Greenhushing – An emerging D&O liability?

Matt Kuznik, partner at Keoghs LLP, on why greenhushing is an emerging risk for directors and officers.

In recent years, some company directors have adopted a “less is more” approach to publishing environmental, social and governance (ESG) credentials and targets. This is sometimes referred to as “greenhushing”. In this article we discuss whether limiting corporate communications about ESG achievements and strategies could give rise to claims against directors.

Why greenhush?

‘Greenhushing’ does not mean that a company actually decreases its ESG activities – only that it highlights them less. The practice of greenhushing has developed as a response by management boards to certain regulatory and/or litigation trends.

Firstly, directors want to limit exposures to allegations of greenwashing, which refers to the exaggeration of companies’ ESG ‘good deeds’ with the aim of enhancing reputation and therefore favourably influencing financial performance. An obvious example would be an energy company devoting disproportionate website space to renewable energy even though this is only a minor part of their business. The notion of greenwashing has been part of the regulatory and directors and officers (D&O) risk landscape for some time now, and continues to receive particular attention from financial regulators, including the Financial Conduct Authority and Securities and Exchange Commission. For example, the Financial Conduct Authority’s anti-greenwashing rules and guidance came into force as recently as 31 May 2024. Some companies feel that publicising their green credentials simply invites criticism that they are not green enough.

Secondly, greenhushing is driven by opposition to ESG initiatives from some vocal US state legislators and investors, who see companies’ ESG-friendly investments as a means of advancing agendas which they associate with the left of the political spectrum. Perhaps the clearest example is that of the American Airlines (AA) pilot who filed a class-action lawsuit in Texas against his employer. AA allegedly provided investment options for its employees’ retirement savings with certain fund managers and vehicles operating ESG-friendly investments. The pilot’s complaint alleges that this was done “with knowledge of the non-financial investment objectives… and [of] ESG fund shareholder activism to achieve social policy changes rather than maximise risk-adjusted financial returns…” The lawsuit was certified a class action in May this year and has the potential to include up to 100,000 retirement plan members. Its progress is being watched with interest.

Corporate America’s sensitivity to this sort of point is not new. In June 2023 the Wall Street Journal published an article headed ‘Companies quiet diversity and sustainability talk amid culture war boycotts’, which noted that references to green and social initiatives during earnings calls had declined materially over previous quarters.

Some directors have started to see greenhushing as a way to steer a middle course between those stakeholders who believe a wholehearted and well-publicised ESG programme will boost financial performance on the one hand, and stakeholders who see it as having the opposite effect and an inherently political agenda on the other. However, on further analysis, greenhushing might not in fact be a way to ‘have your cake and eat it’ when it comes to ESG communication strategies.

Are greenhushing claims against directors on the horizon?

Opposition to ESG strategies based on concerns about prioritising political agendas over profit seems to be primarily a US phenomenon for now. However, this still makes it a concern for directors of many multinational corporations. It is also fair to say that today’s US D&O exposures have often been tomorrow’s D&O exposures in the rest-of-world market.

As mentioned above, greenhushing is not about actually limiting ESG activities, but downplaying them in public communications. Therefore, trailblazing greenhushing litigants would need to demonstrate that they had suffered a loss as a result of directors’ decisions to limit the publication of ESG credentials or targets. This is unchartered territory.

However, research by Harvard Business School entitled ‘Which corporate ESG news does the market react to?’ analysed the relationship between share price movements and ESG news based on 111,020 observations in relation to 3,126 companies. The study found that share prices react to financially relevant ESG news, with more significant reactions noted in relation to communications about positive ESG developments. This could be the very kind of data litigants might consider as supporting an argument that higher share prices would have been achieved but for directors’ decisions to withhold positive ESG news from the market.

In terms of possible causes of action against greenhushing directors in the UK, section 172 of the Companies Act 2006 comes to mind. This requires directors to act in a way that they consider, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. In doing so, directors must have regard, amongst other matters, to “the need to foster the company's business relationships with suppliers, customers and others” (section 172(1)(c)), “the impact of the company's operations on the community and the environment” (section 172(1)(d)) and “the desirability of the company maintaining a reputation for high standards of business conduct” (section 172(1)(e)). For example, shareholders bringing derivative actions under the Companies Act 2006 might try to argue that withholding information about ESG credentials and targets alienates those suppliers or customers demanding a strong and public ESG position or in fact runs contrary to maintaining a reputation for high standards of business conduct.

The advent of ‘reasonable’ standards in ESG communications?

If greenhushing litigation were to materialise against directors, they would likely argue that they acted reasonably in all circumstances. This, again, would be untrodden ground. The UK’s Chartered Bankers’ Institute has already noted, however, that greenhushing can distort market perceptions of sustainability and hinder customer choice. In what might be tentative first steps towards a “standard of care” for directors in respect of ESG matters, the Institute suggests financial services companies should have a clear understanding of their “green” strategies, communicate these effectively, collaborate with peers about best practices and endorse commercial opportunities that can arise from net-zero investments.

Furthermore, a post by the Harvard Law School Forum on Corporate Governance in 2023 entitled ‘Navigating the current ESG landscape: recommendations for the board and management’ suggests that directors address material ESG issues just like any other important business decision, implying the presence of doubts in that forum about the wisdom of a greenhushing approach.

Conclusion

Setting, implementing and communicating ESG strategies effectively is a challenge for many companies. Against this background, the temptation to greenhush is readily understandable. The risks of greenwashing are relatively well established – but there are also risks to a company underplaying its ESG credentials.

Whether greenhushing could give rise to extensive litigation against companies or directors remains to be seen, but some see the research connecting ESG-related corporate communications with share value as laying the groundwork for civil action from those stakeholders who expect management boards to support strong ESG strategies and communications. Some of these stakeholders can be highly motivated litigants.

Should this develop into a strand of claims against directors, or indeed securities claims where shares are sold on a prospectus which incorporates representations about ESG matters, D&O insurers will need to consider their appetite for this emerging risk.

Matt Kuznik is a partner at Keoghs LLP.