In headlines, controversies continue concerning company assertions about ESG-related initiatives, as well as recent state and federal regulatory efforts related to those claims. While often framed as a novel risk, “greenwashing” has been a subject of scrutiny for many years, with the FTC targeting “environmental marketing” claims since at least the 1990s. See FTC, Cases Tagged with Environmental Marketing Cases Tagged with Environmental Marketing; see also, e.g., Prepared Statement of the FTC, “It’s Too Easy Being Green: Defining Fair Green Marketing Principles” (June 9, 2009). And rather than a purely domestic issue, greenwashing has taken an international dimension, with the United Nations elaborating on “greenwashing” practices globally, UN, Greenwashing – The Deceptive Tactics Behind Environmental Claims, as well as the EU proposing and passing Regulations and Directives providing more guidance on the topic, such as the Directive to Empower Consumers for the Green Transition and the Green Claims Directive.
Domestic and global insurers, in turn, face exposure to their own policyholders’ costs and liabilities for ESG-related claims. See, e.g., Kennedys, Legal Focus: Greenwashing is a Growing Risk for Insurers (July 19, 2023). Particularly, such claims are an acute risk for companies in the food, drug, and cosmetic space, given their sale of products that consumers ingest or apply to themselves. See, e.g., FTC Press Release, Truly Organic? The FTC Says No (Sept. 19, 2019); U.S. FDA, Key Legal Concepts for Cosmetics Industry. From resource procurement, to farming and manufacturing, to shipping logistics, to marketing, to regulatory compliance, the life cycle of a product can be complex and full of pitfalls, simply from how companies describe that cycle to the public.
As a recent example of regulatory efforts, the U.S. Department of Agriculture has announced guidelines to “strengthen the documentation that supports animal-raising or environment-related claims on meat or poultry product labeling.” USDA Press Release No. 0164.24Those guidelines identify examples of agricultural greenwashing, including claims related to animal welfare, breeds, diet, living or raising conditions, negative antibiotic or hormone use, source and traceability, and organic compliance. FSIS Guideline on Substantiating Animal-Raising or Environment-Related Labeling Claims, FSIS-GD-2024-0006 (Aug. 2024) And while such claims may be vetted as part of a regulatory review process, or further verified by inspectors, the agency encourages third-party certification initiatives to avoid the reputational harm from greenwashing allegations and to prevent consumer harm.
Given the influx of controversies, claims, and regulatory efforts, companies should ensure that their risk management and insurance programs are aligned to thoughtfully meet those risks—particularly, insurance with personal and advertising injury (CGL), management liability (D&O), product-recall, and even cyber/media-liability coverages. As part of that process, policyholders should check whether their existing insurance contains any ESG-specific coverage grants or limitations, and then seek adjustments (as necessary) with the help of a broker at renewal. Proactively raising and addressing these issues may help prevent disputes, coverage gaps, and other risks, including the possibility of insurers using the nondisclosure of certain ESG-related risks to deny coverage in the future after a claim arises.
If adequate insurance is not reasonably available, and the risk to a specific company is material, then that reality should inform internal deliberations on ESG issues. Deloitte, Identifying and Mitigating Greenwashing Risk: Considerations for Insurance Firms (Jan. 8, 2024) (reporting plans to restrict insurance for certain industries with heightened ESG risk, such as carbon-intensive industries). Processes to consider, decide, and continually assess that ESG risk, including the possibility of risk transfer through insurance, are the only way to properly factor such risks as part of an effective risk-management program.
