely that statements appearing in SEC filings would be viewed as promotional content by the FTC. But using those same statements outside of the SEC filing context could make them promotional and potentially violate the FTC’s guidance.
SEC’s proposed rule
The SEC presides over environmental, social and governance (ESG) disclosures in financial markets. The SEC has extended the comment period for its proposed rules from May 20, 2022, to June 17, 2020. When finalized, these new rules will add significant climate-related disclosure requirements for registrants. As explained by the SEC in a news release, the proposed rule is intended to provide clarity to companies about how to disclose climate-related risks as well as how to meet investor demand for such information.
Notably, the proposed rule would require companies, to the extent present, to disclose climate-related targets or goals. Under proposed Section 229.1506, the disclosure must, among other requirements, include:
- The scope of activities and emissions described in the target or goal
- The unit of measurement, including whether the target is absolute (a fixed quantity) or intensity-based (a target rate)
- The defined time horizon by which the target is intended to be achieved and whether such time horizon is consistent with other goals established by treaty, law, regulation, policy or organization
- How the registrant intends to meet its climate-related goals
FTC’s ‘Green Guides’
Sharing climate-related goals — and how a company intends to meet those goals — outside of the SEC filing context could run afoul of FTC advertising requirements. The FTC has jurisdiction over environmental marketing claims. Its Green Guides generally prohibit advertisers from making claims that are false and/or misleading.
Even though codified, these serve only as guidance. That is, they cannot independently provide the basis for enforcement on their own. However, violations of the Green Guides can serve as evidence. In other words, while FTC authorities generally prohibit false and/or misleading advertising, the Green Guides tell us how environmental marketing claims can become false and/or misleading.
States can also adopt the Green Guides into law to add clarity to the requirements for environmental marketing claims made within their jurisdictions. This is how California adopted the Green Guides into its California Business and Professions Code § 17580.5.
Standards for most of the environmental marketing claims in the Green Guides track with common sense. That is, companies should not:
- Suggest a product is endorsed by an independent third party if it is not
- Imply that a product is “free of” a substance if it is not
- Represent that a package is refillable if it is not
But other Green Guide standards are significantly more prescriptive. For example:
- General environmental benefit claims: Claims suggesting environmental benefits (e.g., “green,” “eco-friendly” or “sustainable,”) must include qualifying language that limits the scope of the claim to that which is substantiated by the advertiser. As an example, instead of using the claim “eco-friendly” to describe a product, the advertiser could revise the claim to say “eco-friendly: made with recycled materials” to clearly describe how the product is eco-friendly. [16 CFR 260.4]
- Carbon offset claims: Claims must clearly and prominently disclose if the carbon offsets represent emission reductions that will not occur for two years or later. [16 CFR 260.5(b)]
- Recyclable claims: Unqualified “recyclable” claims should be made only when recycling facilities that can process the recyclable content are available to 60 percent or more of the consumers or communities where the product is sold. [16 CFR 260.12]
- Renewable energy claims: Unqualified renewable energy claims should not be made when fossil fuels or electricity derived from fossil fuels are used to manufacture any part of the advertised product. [16 CFR 260.15]
How can companies avoid, or at least mitigate, advertising risks?
In a perfect world, Acme Widgets’ financial counsel would handle SEC filings, while its advertising law counsel would handle advertising. The two would cooperate on climate change disclosures and statements, and in the meantime, the marketing team would know where to turn for specific advice on how to structure its associated claims, slogans and promotions.
In practice, expanded climate change reporting for the SEC will likely spur ever more vocal and demanding consumers looking for climate-friendly products and services. Marketing teams will detect this demand and seek to move rapidly to adjust the company’s messaging.
This may be new ground for many. But the marketing team must be informed that climate-related disclosures in SEC filings are not automatically approved for use in promotional materials and that further review may be required. Implementing this type of process can help companies avoid making environmental marketing claims the FTC might deem misleading or unsubstantiated.
What should companies be watching for in this space?
The law and guidance across these fronts are by no means settled science, but rather, a continuously moving target. Matters to pay attention to moving forward include:
On the SEC front …
- Changes to the final rule: The comment period for the proposed rule ends May 20, 2022. The SEC could potentially discuss the advertising issues in its final rule if comments raise those issues.
- Climate and ESG Task Force in the Division of Enforcement: The SEC announced the creation of a task force in March 2021 “to develop initiatives to proactively identify ESG-related misconduct” in financial reporting. Enforcement actions arising because of this initiative may give registrants insight about the types of activities the SEC is actively monitoring.
On the FTC front …
- More exposure (via the proposed rule) equals more enforcement? With companies potentially having to provide deeper climate-related disclosures, there may be a corresponding increase in the use of environmental marketing claims from companies hoping to repurpose existing disclosure language into advertising. Greater focus equals greater risk.
- Revised Green Guides: Initially issued by the FTC in 1992 then revised in 1996, 1998 and 2012, the Green Guides are due for review in 2022. However, it is uncertain whether the FTC will address the SEC proposed rule in its latest revision.
Follow the right standards
In sum, both investors and consumers want more information about the climate and ESG impacts of businesses, products and services. But companies must take care when mating SEC-regulated reporting to FTC-regulated marketing materials. There are significant differences between the two agencies’ standards — and it is the duty of compliance teams to make certain the marketing and sales teams understand the nuances.