Your company has an ESG (Environmental, Social, and Governance) mission. It could be as (seemingly) simple as using renewable energy in production, sourcing eco-friendly materials or, more broadly, coming up with a "more sustainable" product—cradle to grave—altogether. You want this ESG focus to be a fundamental aspect of your advertising, part of your corporate or brand identity, or maybe just a way to distinguish your products. And for good reason. McKinsey and NielsenIQ recently found that consumers care about sustainability and ESG claims, with "disproportionate growth" in sales for products advertised with ESG-related claims (28%) versus those without (20%).
To succeed as a company, you not only have to turn those ESG aspirations into reality but also spread the word about your efforts while minimizing the legal risks associated with such advertising. In this article, we introduce you to general principles when advertising so-called "green" claims and provide a high-level discussion of the potential risks of getting it wrong (or not quite right). The same principles broadly apply to any product or service claims, like those based on your company's other social or governance goals and progress.
Basics of Advertising Law
First, always keep in mind these foundational (though not exhaustive) principles of advertising:
- Most public statements you make about the benefits of your products, services, or even your company reputation are considered advertising claims that require what is known as "competent and reliable" evidence or support—this goes for press releases, social media posts, and sometimes corporate earnings and annual reports, and not just what is typically thought of as advertising.
- In the ESG context, these claims may cover a broad range of laudable goals, such as that your company is on its way to becoming "carbon neutral" or "net zero," that your products are made from post-consumer waste, or that your company is committed to sustainable and/or humane farming practices.
- These claims must be truthful, not misleading, and substantiated (i.e., capable of being proven by evidence) when you make them.
- Not only that, but they must remain true for as long as you make the claim. For example, if your "carbon neutral" claim was based on sourcing 100% of your electricity from renewables and you later switched to natural gas or coal—maybe just by going back to the "grid mix" your utility supplies by default—the claim would no longer be true.
- Look at your claims in context and from the consumer's perspective. Your company is responsible for substantiating all reasonable interpretations of the claims you make—express and implied—even if some interpretations may not be what you intended to make.
- If your company does not have evidence that adequately supports all reasonable interpretations of its claims, the claim(s) should be removed or revised so they do.
As noted, claims can be express or implied. They are evaluated in the context of the entire advertisement—for example, words, images, colors, and also explanatory information the absence of which could render a claim misleading. Be cautious about aspirational statements—for example, what you're working toward or hoping to achieve, such as carbon neutrality by 2030. More and more, such aspirational claims require proof of a viable long-term plan, evidence that the "plan" is well underway, and that steps have been taken to ensure its viability. See below for an example from the NAD.
Intro to "Green Claims"
If you're going to make claims about the "E" part of ESG – that is, environmental impacts – the Federal Trade Commission's ("FTC") Guides for the Use of Environmental Marketing Claims (the "Green Guides") is a good place to start. As the name suggests, the Green Guides provide guidance but are not law. They are also rather stale, especially on carbon and climate issues, having last been updated in 2012, but the FTC is currently reviewing them and an updated version is expected in the next year or so. The Green Guides currently address claims such as: "recyclable," "compostable," "non-toxic," made with or uses "renewable energy," and "free-of" claims, among others. If you're going to have your product "certified" to a particular standard (e.g., "certified carbon neutral"), the Green Guides speak to that as well.
In addition, many states have taken regulation of green claims into their own hands. For example, California recently passed laws about use of the claim "recyclable" and the "chasing arrows" symbol (Cal. Pub. Res. Code § 42355.51 (2023); Cal. Bus. & Prof. Code §§ 17580, 17580.5), and Colorado recently passed laws on "compostable" claims (Colo. Rev. Stat. Ann. § 25-17-801). California also recently enacted three significant pieces of climate disclosure legislation: Senate Bill 253 (the Climate Corporate Data Accountability Act), Senate Bill 261 (focused on climate-related financial risk reporting), and Assembly Bill 1305. See here for DWT's summary of the first two; the third (AB 1305) requires substantial disclosures by companies doing business in California in substantiation of many types of climate claims they make, especially (but not only) if based on voluntary carbon offsets.
Why It Matters: Enforcement and Litigation Risks
The "environmental" portion of ESG claims has received lots of attention from the FTC, State Attorneys General, and from the National Advertising Division ("NAD"), a Better Business Bureau National Program which is voluntary self-regulation supported by the FTC, consumer groups, and the class action bar. In addition, as discussed below, the Securities and Exchange Commission ("SEC") and the Commodities Futures Trading Commission ("CFTC") have recently entered this space.
The FTC is the federal agency tasked with protecting consumers "from deceptive or unfair business practices and from unfair methods of competition." It has the authority to initiate enforcement action against companies and individuals engaging in unfair or deceptive practices. The FTC has brought a range of cases based on environmental marketing claims that are helpful to review. Most end in consent orders that outline in detail the FTC's views. Given the FTC's current review of the Green Guides, it is possible the FTC will increase its enforcement in this area—at least for a period of time following its publication of updated guidance.
The NAD has also reviewed a number of green marketing claims as part of its self-monitoring program, where it brings advertising inquiries directly without any competitor's complaint. The NAD has initiated investigations into companies making claims about plastic recycling initiatives and the potential impact of a burrito on carbon emissions, among others.
However, the greater enforcement has been through competitor action and consumer class actions. The NAD has reviewed competitor/watchdog entity challenges to claims about companies' efforts to achieve net zero emissions, biodegradability of products, and a certification for animal welfare claims, among others. Consumer class action plaintiffs are also paying attention. Across the U.S., the plaintiffs' bar has challenged advertising by companies about the recyclability of their products, the carbon emissions of their services, and the "ethical" and "sustainable" sourcing of fur or other materials allegedly used to create various products. Although some cases have been dismissed, others have moved forward or have settled.
The SEC's recent focus on climate-related claims made by registered public companies illustrates that these advertising principles are applicable beyond the voluntary claims a company may make, for example, on social media or its website. Under a rule proposed in early 2022, these companies must disclose their GHG emissions, describe the risks to their business both from climate change and from economic transitions in response, and, if they have publicly disclosed climate targets, also substantiate their plans and progress toward reducing emissions. The SEC will likely issue a final rule in the first half of 2024, though it will surely be challenged.
The CFTC also just published proposed guidance for participants in the voluntary carbon markets ("VCM") to ensure the credibility and stability of voluntary carbon credit derivates markets, which will require significant attention to the quality of the underlying credits. The focus of the proposed guidance is on compliance with commodity market laws and regulations by VCM participants rather than on claims by the end users of credits, but there is much overlap with the issues of substantiating any advertising claim based on voluntary carbon credits or offsets; see our colleagues' analysis for more.
Companies working to decrease the environmental impacts of their businesses rightly want to share the stories of their successes. But as more companies take such action, as consumers increasingly demand it, and as governments around the world take action in this space (e.g., the UK's Task Force on Climate-related Financial Disclosures; the EU's Green Claims Directive), the importance of being careful about how you talk about those efforts and impacts is clear. In the coming weeks, we will dive more deeply into the topics discussed above to help you familiarize yourself with the issues you should be keeping in mind as you craft your claims.