This morning (29 July 2022), UK fashion retailers are waking up to the news that their product sustainability claims are going to be scrutinised by the Competition and Markets Authority (CMA). Where the claims are found to be misleading ("greenwashing"), they face enforcement action and criminal penalties.
Today's development is significant as it demonstrates the practical implementation of the CMA's Green Claims Code, adding the CMA's regulatory weight to the growing list of greenwashing notifications made by the Advertising Standards Agency. The Green Claims Code, published in 2021, is a CMA code and guidance on avoiding misleading sustainability claims. This enhanced the CMA's policy statement that they would investigate sustainability claims to ensure that consumers could trust the representations that are being made about the environmental and social impact of products.
For many, environmental, social and governance (ESG) has been a dynamic that has lacked regulatory bite and accountability. However, that view, as underlined by the CMA today, is short-sighted. ESG is about the gap between a standard of performance that business feels meets legal requirements and stakeholders' (or society's) expectation of that performance level. We wrote a few years ago about the changing view of the person on the Clapham Omnibus in relation to environmental and social impacts (the standard of care in negligence). We argued that stakeholders will find legal recourse to hold to account performance that falls below the standard of care. When it comes to making sustainability claims about fashion products, this was a legal risk yesterday. Today, it is a legal liability. The better way to view ESG legal risk management is that legal liability is crystallising and will continue to do so at an accelerated pace. Visibility of your exposures, including director and officer liability, and an understanding of how to manage the risk, is central to enterprise value.
Practically then, what does this mean for the fashion industry, or indeed any business making sustainability claims to enhance their market position?
Quite simply, it means that if you make a sustainability statement, you have to be able to legally back it up. However, doing so is no simple task. Businesses that wish to manage this risk would be well advised to identify their claims and commission an external legal review on the efficacy of their substantiation and reasonableness of messaging. This will be a complex process for the fashion industry, as evidence will need to be provided from supply chains and the robustness of certification fully appraised.
Arguably, responsible businesses will have this audit trail already in place but, in the absence of a legal requirement to manage environmental and social risk in the supply chain, will the lack of regulatory bite have discouraged businesses from investing in this level of risk management?
Wait, isn't there talk of new regulation on supply chain due diligence? It becomes law in Germany next year, the UK has Forest Risk Products included in the 2021 Environment Act, the EU is developing a corporate sustainability value chain due diligence law, and other countries are moving in that direction. ESG legal risk today, ESG legal liability tomorrow.