Contributed to the Toronto Star by Conor Chell.
Whether by act or by omission, greenwashing will not be tolerated in Canada.
A new era in environmental, social and governance (ESG) disclosure and regulation is upon us.
With the federal Competition Act (Bill C-59) passing into law, Canadian organizations will now be required to back up their environmental and social claims about products or services with “adequate and proper tests”. Similarly, they must substantiate any claim they make about their business protecting or restoring the environment or mitigating the environmental and ecological causes or effects of climate change (i.e., net-zero or carbon-neutral claims) with an “internationally recognized methodology”.
Those that cannot back up their claims will face stiff penalties. Individuals can be fined up to $750,000 for a first offense and up to $1 million for subsequent orders. Penalties to organizations can be up to $10 million, or an amount three times the value of the benefit derived from the claim, or three per cent of the organization’s global annual gross revenue, whichever is greater. For each subsequent order, the penalty jumps to $15 million.
Greenwashing -- making exaggerated, inaccurate or misleading statements about an organization's environmental or social impact – is not a new phenomenon. But, it’s become much more prevalent and problematic in recent years as the demand for ESG information and the scrutiny of stakeholders have grown. Greenwashing can damage an organization's reputation, erode trust with customers and investors, and now, expose it to legal liabilities and sanctions.
Once broken, integrity and trust are difficult to repair, and can harm a organization’s ability to access future capital.
According to the UN Environment Programme and New York's Columbia University, the number of climate-related lawsuits has more than doubled since 2017 with nearly 2,500 climate-related lawsuits filed globally. That number is expected to rise significantly in the coming years as ESG-related reporting becomes mandatory and anti-greenwashing laws are enacted around the world and here in Canada.
With increasing legal risk, it is important for organizations to ensure they can support the claims they’re making.
Our understanding is that over the coming months, the Canadian government will update its guidance to provide clarity as to when action will be taken under the new provisions of Bill C-59. We also expect the Competition Bureau to review and update its enforcement guidance to ensure transparency for the business and legal communities.
Bill C-59 is not the only law to worry about.
Greenwashing is currently regulated by other various federal and provincial laws and agencies that depending on the requirements ultimately obligate organizations to disclose material information related to ESG factors, including climate change risks, carbon emissions, diversity and inclusion, human rights, and corporate governance.
Proposed new legislation aims to address gaps and inconsistencies in ESG definitions, standards, and disclosure requirements, such as the federal Bill C-372, known as the Fossil Fuel Advertising Act, and Bill S-243 or the Climate-Aligned Finance Act.
The impacts from Bill S-243 alone will reverberate throughout the economy as financial institutions seek to cascade their needs for climate data and improvement down to their vendors and customers.
Given that many organizations will be directly or indirectly impacted by incoming mandatory ESG reporting requirements and by one or more of the incoming anti-greenwashing pieces of legislation, legal risk, and the potential for liability for organizations, organization leaders, and boards of directors is sharply increasing.
The only choice organizations have today is to back up, revise or overhaul their public commitments and communications.
Organizations will be held accountable on how clearly they measure, verify, and communicate ESG performance and impacts. Even historical ESG reports – based on voluntary, not mandated disclosures – could potentially be classified as greenwashing, and need to be looked at against these new regulations.
There are ways organizations can mitigate legal risks.
They will need to assess their ESG disclosures from a legal risk perspective. This includes ensuring that their ESG data, information, targets and goals are credible and verified. ESG targets, goals and ambitions will need to be proven as technically, financially, and operationally feasible.
Organizations also need to identify where they’ve made ESG disclosures or talked about ESG publicly, ranging from websites, investor decks, media interviews, and social media to the less obvious like responses to request for proposals.
They will need to close any gaps in their compliance programs and ensure their internal and external processes and controls can withstand the expected additional legal scrutiny public ESG disclosures will undoubtedly attract.
Taking these steps will help organizations to be duly diligent and protect themselves from charges of greenwashing.
Leaders will emerge not only based on the sustainability claims they make, but rather on their ability to back them up, anticipate concerns, and withstand new waves of scrutiny.
The organizations that can communicate their ESG commitments with confidence and integrity will be well-positioned to navigate this new reality.
Conor Chell is a lawyer, partner and the national leader of ESG Legal Risk and Disclosure for KPMG in Canada.
