The SEC is expected to publish its final rules regarding ESG disclosures later this year, and in the meantime, both the agency and consumers have been busy making noise about companies’ environmental records. Experts say that without a sober evaluation of claims, you could be risking your very reputation.
“Seafood With Standards.” “Traceable. Sustainable. Responsible.” “These are more than just words on our menu — it’s our promise that all the seafood we serve is sourced to the highest standards.” Red Lobster, the world’s largest seafood restaurant chain, has made these claims in advertising and on its menu, but a class-action says Red Lobster’s actual practices are anything but sustainable.
An ongoing lawsuit in California alleges that the company’s seafood is sourced from suppliers that use environmentally destructive and even inhumane practices and that Red Lobster’s advertising and marketing claims about its environmental bona fides mislead consumers and violate that state’s consumer protection regulations.
And Red Lobster, which has refuted the claims in court, is not alone in being targeted by private lawsuits over claims of greenwashing, while others have faced federal action by the SEC’s Climate and ESG Task Force — and it won’t be the last. Indeed, the task force appears to be ramping up efforts to identify ESG-related misconduct, as investors increasingly use this information to inform their decision-making.
A small sampling of SEC enforcement actions just this year shows how vigorous the agency is in investigating ESG disclosures and potential misconduct:
- Compass Minerals International agreed to pay $12 million to settle charges that it misled investors about its Canadian mining operations.
- A Tampa-based health insurance distributor and its former CEO were charged with making false statements to investors.
- BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty to settle a case regarding ESG quality scores of investments.
And with newly standardized climate-related disclosure rules expected to be issued sometime before the end of 2022, for the average company, it’s not a question of if their climate-related policies will come under scrutiny but when, says Noah Miller, co-founder of ESG consulting firm Rho Impact.
“Long gone are the days when a company could make frivolous claims on all-natural or eco-friendly products. Consumers are more aware than ever about the negative environmental and social impacts of far-flung supply chains and what companies are or are not doing to address them. One misstep in today’s digital world and a company’s reputation and bottom line can be damaged or destroyed in a matter of minutes.”
A Harvard Business Review study found that not only are consumers poised to punish companies that harm the environment but that their ire extends to those making false sustainability claims — and the impact of negative consumer sentiment can be devastating. It’s an extreme example, to be sure, but BP’s reputation after the 2010 Deepwater Horizon spill has remained far lower than what it was before the spill and below levels other oil companies enjoy, according to an analysis released this year.
But despite knowing the risks of greenwashing as well as actual environmental harm, a 2021 study by the European Commission found that 42% of positive environmental claims made by companies were exaggerated, false or deceptive.
What can firms do to avoid running afoul of consumer desires and regulator requirements? In addition to bringing in experts to ensure their bold environmental claims are valid, Miller says companies should accept reality.
“There is no question organizations must not only adapt to these new norms but they must also genuinely embrace them,” Miller continued. “Unlike any group of consumers before Millennials and Gen Z, how an organization conducts itself truly drives a customer’s purchasing decisions. Is the company or organization socially responsible? Is it environmentally responsible? Does it treat its employees fairly? Does it provide employees with a safe work environment? The list goes on and on. Organizations can’t be cursory or inattentive. They need to be genuine, transparent and focused, otherwise they will likely feel the wrath of customer discontent, poor sales or worse yet, being canceled outright.”
An earlier version of this story incorrectly stated that Compass Minerals, in a separate case earlier in the year, was charged with making false statements about its Brazilian mining operations ahead of the deadly collapse of one of its dams.