A scholar analyzes the differences between the American and EU approaches to regulating greenwashing.
Investors are holding companies accountable for their environmental claims. Oatly, an oat-milk company, recently agreed to a $9.3 million settlement with investors who alleged that the company made unsubstantiated sustainability claims about its product’s impact on the climate to inflate its stock price.
The U.S. federal government, however, has struggled to hold company’s similarly accountable for unsubstantiated environmental claims. The U.S. Court of Appeals for the Fifth Circuit recently issued a temporary stay of a Security and Exchange Commission (SEC) final rule requiring companies to disclose their carbon emissions.
How can the federal government better protect investors and consumers from companies misrepresenting their environmental impact? According to one scholar, American regulators should look to Europe.
In a recent paper, Caroline M. Bradley of the University of Miami School of Law compares the European Union’s and the SEC’s approaches to climate disclosures. She observes that the EU integrated its climate disclosure requirements into a broader sustainability framework with the intention of improving the sustainability of business. The SEC, however, created a much more limited climate disclosure rule due to political opposition and institutional barriers, she claims.
Bradley concludes that while neither regime is perfect, the EU system better informs investors and improves business sustainability compared to the SEC’s approach.
Investors increasingly make decisions based on climate and environmental related factors. Ninety-three percent of investors say that the climate will impact the performance of investments over the next two to five years.
In an attempt to attract environmentally conscious investors and consumers, some companies may misrepresent their environmental impact, according to Bradley. Bradley argues that a company may market its “sustainable” products or business operations despite their having a significant impact on the environment—also known as “greenwashing.” For example, plaintiffs brought a private class action against Lululemon for claiming in 2020 that it would reduce carbon emissions by 2025 even though it allegedly has increased its carbon emissions in every year since.
Bradley observes that in response to growing concerns over greenwashing, U.S. and EU regulators have issued regulations designed to improve the accuracy and transparency of companies’ climate-related disclosures: the EU’s Corporate Sustainability Reporting Directive (CSRD) and the SEC’s Climate Disclosure Rule.
Both initiatives require companies to disclose “material” information about a company’s relationship with the environment. Bradley claims, however, that the difference in how the two directives define “material” has a significant affect on the disclosures required under each rule.
The CSRD considers information material and requires its disclosure if it relates to climate change’s affect on a company’s operations or a company’s operations contributions to climate change, according to Bradley. As a result, the CSRD requires a company to report not only likely changes to its operations due to global climate change, Bradley argues, but its own carbon emissions as well.
Bradley refers to the CSRD’s materiality standard as a “double materiality” standard—it considers information about the environment’s affect on a company and a company’s affect on the environment equally material.
Furthermore, Bradley observes that the CSRD requires disclosure of information unrelated to climate change—including social factors, working conditions, and more general environmental degradation.
The SEC rule, on the other hand, focuses on climate change’s impact on a company’s operations, according to Bradley. Although the SEC rule considers climate related risks to a company’s operations material, it gives companies discretion to evaluate the materiality of their own emissions, she claims.
Specifically, the SEC rule would not require a company to disclose its emissions unless the company believed reasonable investors would consider the emissions material, Bradley argues, but it would require a company to disclose how climate-related risks may “affect the registrant’s strategy, business model, and outlook.”
As such, the CSRD requires more broad and relevant environmental disclosures, according to Bradley. She argues that the difference in ambition and effect of the two rules stems from differences in the institutional powers of the EU and SEC and the political hurdles the two institutions face.
For example, Bradley claims that the EU included the CSRD as part of a broader effort to help the financial sector contribute to a greener economy—the Sustainable Finance Disclosure Regulation. Through the Regulation, EU regulators work to promote sustainability initiatives across several sectors, including banking, insurance, and securities, according to Bradley. The SEC, on the other hand, focuses exclusively on securities, she observes.
Furthermore, regulators pushing for corporate disclosures in the US face greater political and legal barriers than their EU counterparts, Bradley argues. The SEC cannot currently enforce its climate-disclosure rule because the Fifth Circuit issued a stay against the rule pending judicial review. Bradley claims that although some climate and industry groups have fought the EU disclosure rule, it has not faced the same sort of legal and political resistance as the SEC rule.
Finally, Bradley argues that the EU gives financial regulators a broader institutional mandate to regulate environmental claims and disclosures than SEC regulators.
Because the EU included the CSDR as part of a broader effort to promote sustainability throughout [?[] the financial sector, EU regulators can focus on a variety of stakeholders when determining whether information is material and requiresdisclosure, according to Bradley. The EU can adopt a “double materiality” standard because its comprehensive framework allows it to focus on businesses and consumers, she claims.
On the other hand, Bradley observes that Congress tasked the SEC with protecting vulnerable investors from misleading financial statements and not with promoting sustainability. The SEC rule succeeds at protecting an investor’s investment because it requires companies to disclose potential future losses from climate change, she argues. The climate disclosure rule does not address other stakeholders, however, such as those concerned with the environment, she argues.
Bradley concludes that the EU’s approach better protects environmentally conscious investors because it requires affirmative disclosures of how companies impact the environment. Ultimately, without better disclosure requirements, American companies can continue to deceive investors about their environmental impacts, Bradley argues.
