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Navigating ESG Compliance: Avoiding the Legal and Financial Pitfalls of Greenwashing
Environmental, Social, and Governance (ESG) considerations are no longer just a corporate responsibility; they are a business imperative. Investors, regulators, and consumers are increasingly scrutinizing ESG claims, and businesses that misrepresent their sustainability efforts—whether by exaggeration (greenwashing) or excessive silence (greenhushing)—face legal, financial, and reputational risks.
The Global Crackdown on Greenwashing
Regulators worldwide are intensifying efforts to combat misleading ESG claims. In Europe, litigation has resulted in the removal of misleading sustainability advertisements, with courts and regulators shifting toward imposing financial penalties and securities fraud charges.
In the Netherlands, KLM faced legal action over its marketing campaign that implied air travel with the airline was sustainable due to its carbon offset program. Environmental groups challenged these claims, arguing that offsetting did not equate to genuine emission reductions. The case resulted in KLM retracting its advertising campaign, setting a precedent for stricter enforcement against misleading environmental claims in the aviation industry[1]. In Italy, oil giant Eni was fined EUR 5 million by the Italian Competition Authority for falsely marketing its diesel product as "green"[2]. The investigation revealed that Eni's claims were misleading because they referred only to a minor bio-based component of the fuel rather than the entire product. The ruling reinforced the principle that environmental claims must be fully substantiated and not selectively framed to mislead consumers.
The legal consequences have since escalated beyond advertising breaches. The Mercer Super annuation case in Australia serves as a clear warning—Mercer was fined AUD 11.3 million (USD 7.2 million) for falsely marketing its “Sustainable Plus” pension fund as excluding fossil fuels, gambling, and alcohol investments, when in reality, such investments were present[3]. Similarly, Deutsche Bank subsidiary DWS faced significant penalties after German authorities and the U.S. Securities and Exchange Commission (SEC) investigated its ESG claims. In 2023, DWS was fined a combined USD 25 million for overstating its ESG credentials in investment products and failing to establish a proper anti-money laundering program[4]. These cases highlight a regulatory shift from simple compliance warnings to substantial financial penalties and legal consequences under securities fraud and misrepresentation laws.
ESG Enforcement in Southeast Asia
While Southeast Asia has yet to impose similar financial penalties, enforcement is increasing. Advertising regulator in Singapore has begun scrutinizing greenwashing claims, and regulatory frameworks are evolving to align with international ESG standards. This shift signals that businesses must proactively strengthen compliance efforts to avoid regulatory scrutiny and potential financial repercussions in the near future.
A notable case is the VietJet incident in Singapore, where the Advertising Standards Authority of Singapore (ASAS) ruled against the airline’s misleading green marketing campaign. VietJet promoted its “Green Friday” sale, suggesting that discounted air tickets contributed to a greener future, and made claims about the environmental benefits of its fleet and digital services. ASAS determined that the claims were misleading, lacking substantiation, and ordered their removal. This case underscores the increasing regulatory vigilance in the region and the expectation for businesses to ensure transparency and accuracy in their ESG-related claims.[5]
Key Greenwashing-Related Legal Frameworks in Malaysia
From a legal standpoint, misrepresenting ESG commitments may constitute corporate fraud, misleading advertising, or securities violations. In Malaysia, key statutes that regulate corporate misrepresentation and deceptive business practices include:
- Capital Markets and Services Act 2007 (CMSA) – Prohibits false or misleading statements in securities offerings, which could include ESG-related financial disclosures.
- Companies Act 2016 – Addresses fraudulent trading and misrepresentation in business dealings.
- Financial Services Act 2013 – Regulates misrepresentation in financial products, including sustainability-linked investments.
- Consumer Protection Act 1999 – Prohibits misleading claims in advertising and marketing, including environmental claims.
- Malaysian Anti-Corruption Commission (MACC) Act 2009 – Covers governance failures that may arise from unethical ESG reporting.
Given this legal landscape, businesses must recognize that ESG deception or greenwashing can expose them to regulatory enforcement, lawsuits from stakeholders, and significant reputational damage.
The Cost of Inaction is High
For corporate leaders, the message is clear: ESG compliance is no longer optional. Regulators are tightening enforcement, investors are demanding transparency, and consumers are holding businesses accountable. Companies that fail to substantiate their ESG commitments risk financial penalties, regulatory scrutiny, and loss of investor trust.
If you have any questions or require any additional information, please contact Andreanna Ten Maven or the partner you usually deal with at Zaid Ibrahim & Co.
This article is for general information only and is not a substitute for legal advice