A few years ago, Dutch airline KLM ran an ad campaign entitled “fly responsibly” that quickly drew the ire of climate activists.
The buzzy ads promised that customers could embark on “carbon neutral” flights by buying into a carbon offset program. KLM said it would use the funds to reforest vulnerable lands and purchase sustainable biofuel.
That strategy — advertising that an airline will plant trees after its customers fly — seems like a great way to assuage the guilt of frequent fliers. So KLM confidently told consumers things like: “Be a hero, fly CO2ZERO,” or “CO2 neutral: KLM compensates for the CO2 emissions of your KLM Holidays flight.”
Now, the airline is in court fighting allegations that it misled consumers and made fraudulent statements.
A group of environmentalists sued KLM in May 2022 after Dutch regulators said parts of the ad campaign constituted misleading advertising. The Dutch Advertising Code Committee essentially said KLM’s reforestation program was nice, but that reasonable minds differ on whether it is possible to completely zero out passengers’ carbon emissions.
The plaintiffs argue that aviation can never be environmentally sustainable without a reduction in flight volume and that KLM’s claims amounted to greenwashing.
“The absolute environmental claims of ‘CO2-neutrality’ and ‘CO2ZERO’ must be accompanied by sound, independent, verifiable, and generally recognized evidence that in practice there is also guaranteed full compensation,” the plaintiffs said in a statement.
KLM has since scrapped the ads, and it has tried to argue that the environmentalists lack standing to sue. But a Dutch court ruled last summer that the case must continue, meaning that KLM will have to fully defend its campaign in court.
KLM is not alone. Other airlines like Delta, Ryanair, Etihad, and Lufthansa have faced greenwashing inquiries or allegations in recent years. So have companies like Shell, H&M, and Coca-Cola. As companies increasingly tout their corporate sustainability practices, consumers and investors are scrutinizing these disclosures line by line and responding strongly to what they see. But they’re not reacting in the way that corporations had hoped: They are responding with litigation.
The plaintiffs’ bar is enthusiastically pursuing greenwashing litigation. So much so that at least one country — Australia — is trying to enact a temporary ban on corporate greenwashing litigation so companies can feel free to make full climate disclosures.
In July Australian companies will have to start reporting their climate-related risks in their financial disclosures, and Australia’s Treasury is reportedly concerned that multinationals will water down those reports to stave off potential greenwashing claims. As a result, it wants to implement a three-year ban on certain kinds of greenwashing litigation, according to the Australian Broadcasting Corporation.
Meanwhile, regulators around the world are filing more and more greenwashing actions targeting both environmental and ethical claims, according to the Financial Times. Increasingly, the concept of greenwashing is expanding beyond environmental claims to cover corporate sustainability issues more broadly. This raises questions about whether reporting topics like taxation could potentially inspire greenwashing litigation in the future.
What Is Greenwashing?
The term “greenwashing” is widely used, but ill-defined. The word first appeared in the mid-1980s, and at the time, it solely applied to environmental concerns.
Here’s a definition that appears in the Encyclopedia of Corporate Social Responsibility:
Greenwashing refers to the practice of falsely promoting an organization’s environmental efforts or spending more resources to promote the organization as green than are spent to actually engage in environmentally sound practices. Thus greenwashing is the dissemination of false or deceptive information regarding an organization’s environmental strategies, goals, motivations, and actions.
In the nearly 40 years since the term “greenwashing” was coined, the concept has expanded beyond environmentalism to include general sustainability claims. For example, the Corporate Finance Institute defines greenwashing as follows:
Greenwashing is when the management team within an organization makes false, unsubstantiated, or outright misleading statements or claims about the sustainability of a product or a service, or even about business operations more broadly.
And the three European supervisory authorities, which oversee banking, securities, and insurance and occupational pensions within the EU, created a common understanding of greenwashing in their 2023 “Progress Report on Greenwashing”:
A practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product, or financial services. This practice may be misleading to consumers, investors, or other market participants.
This definition, like the one offered by the Corporate Finance Institute, extends greenwashing beyond purely environmental claims. However, there are some differences. In a client alert, lawyers at Macfarlanes LLP pointed out that the European supervisory authorities’ definition covers both intentional and unintentional conduct. Meanwhile, the Corporate Finance Institute’s definition seems to only apply to intentional conduct.
Adding to the complexity, no government in the world has created a legal definition of greenwashing, meaning regulators and other enforcement authorities are relying on their own understanding of greenwashing to evaluate companies’ sustainability claims.
That has not stopped consumers and regulators from filing an increasing number of greenwashing claims in several countries. What does greenwashing litigation look like? It largely revolves around consumer protection claims, both in the United States and abroad. However, some agencies like the U.S. SEC are expanding that scope.
SEC Task Force
In March 2021 the SEC announced that it had launched a special enforcement task force dedicated to environmental, social, and governance (ESG) matters. That group, the Climate and ESG Task Force, was created in response to investors’ growing attention to climate and ESG-related disclosures. At the time, the SEC said the task force would initially focus on two things. First, it would investigate material gaps or misstatements in issuers’ disclosures of climate risks. Second, it would analyze any disclosure or compliance issues stemming from the ESG strategies adopted by investment advisers and funds.
The SEC encouraged the public to send whistleblower complaints, tips, and referrals on any potential violations and established a pipeline for doing so.
Since then, the SEC has made some headway in pursuing ESG-related matters. Its first case involved Brazilian mining company Vale S.A., which agreed to pay a $55.9 million settlement to the SEC in March 2023 after the agency charged it with making “false and misleading” claims about its dam safety. Vale came within the SEC’s crosshairs after a company dam collapsed in Brazil and released 12 million cubic tons of mining waste, killing 270 people. In its complaint, the SEC homed in on public disclosures and statements that the company and its executives made asserting that Vale rigorously complied with regulatory requirements and followed the strictest international safety requirements. The reality was that several company dams — including the one that collapsed — did not meet international safety standards. They were fragile, and the company knew this after conducting field tests, according to the SEC. Instead of remedying the situation, the company obtained fraudulent stability declarations.
“Vale’s concealment of the true condition of the Brumadinho and other tailings dams caused Vale’s sustainability reports, periodic filings, and other [ESG] disclosures to be materially false and misleading,” the SEC said.
The SEC cited a few incidents in which false or misleading statements occurred. For example, Vale’s CEO told investors in a 2018 meeting that the company’s dams were of “impressive” quality. That same year, the CEO told a publication that the dams were “impeccable.” In its sustainability report issued around the same time, the company asserted that its dams were safe, and it said the same in an ESG webinar.
Why might this matter for tax? The Vale case shows that the SEC will leave few stones unturned in its investigations. Statements made in public interviews, securities filings, websites, ESG reports, and other forums are fair game, provided they are relevant to the investigation at hand.
Another case filed by the task force involved a health insurance company that allegedly made false representations about the compliance standards it required of its distributors. The company — then known as Health Insurance Innovations — and its CEO allegedly told investors that it held its distributors to high standards that prohibited them from communicating misrepresentations to customers. In reality, some of its distributors failed to meet Health Insurance Innovations’ compliance standards, but the company continued to use them.
The SEC alleged that Health Insurance Innovations made its misleading statements in SEC reports, press releases, and investor communications, including earnings calls. It also alleged that the company’s CEO shared misleading information with research analysts and a subscription news service. The parties ultimately resolved the case after the company agreed to pay an $11 million penalty and its CEO agreed to pay a $1 million penalty.
Here, too, the Health Insurance Innovations case highlights the SEC’s willingness to evaluate all relevant public disclosures, whether they are formal securities documents or informal news interviews.
Other cases have been brought, but overall, the task force has had a rather slow start. But will the SEC similarly turn its attention to tax-related matters? SEC Chair Gary Gensler has stated that he supports enhanced tax disclosures, signaling that the agency has an increasing interest in companies’ tax data.
Could This Arise in the Tax Context?
Some multinationals are making ESG-related tax disclosures via public country-by-country reports and total tax contribution reports. Companies are also releasing some tax information via country-specific disclosures, like the United Kingdom’s tax strategy reports.
Total tax contribution reports disclose a wide array of multinational tax data; they’re not limited to corporate tax disclosures. For example, PwC maintains a two-part total tax contribution framework for companies to report their taxes borne and report the taxes they collect on behalf of the government.
According to PwC, “taxes borne” include five different bases: profit, people, product, property, and planet (environmental) taxes. Profit taxes include corporate income taxes and withholding taxes on payments to third parties. People taxes include income tax, social welfare taxes, and taxes related to employment. Product taxes include indirect taxes on production, consumption, and sale of goods and services. Property taxes include taxes on the ownership, sale, transfer, or occupation of property.
“Taxes collected” by a company include payments that aren’t traditionally classified as a pure tax, like license fees. But both of these disclosures — taxes borne and taxes collected — are essentially just data disclosures and do not offer any promises about sustainability, at least not the kind that plaintiffs might heavily scrutinize. Over the years, several corporations have used total tax contribution reports as a way to inform the public about their tax activities, including Shell, BBVA, and P&G.
Public CbC tax disclosures could be a bit different. For example, the Global Reporting Initiative’s 207 tax standard asks for a considerable amount of contextualized information that could include sustainability-related claims.
The first part, disclosure 207-1, asks for the organization’s approach to tax, which includes its approach to regulatory compliance and how its tax strategy ties into its overall business and sustainable development strategies.
The second, disclosure 207-2, seeks information about the organization’s tax governance, control, and risk management. This includes its approach to identifying, monitoring, and managing tax risks and an explanation of how its approach to tax is embedded within the organization.
The next disclosure, 207-3, concerns stakeholder engagement and management of tax concerns and asks organizations to describe their approaches to public tax policy advocacy, strategies for engaging with tax authorities, and procedures for addressing feedback.
Then there’s the EU’s public CbC directive, under which companies are expected to share data about their corporate tax payments in the jurisdictions where they do business. However, they are not expected to share any information beyond this pure data, similar to total tax contribution reporting. While companies are encouraged to share additional information contextualizing their public CbC reporting data, it is not mandatory, nor has the EU suggested a framework on how companies can do so.
A key question is whether companies’ tax disclosures might render them vulnerable to greenwashing claims. Remember how Australia’s Treasury is concerned that companies might water down their climate disclosures under the threat of greenwashing litigation? It appears that phenomenon is already happening in a tax context. At least one group of researchers suggests that companies are playing things so safe in their qualitative tax disclosures that they’re not saying much at all. In a working paper, “Tax Strategy Disclosure: A Greenwashing Mandate?” the researchers, which evaluated corporate responses to the United Kingdom’s tax strategy disclosure mandate, say it is difficult for standard setters to ensure that businesses make high-quality and substantive disclosures. This is because qualitative tax strategy reports, which ask for information like attitudes to tax planning and tax risk management, are inherently flexible.
“We find that treated firms — those that must publish a tax strategy report — significantly increase the volume of tax strategy disclosure in their annual reports but also provide more boilerplate statements,” the working paper says. “Disclosure volume and boilerplate increase the most for high public pressure and tax aggressive firms.”
So the bottom line is that tax disclosures, in their current forms, might not provide enough information to trigger greenwashing claims. That said, tax practitioners would be wise to keep the issue in mind, given growing scrutiny on taxation as a sustainability metric.