“Net zero” is a topic as hot as the climate these days. With so much regulatory attention being placed on it, companies that do not communicate their net zero efforts appropriately or, worse, intentionally make false and misleading claims will face significant legal, financial, and reputational damage. But by following a few core principles, companies can mitigate these risks.

With adoption of the Paris Agreement in 2015, several countries and companies worldwide have committed to limit global warming to 1.5 degrees Celsius. At the United Nations Climate Change Conference (COP26) in 2021, members of the United Nations Framework Convention on Climate Change (UNFCCC) further committed to reaching net zero by 2050.

In the short term, more than 9,000 companies, to date, have joined the Race to Zero, pledging to halve global GHG emissions by 2030, according to the United Nations.

For the private sector, some of the biggest risks lie in making claims about products, services, brands, or business operations that put a company in a more environmentally friendly light than is truly the case, otherwise known as “greenwashing.” This has created tremendous litigation risk for companies.

According to the Grantham Research Institute on Climate Change and the Environment’s “Global trends in climate change litigation: 2023 snapshot,” in the private sector alone, 52 companies faced “climate-washing” litigation in 2023. “Increasingly, these cases focus on claims regarding terms such as ‘net zero,’ ‘climate neutrality,’ and ‘deforestation-free,’” the report stated.

On the opposite end of the spectrum, choosing to remain silent and not publish any environmental claims – a practice referred to as “greenhushing” – will not fly in the eyes of regulators. Thus, understanding what types of net-zero-related claims commonly land companies into trouble is the first step in avoiding common pitfalls.

Common greenwashing practices

Gathering lessons learned from enforcement actions, and as shared in regulatory guidance, common greenwashing practices include:

• Making false or misleading claims;
• Making statements that cannot be supported with evidence, or are based on flawed calculations, or wrongful assumptions;
• Omitting material information about a product, service, or company’s operations; or
• Overly exaggerating environmental benefits or severely underestimating harms.

Specific industry examples of greenwashing practices include fossil fuel companies pledging “net zero” while continuing with new fossil fuel operations or generally engaging in other environmentally destructive activities, such as deforestation, wetland loss, or destruction of other natural ecosystems.

Other examples include participating in lobbying activities against climate change, or making public disclosures about one part of the company’s efforts while excluding information about core products, services, or operations that are not climate-friendly.

Core principles

The core principles discussed below summarize what has been recommended in several guidance documents, including the UN Report, “Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions.”

Do not engage in false and misleading marketing practices. Companies have long had an obligation not to engage in false and misleading marketing practices. However, temptations to make unsubstantiated net-zero claims bring a new level of risk. In simple terms, any environmental claims made in advertising must be justifiable to mitigate greenwashing risk. One general rule of thumb is not to use broad terms or general claims, like “green,” “environmentally friendly,” or “eco-friendly,” unless the company has clear evidence to back up those claims.

For further guidance on ensuring environmental claims comply with consumer protection laws, legal and compliance professionals may find it helpful to review the UK Competition and Markets Authority (CMA) Green Claims Code, which provides companies with specific industry examples and key questions to consider when making environmental claims about products or services. The CMA recently placed the fashion retail sector on notice in an open letter in March 2024, warning fashion retailers to be aware of the environmental claims they make.

Another comparable resource to the CMA Green Claims Code is the U.S. Federal Trade Commission’s “Green Guides.” However, that guidance has not been revised since 2012. While the FTC published a proposed rule to weigh revisions to the Green Guides on issues including “net zero,” “carbon neutral,” and “carbon negative,” no changes have been made to date.

Practice what you preach. Recently, a few companies have faced enforcement actions for publicly stating commitments to achieve net zero, even as they were continuing to increase their production or operations, increasing their carbon footprint. Mitigating this risk begins at a level of good governance, involving a cross-functional effort between the business functions – legal, compliance, risk, sales and marketing, and the business – to ensure that what the company has publicly disclosed aligns with its entire operations lifecycle and supply chain activities.

Get emissions-reduction targets verified and validated. There are many ways for companies to get third-party validation of their net-zero efforts. One trusted verification body is the Science Based Targets initiative (SBTi), whose Corporate Net-Zero Standard provides companies with a framework against which to set science-based net-zero targets in line with the Paris Agreement.

Through an independent Validation Council, the SBTi also assesses and validates targets. To date, approximately 5,500 companies and financial institutions have SBTi-validated science-based targets. According to the SBTi, a company reaches net zero “when it has achieved its long-term science-based target and neutralized any residual emissions.” This requires a monumental feat – slashing emissions by at least 90% by 2050.

Be transparent. Once a company has made a net zero pledge and committed to short- and long-term science-based targets, be transparent and honest about transition plans. Best practice is to show emissions reductions, investments, and expenditures that align with those targets, and report at least annually on progress being made.

Get into alignment. Governance and oversight processes, business and operating procedures, and advocacy efforts – such as lobbying efforts that support climate policies – should all be in alignment. This includes aligning investments with net-zero targets and linking executive compensation to climate action and demonstrated results, as highlighted in the UN report.

Net zero principles for financial services firms

While all the above principles equally apply to the financial services industry, its transition plans vary slightly from those of companies. For example, the UN report recommends that financial institutions “demonstrate alignment to funding and enabling real-world decarbonization (e.g. green taxonomies), and contribute to help to finance net zero goals in developing markets via blended finance and other financial vehicles.”

In the United States, the Department of the Treasury’s “Principles for Net-Zero Financing & Investment” further highlights a voluntary set of principles that “promote consistency and credibility” toward implementing best practices for financial institutions that have made net-zero pledges.

Another initiative is the Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of over 675 financial institutions from 50 jurisdictions working together to reach net zero by 2050. More than 50 U.S. financial institutions will publish net-zero transition plans over the next year, according to the Treasury Department.

Another initiative is the Principles for Responsible Banking (PRB), a framework in which signatory banks have committed to align their activities with the UN Sustainable Development Goals and the Paris Agreement.

Regulatory developments

Beyond voluntary commitments, financial institutions also have several regulatory obligations to follow. Europe and the United Kingdom have been especially active on the regulatory front recently.

For example, the European Commission published a summary report in May assessing the implementation of the Sustainable Finance Disclosure Regulation (SFDR), including its role in combatting greenwashing. The SFDR framework requires financial services firms to disclose at the entity- and product-level how they integrate sustainability risks into their investment decision-making processes.

In another development, the UK Financial Conduct Authority’s (FCA) anti-greenwashing rule took effect on May 31, requiring all FCA-authorized firms that make sustainability-related claims about their products or services to ensure that they are “fair, clear, and not misleading.” The FCA additionally issued finalized guidance to accompany the anti-greenwashing rule.

Conclusion

Although much confusion remains around how to make environmental claims, the core principles that companies must follow to mitigate legal, financial, and reputational risks associated with greenwashing aren’t all that complicated when approached from an ethical standpoint.

Those core principles are: Act with integrity. Don’t lie. Be open, honest, and transparent. Be authentic. Take accountability for the company’s climate-related actions – or non-actions. Back up net-zero pledges with healthy cultural practices, like executive compensation structures that reward sustainable initiatives. Learn from regulatory guidance. Take a page from industry peers who are doing it best, and heed warnings from those who are doing it worst. The road to net zero may be complicated, but following a moral compass should not be.