Why businesses should avoid "greenwashing" their ESG claims

Air date: 9/13/23
Record date: 8/23/23

Going green sells. But in an effort to drive profitability, companies can — intentionally or unintentionally — “greenwash” products or services. What is greenwashing? Today we’re talking to Leor Kaplan, Vice President and Management Liability Product Officer for Zurich North America, to learn what greenwashing is and why you should treat this and other ESG topics in the same manner that you do your financial results.

Guest:

Leor Kaplan
Vice President and Management Liability Product Officer 
Zurich North America

Leor Kaplan is the Management Liability and Fiduciary Product Officer for Zurich North America. Prior to joining Zurich, he was a Senior Claims Manager overseeing D&O, E&O and transactional liability claims. Leor has extensive experience in commercial litigation and insurance coverage, with more than fifteen years of experience focused on specialty lines.

Host:

Stephani Gordon
Future of Risk podcast co-host

As part of Zurich's Communications team Stephani Gordon finds and shares stories by asking questions that connect people with ideas to pique curiosity and broaden awareness and create communities. Fondly considered a compassionate interrogator, she has had roles coaching and supporting executive communications for the CEOs of Zurich North America and Zurich Canada, has lead C-suite video production and has connected employees with corporate strategy through storytelling and engagement. Stephani is currently one of the hosts of Zurich North America’s Future of Risk podcast. She unabashedly spends too much time on TikTok in the guise of “anthropological study.”

Episode transcript: 

STEPHANI GORDON: Hi, I'm Stephani Gordon and I'm your cohost today for the Zurich North America Future of Risk podcast. I'm joined by Leor Kaplan, who is Vice President and Management Liability Product Officer in Zurich's Financial Lines business unit. He's working in New York City. So, in recent years, there's been increasing focus on a variety of environmental, social, and corporate governance topics. We usually hear those in the news as ESG. So today we're discussing a topic that really falls under the “E,” or the environmental category of ESG and that's greenwashing. Before we dive into that, Leor, can you provide our listeners with a brief description of ESG, specifically in the context of corporate governance?

LEOR KAPLAN: Yeah, thanks Stephani, happy to. So, ESG refers to a variety of environmental, social and governance topics that corporations consider when making strategic and operational decisions. ESG continues to be an important topic for public companies of all sizes and every industry, as you mentioned, because investors, regulators, and lawyers are actively monitoring board oversight and disclosure of ESG issues. From a D&O perspective — and that's Directors and Officers Liability Insurance — ESG provides a framework through which we can evaluate and consider a company's non-financial metrics and practices. This has become increasingly important because, over the last few years, the Directors’ and Officers’ Liability Insurance industry has observed a shift in claim activity where non-financial or so-called event-driven litigation has increased in both frequency and severity. So, you mentioned corporate governance, Stephani, there's two key aspects of corporate governance that have been and will continue to be impacted by ESG. The first has to do with what a company does: the process that a company and in particular its board of directors puts into place to drive and monitor corporate behavior on any given ESG topic. The second has to do with what a company says, what it communicates to the financial markets. The accuracy and completeness of a company statements concerning ESG topics in the context of its disclosure obligations under the securities laws is a paramount corporate governance concern for all directors and officers of public companies.

GORDON: I appreciate that framework. It's helpful, especially to hear it within that D&O construct because a lot of times when we hear ESG, it's increasingly politicized. So, it's very helpful to have this conversation and to understand the risks from the D&O perspective. Having said that, can you talk about what some of the challenges are that ESG presents both to companies and its senior management?

KAPLAN: Sure. So, the first thing is something you just alluded to, and that is the publicity that ESG has been receiving increasingly over recent years.

GORDON: A lot of scrutiny.

KAPLAN: A lot of scrutiny and with that scrutiny and with those headlines comes what we call headline risk, right? So generally speaking, if their senior management find themselves on the front page of the New York Times or the Wall Street Journal, that may bring with it some D&O exposure. The second has to do with the general business operations of any company. So, the optimal landscape for corporations to operate in has well-defined rules, goals, players and outcomes. The overarching challenge presented by ESG is that it has been continuously evolving and expanding across a variety of different areas simultaneously. So, while the task of managing what a company does and what a company says and all of the obligations and fiduciary duties that come with corporate governance — while that all may seem straightforward and not overly burdensome on its face, it’s certainly not with respect to the company's core operations. When it comes to ESG, directors and officers are in some cases navigating uncharted territory. At the same time, they're trying to manage the day-to-day operations of a large complex business. Just by way of example, Stephani, these are not exaggerations. You know, from an operational standpoint, many commentators believe that over time companies will be expected to incorporate a wide variety of ESG issues into their business planning. Then from a compliance standpoint, companies will likewise be required to disclose information concerning a growing list of ESG topics. We're already seeing this with the new cyber disclosure rules that the SEC recently passed. There is expectation that the SEC will pass rules concerning climate change and greenhouse gases later this year.

GORDON: Right.

KAPLAN: And then finally, just a few weeks ago, the EU adopted sustainability reporting standards. So, to say that it's a shifting and evolving landscape is by no means an exaggeration. That is really the overarching challenge that ESG presents: the optimal situation or landscape is certainty. ESG brings with it some uncertainty and some new issues and topics that directors and officers need to understand and manage.

GORDON: I think it's good to point out that this is an evolving landscape because ESG risks are something that, you know, insurers and other like companies have been looking at for a long time. This isn't new, but the point you're making is that it's evolving.

KAPLAN: It's evolving. What I would say is new about it is the actual terminology, right? The reference to ESG as a framework through which companies, directors and officers and their insurers view non-financial considerations.

GORDON: Right, and I think that's a good segue. We talk about the language. We said we're going to focus today on an environmental aspect of that and that's greenwashing. Again, it's a word that you hear in a lot of headlines, etc. Why don't you go ahead, if you wouldn't mind, and break it down. How do you define that?

KAPLAN: It's a great way to start because there is no clear consensus around what the definition of greenwashing is. Generally, it is understood to be a practice where a company makes misleading statements or engages in deceptive practices that give a false impression of environmental responsibility.

GORDON: Can you give us a couple examples?

KAPLAN: Sure. So, greenwashing is commonly alleged in the context of a marketing campaign or advertising — where a company might communicate a purportedly eco-friendly product or practice in furtherance of its stated commitment to achieve environmental sustainability, when in fact the product of the practice is either ineffective or it's not even present.

GORDON: Why would a company do that? Like, is it as simple as they're being tempted to understate its impact in order to boost profits, for example?

KAPLAN:  Well, that would be one reason. So, it's true that going green sells. There was a recent study where they found that 85% of global consumers said that they considered the environment more when they were shopping than they did just five years prior. And at least a third said they were willing to spend more money for green products.

GORDON: Wow.

KAPLAN: Yeah. So, certainly it is something that corporations, as they're trying to drive profitability, it's something that they should be, and they are considering in the context of their products, their services and their marketing. But, you know, greenwashing may also reflect a lack of oversight or process at the company in terms of its own internal controls. So, what you and I would consider to just be an honest mistake about the true environmental impact of a product or a business practice — and that can arise because of faulty testing, incomplete data, insufficient oversight — these could all, in theory cause a company to misstate its environmental practices or perhaps make unsupported or unverifiable claims about its environmental considerations.

GORDON: So, it could be intentional or unintentional, you know, for a variety of reasons.

KAPLAN: Correct. And then the most extreme examples would be instances where a company is engaging in a practice that is designed to avoid or evade environmental regulation in furtherance of its own profit motive.

GORDON: Which we would refer to in our industry as fraud, right?

KAPLAN: Outright fraud. Correct.

GORDON: So does … I don't think this is what you're saying, but greenwashing doesn't always involve fraud. So, what other situations might someone allege that greenwashing is occurring?

KAPLAN: Yeah, so if we think about it as kind of a scale of culpability. Greenwashing can range anywhere from good faith, but potentially misleading advertising to inaccurate or incomplete disclosures in a company's securities filings or communications to its investors. And then, lastly, like I said, a deliberate program designed to either undermine environmental regulations or avoid scrutiny of a known environmental issue. So, it really does run the full range of potential culpability.

GORDON: You're talking about levels of intention.

KAPLAN: Correct. And the challenge for directors and officers and for their D&O insurers is that in each of these instances, allegations of greenwashing may result in D&O claims. The claims themselves may not require proof or evidence of fraud.

GORDON: Did you want to give an example?

KAPLAN: Yeah, so one example that has come up is in the context of automobile manufacturers who've been sued in connection with fraudulent emissions testing and emissions control system. So, this is an example of one of those extreme situations where, a company is alleged to have engaged in a practice that's designed to mislead regulators and the public at large about its environmental impact. So, in those cases, the companies were alleged to have misled investors by failing to disclose that the company had in fact utilized illegal software to manipulate emissions testing on certain cars. In reality, the vehicles were producing emissions up to 40 times the legal limit and what the software did was allow those cars to pass those tests and kind of conceal the environmental impact that the vehicles were having. While at the same time, the company's marketing was touting its commitment to reducing pollution. So, when the unlawful practice was eventually uncovered, several lawsuits were filed against the company and its directors and officers resulting in billions of dollars of fines and settlements. That scandal has also had a lasting effect on the company's reputation, and in fact, it continues to make headlines, more than eight years after it was exposed. I looked recently, and there's still some trailing issues involving that litigation. Another thing is that this is a good example of how ESG issues that materialize at one company can spread across a broader industry. So, in the years following that first emission scandal, other automobile manufacturers were targeted in litigation arising from similar emissions related issues.

GORDON: Yeah, I remember this story well, and how it reverberated across the news, etc. Yeah, very, very interesting. Do you have a more benign example?

KAPLAN: Yah, so greenwashing is often far less sensational than a multi-billion dollar scandal involving, carbon emissions. So, there have been instances where companies have been called out for using certain imagery such as trees, leaves, water on their product packaging or in their advertisements. And consumer regulators allege that this was improperly suggesting or implying that the products or the company's own practices were environmentally sustainable.

GORDON: So they don't say it, but they just let us assume that by the imagery.

KAPLAN: Correct. In other instances, they do say it, they'll use words like “natural” or “eco-friendly,” and this language is vague and subjective. But it also can give rise to claims of greenwashing. One example was a plastic bottling company that was sued on the grounds that its claims of being environmentally friendly constituted deceptive trade practices. While the company had made many statements in its own self-promotion, touting its green practices, the plaintiff took it to task on those statements because the company's sole packaging product was a plastic bottle, and it had not actually endeavored to use any recyclable materials or other more environmentally friendly materials in its packaging. So again, nothing like the automobile manufacturers, but perhaps more concerning in the sense that these types of greenwashing claims could be more pervasive, right? If you think about any commercial you see on TV or you hear on the radio that alludes to a company that's either striving to be green or environmentally conscious, that could potentially open the door to a claim of greenwashing if there is no data or process to support those claims.

GORDON: So, really they're jumping on the marketing bandwagon because to your point, consumers are increasingly interested and willing to spend with organizations that they feel are demonstrating an environmental consciousness. It's really just because you say it doesn't mean it's true. Right?

KAPLAN: Correct, and that's a great phrase, Stephani. Jumping on the marketing bandwagon because what we saw a few years ago was, you know, a similar litigation trend involving a different ESG topic, diversity, equity and inclusion. Where several companies were targeted in D&O claims alleging that they similarly had made statements to jump on the diversity equity inclusion bandwagon. Yet, their actions or their actual data did not support statements alluding to diversity being a key goal for the company or the company's efforts to achieve workforce or board diversity. And so that is something that companies are going to need to be very mindful of and careful about that it's perhaps not a wise thing to do … to simply jump on a bandwagon when you do not have the data or the support for the statements that you're making.

GORDON: Right, and I think I probably know the answer, but do you get a sense that the greenwashing claims are going to continue to be an area of concern for directors and officers? We talked about the landscape and the evolution of this topic. So, I think you're probably going to say “yes.”

KAPLAN: I am going to say “yes,” and it's really primarily for two reasons. First is, as we started this conversation talking about the shifting landscape, whenever you have new rules, new regulations governing corporate behavior, there's the potential for increased claim activity. That's the first point. The second reason would be that ESG topics, and in particular the items falling under the environmental category, seem to be gaining prominence at a time when the plaintiff's bar has been pursuing novel theories of liability and obtaining larger settlements.

GORDON: Right. We've had other conversations about that landscape as well. Correct?

KAPLAN: Correct. So, as the lawyers test new theories of liability and successfully recover large settlements using those new claim types, you would fully expect those claims and those lawsuits to proliferate across any topic or issue that could support a similar claim. So, I go back again to the DEI litigation trend that we saw whereas you stated they were companies that were jumping on a bandwagon, so to speak, in terms of feeling compelled to make statements touting their commitment to diversity and touting diversity as one of their key objectives. Perhaps not having the support to show that they meant what they said. You know, as plaintiff's lawyers gain success in these other areas of litigation, you would expect them to translate that success over to other areas. In particular, environmental issues and topics such as greenwashing. And again, you're going to have instances where regulators or governmental agencies discover a business practice that is clearly improper or unlawful. That will be problematic and will likely create significant exposure for that company. But then there's also the frequency risk of a claim that can be made arguably against an entire sector or industry because the companies operating in that area have jumped on a bandwagon, so to speak. Whether it be through something as benign as the packaging that they're using for their products or a catchphrase they use in their advertising. So, for those two reasons, I do think we will see an increase in these types of claims for the foreseeable feature.

GORDON: So, to avoid or at least mitigate some of the risk when a company's talking about its sustainability efforts so that they aren't perceived as greenwashing —which is a risk both from a reputational perspective and also from a regulatory perspective — what are some best practices that you could advise companies to consider?

KAPLAN: Yeah, so the first step is really just to acknowledge the risks that currently exist and make sure that directors and officers, their risk managers, their counsel, their D & O insurers are well-educated, well-informed on these areas. Because whatever we feel about the merit behind these claims, the fact is that these claims are here. We anticipate they will be here for the foreseeable future. And so, acknowledging that and appreciating the, the potential litigation severity that they represent is the first step. And so, I think it's important for every company to appreciate the complexity of these issues and understand just how sophisticated and strategic the plaintiff's bar has become when it comes to ESG topics. So don't, you know…

GORDON: Don't think it can't happen to you.

KAPLAN: Don't think it can't happen to you. In fact, assume that if the plaintiff's lawyers are successful against one company, they will, if possible, attempt to replicate that success across as broad a universe of corporate targets as possible.

GORDON: Like the auto industry example that you gave.

KAPLAN: Correct. Yeah, we saw several companies become ensnared in similar regulatory investigations and litigation following that first discovery. The next thing I would say is that it is important for companies to ensure that they have an effective process in place to identify areas within the company that might give rise to greenwashing concerns. So, we've talked about advertising and marketing and also, you know, regulatory risk, right? So, if you are a company that produces widgets that have greenhouse gas emissions, if you are producing any sort of product for consumers where the consumers might be swayed by marketing that alludes to environmentally conscious or green practices, it's important to identify those risks. Once you do identify those risks, the last step is to make sure that you've developed and implemented a process to manage and monitor and hopefully mitigate any risk that could come about because of the potential for a greenwashing claim.

GORDON: Would it be fair to summarize that as, “Do what you say. Say what you do. Tell the  truth?”

KAPLAN: That’s it exactly. Only say it if you mean it. Only say it if you have a justification and a basis for saying it. Effectively learn to treat the ESG topics that we've talked about today and that are in the press and on the front page of the news periodicals. Learn to treat those in the same manner and with the same appreciation that you do your financial results.

GORDON: Right. To be respectful, I think of the topics because they have been … the subjects have been weaponized to a great degree. But they're the core foundations of a healthy business and of being a healthy risk, right?

KAPLAN: Right. It also goes back, Stephani, to what we're seeing across the broader directors and officers landscape — risk landscape — that is today where we are seeing a shift from claim activity, both frequency and severity shifting from financial-related matters to non-financial or event-driven matters. Those event-driven matters tend to fall within one of the three ESG categories and one of the reasons why we're seeing that shift is perhaps precisely what you just mentioned: that many companies, many senior managers, have not historically viewed ESG or non-financial topics with the same care, diligence and scrutiny as they had financial metrics. Now with the onset of ESG regulation, litigation and claim exposure as we have already seen, I think that's exactly right. It's important to understand the landscape on which you are trying to manage your business. The fact is that today's landscape presents a much wider variety of issues and challenges than we had perhaps even 10, 20 years ago.

GORDON: I'm curious, do you think some of this shift is generational? You know, new generations are entering business and maybe they have different priorities or they have a higher level of awareness of the impact that these topics can have on successfully running a business? Or is it something else? What do you think?

KAPLAN: I do think that is part of the story. I do think that we're seeing a shift from what we would have considered as pure stakeholder capitalism — where companies were focused primarily, if not exclusively, on maximizing value for shareholders — to now pressure across a wide variety of governmental agencies, public policy offices where companies are being urged to consider much more than just financial success. The other shift I think that we're seeing is enhanced financial capabilities within companies and in particular public companies where we are seeing a sharp decline in restatements or revisions of financial information, where companies have engaged in very diligent and effective accounting practices. As a result, you're seeing a decrease in financial issues and consequently financial claims. And yet we still have, you know, the same plaintiff's bar and the same regulatory regime governing and monitoring these corporate practices. And so, with the improvement in financial best practices, you've seen some of those constituents focus on non-financial issues. So that is where I think we're seeing more novel, unique, creative claims, new theories of liability. And, to your point, in some instances where there is found to be highly questionable corporate behavior, you do see very large settlements and recoveries. Or from a regulatory standpoint, fines and penalties.

GORDON: It almost sounds or feels like maybe an increased awareness of the impact that companies, especially large companies, can have on society, the environment, etc., that goes beyond its financial footprint.

KAPLAN: Correct. [It] goes beyond, and in some instances can actually impact the company's financial stature. So, you could have an incident or an event in connection with either the company itself, its facility, its employees that causes the company financial harm, right? [It] causes the company to undergo additional regulatory burdens to be subjected to fines or penalties, or even to have to undertake a significant improvement and investment in some of its business practices to mitigate or avoid having similar incidents occur in the future.

GORDON: So, to your point again, to bring it full circle of why it's so important that companies are thinking about this, that they're aware of it, that they're looking internally at their own practice, that they're thinking hard about the integrity of their marketing, etc., right?

KAPLAN: Correct. So, it's important to apply the same level of scrutiny and diligence that we do to our financial controls and metrics to other topics that would fall under the ESG umbrella, right? Environmental, social and governance issues are now of paramount concern for every company.

GORDON: Very good. Leor, thank you so much for the conversation. I really appreciate it. I personally feel like I have a much better understanding of the topic, and I appreciate the depth that you've gone into this with us. So, thank you.

KAPLAN: Yeah. My pleasure, Stephani, thanks for having me.

GORDON: And to our listeners, thanks for tuning in to Zurich's Future of Risk podcast. We hope you've gotten something valuable you can take away from the conversation today, and we look forward to bringing you more content in the future.