Explainer

The Securities and Exchange Commission (SEC) in the United States has fined Keurig Dr Pepper, a beverage company, for greenwashing by claiming coffee pods marketed as ‘K-cups’ could be fully recycled when they couldn’t.

Wake up and smell the regs: regulators are increasingly focusing on greenwashing breaches

What is greenwashing? It sounds like the use of biological washing powder.

Not quite! The term greenwashing refers to a company making misleading or false claims about the environmental impact of its products or services. Some customers may purchase these products even though in reality they are less environmentally friendly or sustainable.

What happened with Keurig Dr Pepper?

Keurig Dr Pepper Inc (KDP), a leading drinks manufacturer in the US claimed its K cups for coffee making machines could be fully recycled. However, from tests in 2015/16, KDP discovered this wasn’t the case as two recycling firms refused to process the pods.

Why did SEC become involved?

KDP declared in its 2019 and 2020 annual reports that “testing with recycling facilities confirmed pods can be effectively recycled,” when this was incorrect. SEC concluded KDP’s statements about the recyclability of its coffee pods were “incomplete” and “inaccurate” and fined KDP $1.5mn.

Are there any lessons learnt from this episode?

There is a need for careful with disclosure as SEC argued KDP made an implicit assertion that the pods ‘would’ be recycled rather than ‘could” be. Given the fine is in relation to annual reports filed over nine years ago, there may be value in conducting an exercise to identify and substantiate any other loosely worded claims before further regulatory sanction.

What is the regulatory position in the United Kingdom?

In April 2024 the Financial Conduct Authority (FCA) released its finalised guidance (FG 24/3) on greenwashing to supplement their policy statement (PS) on Sustainability Disclosure Requirements (SDR) and investment labels (PS23/16).  The objective of the guidance is very to SEC, to ensure “the sustainability characteristics of the product or service, are fair, clear and not misleading.”

What does the FCA mean by “sustainability characteristics”?

The FCA is aware the abbreviation ‘ESG’, environmental, social and governance for sustainability has a wide interpretation but sustainability is not defined either! The FCA interprets “sustainability characteristics” as “environmental or social characteristics.”

Where will the FCA focus?

The regulator will focus on the financial products and supporting disclosure which FCA authorised firms make available to their customers. The FCA has concerns that some firms may be making “misleading or exaggerated sustainability-related claims about their investment products.”

Surely the FCA has numerous rules which covers greenwashing and sustainability?

There are, such as Consumer Duty rules and Conduct of Business Sourcebook (COBS) 4.2 on financial promotions. The FCA admits there is some overlap but “the anti‑greenwashing rule is intended to complement and be consistent with these rules.”

What do firms need to do to comply with the anti-greenwashing rule?

Any claims firm make need to be “factually correct.” In keeping with Advertising Standards Agency (ASA) requirements, firms need to have appropriate evidence to support their claims. The evidence needs to be accurate and valid. For example, in 2015 Volkswagen were fined $4.3B by the United States (US) Environmental Protection Agency for falsifying vehicle emissions to meet US standards, so care should be taken.

Is there anything else firms need to be aware of?

Firms need to ensure the evidence they gather to support a sustainability statement remains relevant for the time those claims are being communicated. This suggests firm need to do periodic checks to confirm any sustainability statements remain valid and act upon new information, unlike KDP.

In terms of firm’s sustainability statements, what does good look like?

Fortuitously the FCA has provided numerous examples of good and bad practice. For example, if a fund manager claims they invested in fossil free fuels stocks and shares but in practice the portfolio was heavily weighted toward the petrochemical industry, this is clearly misleading and bad practice.

Where a fund manager establishes clear standards for selecting investments and has included suitable criteria such as carbon emissions, actively monitors the investments for possible variations and acts upon this would be regarded as good practice.

Is there any other guidance firms should be aware of?

Any communication with customers should be clear and widely understood and avoid generalisations. Care should be taken not to omit or cherry pick information to give a false impression. The FCA is at pains to stress the guidance is principles based and firms must decide how to apply these to their business.