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Understanding Greenwashing

Picture of Kate Granville Smith
By Kate Granville Smith Suzanne Padmore Victoria Barnes Brandon Wong
4 Mar 2025 15 min read
Green paintbrush covered in paint

Greenwashing, the practice of disseminating disinformation to present an environmentally responsible image, has become a significant concern for pension trustees. This report delves into the concept of greenwashing, it’s impact on credibility, and the legal risks associated with it, providing a comprehensive analysis for pension trustees.

In this article, we explore the concept of greenwashing and its relevance to trustees, looking at the potential impact on credibility, the legal risks and how to manage these effectively.

What is greenwashing?

There is no universally accepted definition of ‘greenwashing’ or one enshrined in law and various jurisdictions define it in different ways. In 1999, the Concise Oxford English Dictionary defined greenwashing as “disinformation disseminated by an organisation so as to present an environmentally responsible public image” and so although greenwashing can sometimes feel like a relatively new idea, it has actually been around as a concept – in a form which we think is still meaningful – for quite some time.

The term itself is believed to have first been coined by environmentalist Jay Westerveld in 1986 after he noted the irony of a Fijian hotel asking guests to reuse their towels to protect the island’s ecosystem when it was itself in the middle of an expansion project. So essentially, greenwashing comes down to a misrepresentation of environmental claims which can lead to reputational risk and potentially even litigation or regulatory enforcement.

It is important to remember that greenwashing extends to beyond what you expressly say. It is a broad concept that can include any of the following, but this is not an exhaustive list:

  • cherry picking examples or situations so as not to provide a holistic picture;
  • providing aspirational journey claims without a supporting method;
  • misusing the word ‘sustainable’;
  • using imagery which gives a false impression of environmental friendliness.

There have been some high-profile allegations of greenwashing in the pension sector in the press lately. For example, in 2023 it was found that over 160 pension funds had investments of more than $4.6 billion in fossil fuels majors despite having a green label or claiming to invest in a low carbon economy.

Impact on credibility

A consequence of greenwashing, and especially high-profile examples like the above, in the context of pension schemes, is that it undermines the credibility of environmental, social, and governance (ESG) investing. The Association of Investment Companies reported in October 2023 that ESG investing was declining in popularity as fears of greenwashing grew.

In a 2021 survey, 48% of respondents agreed with the statement “I’m not convinced by ESG claims from funds”. This figure rose to 58% in 2022 and 63% in 2023.

It is, therefore, important to ensure reliable and robust information is provided so that receivers of this information have confidence in their investment choices.

The changing landscape

Greenwashing (and more recently, climatewashing) has become a buzz word in the pensions industry and the wider financial services sector. As a law firm, we help clients across different sectors with their disclosures, environmental claims and on how to manage risks. As a result, we have been able to witness a rise in prominence of greenwashing related concerns.

We have seen that consumers, regulators and highly motivated and organised NGOs are decision-making and calling out dubious environmental claims. This means that companies and organisations are now facing a range of challenges that flow from a greenwashing accusation or action including litigation, regulatory scrutiny and enforcement and the associated reputational risks.

Dr Daniel Summerfield, Director of ESG and UK Client Services for Pomerantz LLP comments that “we are seeing a notable increase in the number of lawsuits being filed around the world which are centred around allegations of greenwashing and climate-washing. As a result of the ever-changing political and regulatory contexts, this trend will continue unless and until regulators agree on the standards expected of companies in disclosing their corporate climate commitments. Pension funds and investors will also need to assess their reporting carefully with an increase in legal and regulatory actions against them as their commitments, actions and disclosures are, in turn, now subject to greater scrutiny.”

So why is this area of interest to pension trustees?

Trustees are particularly vulnerable to greenwashing risks. This is partly because of the reporting requirements, such as those related to the Task Force on Climate-related Financial Disclosures (TCFD).

It is against this increased reporting and enhanced regulatory landscape that there is increased scrutiny in relation to what is being said and a growing interest can be observed from climate action groups and members in this area. This highlights the importance of accurate and transparent reporting. It is notable that AI can facilitate the scrutiny of reports and statements, making it easier to identify potential discrepancies.

An increased focus on greenwashing and ESG disclosures is consistent with wider regulatory developments in the UK, including measures recently introduced by the FCA such as the anti-greenwashing rule and the Sustainability Disclosure Requirements (which introduce sustainable investment labels for investment funds as well as additional disclosure obligations).

However, trustees also need to be alive to the possibility of greenwashing in the information they themselves are receiving. Trustees may rely on such information in making their own disclosures and as such they should ensure that they are equipped to deal with this issue themselves as receivers of information.

The Pensions Regulator acknowledges the challenges that trustees face and has commented that:

“Integrating climate change into trustee plans and decision-making structures will pose new and interesting challenges. The world of green finance is moving incredibly quickly and debates around divestment versus engagement, greenwashing, standards and metrics are real and complex. Savers are increasingly showing that they too are interested in understanding where their pension savings are being invested and the impact of these investments.”

Climate Change Strategy, 7 April 2021, The Pensions Regulator

Caroline Hopper, Lead Consultant at communications consultancy Quietroom has seen this interest from savers grow over time:

“We see consistently that, once members understand their pension savings are invested, they want to know more about the companies they’re investing in. They tend to ask for specific examples of investments – and are particularly interested in examples local to them. Showing the positive impact their investments have can help make members feel more positive about their pension scheme. The challenge here though is to avoid cherry-picking examples – it’s important to put them in context, showing that they are part of a much wider portfolio.”

Caroline Hopper, Lead Consultant, Quietroom

White plastic bottle being painted green

Greenwashing poses significant legal risks and liabilities for trustees. The trend to tackle greenwashing is growing worldwide, but the specifics of liability or risk can vary greatly depending on the jurisdiction and the particular facts of each case. Whether a case proceeds to enforcement or litigation will depend on its merits as well as the particular law in that jurisdiction.

Where there may be greenwashing, the person who has received the information will need to have an underlying cause of action. This might take the shape of one of the following:

1. Regulatory breaches

An example of this could be a breach of the FCA’s anti-greenwashing rule which came into force on 31 March 2024. The rule requires all FCA authorised firms to ensure that sustainability references of a product or service are fair, clear and not misleading and capable of being substantiated. In addition, they must be presented in a way which is understandable and complete and any comparisons to other products or services must be fair and meaningful. Breaches of these rules expose the FCA-regulated firm to potential action by the FCA2. This may be relevant to trustees that deal with FCA-regulated firms subject to these rules or that invest in ESG products and as a consequence, receive sustainability-related information related to their investment.

2. Breach of statute

In other situations, greenwashing could result in a breach of statute. For example, in an Australian case involving Active Super, the court found that the corporate trustee had contravened Australian law by making misleading representations about its ESG credentials.

Active Super was found to have invested (directly and indirectly) in various securities that it had claimed were eliminated or restricted as they posed a risk to the environment and community. The court rejected the Trustee’s claims that an ordinary or reasonable consumer would draw a distinction between holding shares in a company and indirect exposures through a pooled fund.

In the UK there is a risk of shareholder securities litigation under section 90 and 90A of the Financial Services and Markets Act 2000 which allow claims against UK-listed companies which publish misleading material. We have seen incidences of ESG related shareholder-type litigation by pension scheme members and bodies such as the PPF, who wish to hold companies accountable for their actions to meet commitments regarding climate change.

3. Other cause of actions including misrepresentation, breach of contract and breach of fiduciary duties

For example, a misrepresentation claim would require proof that there was a misrepresentation, it was relied upon, and it caused a loss and is very fact specific. There could be a difference between the effect of greenwashing in relation to defined benefit and defined contribution schemes since there is potential for a misrepresentation to affect a member’s DC account where they act in reliance of a statement.

Of course, even if there is no legal basis for a claim, those on the receiving end of a complaint will want to avoid reputational risk and will need to respond to and manage even unmeritorious claims.

White plastic bottle being painted green

Greenwashing poses significant legal risks and liabilities for trustees. The trend to tackle greenwashing is growing worldwide, but the specifics of liability or risk can vary greatly depending on the jurisdiction and the particular facts of each case. Whether a case proceeds to enforcement or litigation will depend on its merits as well as the particular law in that jurisdiction.

Where there may be greenwashing, the person who has received the information will need to have an underlying cause of action. This might take the shape of one of the following:

1. Regulatory breaches

An example of this could be a breach of the FCA’s anti-greenwashing rule which came into force on 31 March 2024. The rule requires all FCA authorised firms to ensure that sustainability references of a product or service are fair, clear and not misleading and capable of being substantiated. In addition, they must be presented in a way which is understandable and complete and any comparisons to other products or services must be fair and meaningful. Breaches of these rules expose the FCA-regulated firm to potential action by the FCA2. This may be relevant to trustees that deal with FCA-regulated firms subject to these rules or that invest in ESG products and as a consequence, receive sustainability-related information related to their investment.

2. Breach of statute

In other situations, greenwashing could result in a breach of statute. For example, in an Australian case involving Active Super, the court found that the corporate trustee had contravened Australian law by making misleading representations about its ESG credentials.

Active Super was found to have invested (directly and indirectly) in various securities that it had claimed were eliminated or restricted as they posed a risk to the environment and community. The court rejected the Trustee’s claims that an ordinary or reasonable consumer would draw a distinction between holding shares in a company and indirect exposures through a pooled fund.

In the UK there is a risk of shareholder securities litigation under section 90 and 90A of the Financial Services and Markets Act 2000 which allow claims against UK-listed companies which publish misleading material. We have seen incidences of ESG related shareholder-type litigation by pension scheme members and bodies such as the PPF, who wish to hold companies accountable for their actions to meet commitments regarding climate change.

3. Other cause of actions including misrepresentation, breach of contract and breach of fiduciary duties

For example, a misrepresentation claim would require proof that there was a misrepresentation, it was relied upon, and it caused a loss and is very fact specific. There could be a difference between the effect of greenwashing in relation to defined benefit and defined contribution schemes since there is potential for a misrepresentation to affect a member’s DC account where they act in reliance of a statement.

Of course, even if there is no legal basis for a claim, those on the receiving end of a complaint will want to avoid reputational risk and will need to respond to and manage even unmeritorious claims.

How can trustees manage these risks?

Trustees must remain vigilant to the potential for greenwashing in both the information they receive and the information they disseminate. It is crucial that they comprehend the significance of performing due diligence in their investment decision-making processes.

Making public statements

Trustees can manage these risks by ensuring that their public statements concerning ESG matters:

• are clear and unambiguous;
• are not misleading or overstated;
• can be independently verified and corroborated by underlying evidence; and
• are consistent with applicable disclosure requirements

If members do challenge the information that trustees have published, the key thing is to ensure that there is an audit trail for advice. Trustees aren’t expected to be climate or investment experts, and can reasonably rely on advisers, but trustees should also have the necessary knowledge and understanding to be able to challenge advisers.

The Pensions Regulator’s guidance outlines a step-by-step example of following the climate change guidance which includes a suggestion for trustee introductory training to cover greenwashing and how it might be identified and addressed in service providers and investment products.

Data quality

When preparing TCFD reports, schemes that are in scope (broadly schemes with assets of £1bn or more) will need to be able to access and rely on underlying ESG data and analysis produced by corporates, assets managers and investment consultants. The quality of that data will be crucial to the trustees’ disclosures on the environmental impact of their fund’s portfolio. Trustees should therefore consider their contractual terms with their fund managers, how they are monitored and how they report.

FCA examples of greenwashing and best practice

The FCA has given examples of claims which could be considered greenwashing5. One such example is where, in the promotions for a fund, investment managers claim that all investments are reviewed for their sustainability characteristics, whereas in reality the investments are not systematically reviewed or factored into investment manager decisions. Trustees may want to request and obtain evidence to substantiate any claims and show how these are factored into the manager’s decision-making process.

Conversely, an example of best practice would be where a firm advertises a fund which makes social sustainability claims, including statements that it invests in companies that have good labour practices in line with international best practice. The fund manager establishes clear and robust standards for selecting investee companies and assesses and monitors the investments that it has selected. They also seek to address any issues that arise through appropriate escalation.

TPR comments

The Pensions Regulator has acknowledged that there are concerns about the availability and quality of data, effective modelling or outcomes, the implementation risks of greenwashing and the potential for greenhushing. It says that although these are legitimate concerns, they shouldn’t be a barrier to trustees meeting their legal duties or an excuse to put things in the ‘too difficult to do’ box.

In The Pensions Regulator Pathway to Net Zero Report March 2024 it said about its own disclosures:

“There is a difficult balance to be struck in communicating alignment to national and international sustainability strategy. We do not wish to be greenwashing and making bold claims relating to our positive impact on the environment that are without basis. Similarly, we do not wish to be ‘greenhushing’ saying nothing on important issues relating to environmental sustainability for fear of criticism. We have therefore sought to be as forthright as possible, outlining both what we believe is appropriate and where our limitations lie.”

Pathway to Net Zero report, March 2024, The Pensions Regulator

It will be interesting to follow legal and regulatory developments in this area, but we might expect enforcement and regulatory action to continue to rise generally across sectors. In addition, it is likely that the risk of litigation will remain.

Some commentators have suggested that “greenhushing” will be adopted in response to the litigation risks arising from greenwashing claims. Greenhushing is where entities choose not to promote their ESG policies to avoid scrutiny. However, increased mandatory reporting obligations are likely to limit the space for greenhushing. Equally, as disclosure requirements become more rigorous, the quality of ESG reporting should improve and, in turn, diminish the risk of greenwashing.

Conclusion

Greenwashing poses significant risks to trustees, including legal, regulatory, and reputational challenges. By understanding these risks and implementing robust management strategies, trustees can navigate the complexities of ESG reporting and maintain the trust of their stakeholders.

Burges Salmon is well placed to advise on all issues relating to ESG reporting and investing. Please do get in touch with Kate Granville Smith or your usual Burges Salmon contact if you have any questions or you would like to discuss anything further.

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