Greenwashing and Litigation
This is the second blog in our series on Ethics in Sustainability. For background on this critical topic for CPAs, please see “Why Professional Ethics are Important in Sustainability Reporting.”
What is "greenwashing"?
“Greenwashing” is the practice of making false, misleading or unsubstantiated claims about the environmental/social benefits of a product, service or company’s operations. Greenwashing can include exaggerating the positive impacts or downplaying the negative ones.
An example of greenwashing can be seen when a company exaggerates its claims in product labeling and advising, such as “Made with 100% recycled material”, “Carbon neutral delivery”, or “Sustainably sourced.”. Greenwashing could also include statements on company websites and voluntary sustainability disclosures. Greenwashing on company websites often involves vague or exaggerated environmental claims, irrelevant or hidden trade-offs, lack of proof, misleading labels, and overstated benefits.
“Greenwashing” in the world of CPAs
CPAs can encounter greenwashing in several ways:
- Assurance Services: CPAs may need to verify the accuracy of environmental claims made in financial statements or sustainability reports.
- Advisory Services: When advising clients on sustainability strategies, CPAs must ensure that the impact of proposed initiatives is accurately represented.
- Compliance Checks: CPAs involved in regulatory compliance must be vigilant about the authenticity of environmental claims to avoid legal repercussions for their clients.
- Investor Relations: CPAs working with investor relations must ensure that all environmental claims are transparent and substantiated to maintain investor trust.
The rise of “greenwashing” regulation and enforcement
Jurisdictions are beginning to enact new laws and regulations on greenwashing, and stakeholders are taking companies to account through litigation.
In Canada, Bill C-59's amendments to the Competition Act mark a significant shift in the legal landscape in Canada by placing the onus on companies to substantiate and support any environmental and social claims. This means the burden of proof lies with the company, not the regulator. Bill C-59 received Royal Assent and became law on June 20, 2024.
From mid-2025, private parties can bring cases directly before the Competition Tribunal. This change increases the risk of regulatory action against greenwashing in Canada and aligns to a global trend toward stricter regulations on sustainability marketing.
In the United States, the Federal Trade Commission’s Green Guides provide a framework for environmental marketing claims, while proposed Securities & Exchange Commission Climate Disclosure Rule aims to mandate climate-related corporate reporting. The SEC’s Climate Disclosure Rule is currently being reviewed by the U.S. Court of Appeals for the Eighth Circuit, and pending resolution of the Rule, the SEC has issued a stay. Existing laws such as the Lanham Act and various state-level regulations (e.g. California’s Environmental Marketing Claims Act) are also being used to address false advertising and greenwashing.
Europe has taken even more stringent steps with the Sustainable Finance Disclosure Regulation and Corporate Sustainability Reporting Directive, both of which are effective, and the proposed Green Claims Directive, all aim to enhance transparency and standardize sustainability reporting.
Greenwashing litigation
Whether intentional or inadvertent, companies who engage in greenwashing can face significant legal risks, including lawsuits from consumers, competitors and regulatory bodies. These lawsuits can result in hefty fines, reputational damage and loss of market share. Two recent greenwashing cases in Canada demonstrate these risks:
- Volkswagen emissions scandal
In 2015, Volkswagen was found to have installed “defeat devices” software designed to cheat emissions tests by making their diesel vehicles appear more environmentally friendly during testing than they were. This software detected when the car was undergoing emissions testing and altered its performance to meet the required standards, while in real-world driving conditions, the vehicles emitted pollutants up to 40 times above the legal limit.
In January 2020, the company pleaded guilty to 60 charges related to the importation of vehicles that violated Canadian emissions standards. As a result, Volkswagen was ordered to pay a record-setting fine of $196.5 million, the largest environmental penalty in Canadian history. Volkswagen also agreed to a settlement of up to $290.5 million to compensate Canadian vehicle owners affected by the scandal. - Keurig Canada misleading claims case
In January 2022, Keurig Canada was fined $3 million for making false claims about the recyclability of its single-use K-Cup pods. The Competition Bureau’s investigation revealed that Keurig’s claims misled consumers into believing the pods were widely recyclable across Canada. However, outside of Quebec and British Columbia, many municipal recycling programs did not accept these pods.
As part of the settlement, Keurig agreed to donate $800,000 to an environmental charity, pay $85,000 to cover investigation costs, and implement corrective measures to prevent future misleading claims. These measures included changing their recyclability claims on packaging and advertising, publishing corrective notices, and enhancing their corporate compliance program to ensure adherence to environmental marketing laws.
Mitigating greenwashing litigation risks
To mitigate the risks of greenwashing litigation, companies should adopt a proactive and transparent approach to their environmental and social claims.
First, ensure all claims are substantiated with robust, verifiable evidence. This includes using internationally recognized standards and methodologies for measuring and reporting sustainability metrics.
Second, maintain comprehensive documentation of all claims and the supporting evidence, as this will be crucial if challenged by regulators or in court.
Third, implement a rigorous internal review process involving legal, compliance, and sustainability experts to vet all marketing materials and public statements. Additionally, stay informed about evolving regulations and best practices in environmental marketing to ensure ongoing compliance.
Finally, engage in regular third-party audits and certifications to provide independent verification of your claims, enhancing credibility and trust with consumers and stakeholders.
How CPAs can help companies combat greenwashing
CPAs have rigorous ethical standards they must adhere to, which positions CPAs to help ensure the accuracy and integrity of environmental and social claims. CPAs can help develop robust internal controls and auditing processes to verify claims and can help provide guidance on adhering to standards and regulations, such as those in Bill C-59. CPAs can identify risks and help provide transparency and accountability reducing litigation risks.
It is crucial for CPAs to actively embrace their expertise to help companies navigate the complex landscape of sustainability reporting and help ensure that companies maintain high standards of honesty and transparency in their sustainability efforts