Dangers of a green sheen – the legal and regulatory risks of ESG "greenwashing" in Hong Kong

One of the more acute challenges that Hong Kong has faced is the lack of consistent, available, and reliable information available for investors to incorporate climate-related matters into their decisions. Therefore, as a priority, Hong Kong regulators are implementing globally consistent sustainability reporting standards for listed companies and across the financial industry.

At its core, greenwashing is essentially misrepresentation, and there are avenues that financial regulators can utilise to address greenwashing behaviour, despite the lack of specific legislation, codes and guidelines.

For example, several provisions under the Securities and Futures Ordinance (SFO) impose a statutory duty on those responsible for issuing public communications to take reasonable care in respect of the accuracy of information involved.

These include: 

• Section 107 SFO creates a criminal offence for making fraudulent or reckless misrepresentations inducing another to enter into an agreement for structured products, collective investment schemes, or securities.
• Section 298 SFO creates criminal liability against a person disclosing information that, inter alia, is false or misleading as to a material fact which is likely to induce investment decisions or have a material effect on the stock price. Section 277 is the civil counterpart of section 298.
• Section 384 SFO makes it an offence for a person, in purported compliance with a requirement, to provide information to a "specified recipient" which they know to be materially false or misleading, or who is reckless in providing the information. A "specified recipient" includes the Securities and Futures Commission (SFC) and the Hong Kong Stock Exchange, hence the section covers filings with the SFC, stock exchange prospectuses and other listing documents or public disclosure materials. An offence under Section 384 carries a maximum penalty of two years' imprisonment and a fine of HK$1 million.
• Section 391 SFO provides that a person responsible for false or misleading communications that may affect the price of securities and futures will be liable to pay damages for any pecuniary loss sustained in reliance on those communications.
• Section 213 SFO allows the SFC to bring legal action on behalf of investors who have sustained losses from market misconduct, without the need for a prior ruling by the criminal court or the Market Misconduct Tribunal. The section is intended to benefit the collective interests of investors by providing civil remedies for those who may have sustained relatively small losses and may be discouraged by the time and costs required to litigate themselves. The sections above also include provisions for compensation where an investor has suffered pecuniary loss. 

Codes and guidance

Greenwashing appears to also be caught under the SFC and HKMA's codes and guidance on advertisements and marketing for financial products, albeit in very general terms. Whilst the regulators recognise that advertisements are by nature promotional material intended to arouse investors' interests in a product, it is essential that advertisements present a balanced picture and are not false or misleading nor feature exaggerated claims.

According to the SFC's Code of Conduct For Persons Licensed by or Registered with the SFC, as part of the honesty and fairness principle, a licensed or registered person should ensure that any representations made and information provided to a client (including in advertisements) are not false, misleading, or deceptive. Similar provisions can be found in the Hong Kong Monetary Authority's Code of Banking Practice, the SFC's Fund Manager Code of Conduct and the SFC's Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products.

These codes and guidelines do not have the force of law, but regulated institutions which breach them may still face long drawn out investigations and the threat of disciplinary sanctions.

No enforcement to date

There have been no ESG enforcement cases as yet. While the regulators are introducing increasingly robust ESG disclosure requirements to be in line with their international counterparts, they are also aware that this must be done in a proportionate and pragmatic manner as smaller companies may not have the resources to meet the evolving commitments.

Having said that, as these new requirements roll in, there will be increasing controls around ESG-related disclosures and solicitation for ESG financial products. As a consequence, the risks of being accused of greenwashing will become significant for financial institutions and listed corporations alike.

Regulation outside the financial sector

Unlike in other jurisdictions, Hong Kong does not have a regulatory body or a single piece of comprehensive legislation regulating advertisements. Control of advertising on television and radio comes under the general remit of the Communications Authority whilst advertising content falls under the auspices of the Association of Accredited Advertising Agencies of Hong Kong. The Association publishes codes of practice to which members must adhere.

Outside of the financial and securities realm, the main legislation governing advertising content is the Trade Descriptions Ordinance and is enforced by the Hong Kong Customs & Excise Department.

Under the Trade Descriptions Ordinance, it is an offence to apply a trade description to any goods that is false to a material degree or to use false and misleading trade descriptions on products in advertisements to consumers. The omission or hiding of information, or the provision of ambiguous material information, may constitute a false trade description if it causes the average consumer to enter into a transaction they would not have made otherwise.

This leaves the door open for a consumer or environmental activist to file a complaint of greenwashing with the Hong Kong Customs & Excise Department which may in turn investigate the complaint and take action against the advertiser. The court may also order a person who has suffered from the false trade description to be compensated.

There has so far been no enforcement action concerning greenwashing by the Hong Kong Customs & Excise Department. Typical enforcement actions have been made in respect of exaggerated functionality of products or counterfeit products.

This could be partly due to the fact that whilst the general public’s awareness of environment / climate related risks is on the rise, the motivation to adopt green sustainable practices in people's daily lives is still fairly low. This will have an impact on the likelihood of greenwashing complaints being made in the near future.

Litigation as a means of redress

One notable feature in Hong Kong's litigation landscape is that class actions do not exist and representative proceedings, where claims are aggregated with other claims, are used as a case management mechanism and are themselves rare.

An aggrieved member of the public may initiate proceedings for misrepresentation against a business which has published misleading claims. For a claim of misrepresentation to succeed, it must be demonstrated that one party made a false statement to another with an intention to induce the other to enter into the contract, and that the other was so induced to enter into the contract.

For the average consumer, however, losses suffered by businesses that greenwash may only be minimal and taking action may not be proportionate and cost effective. Smaller claims are usually settled between the businesses and consumers, or alternatively, given the low monetary value, will be dealt with in the Small Claims Tribunal.

As it is often hard for a person to prove that certain statements are in fact greenwashing, and that damages were suffered as a result of the statement, consumers are unlikely to use the courts to seek redress. Instead, a company may see the value in taking action if it suffers reputational damage as a result of investing in, or using products or services supplied by another company, which were falsely claimed as sustainable.

Conclusion

Greenwashing is already a significant risk for financial institutions and listed companies in Hong Kong, as financial and securities regulators are now focused on positioning Hong Kong as the leading ESG finance hub in Asia. This, combined with the existing legal framework and tools available to combat disclosures and dissemination of false and misleading information, means that greenwashing behaviour is unlikely to be tolerated by financial and securities regulators.

Outside of the financial and securities sector, the risk of regulatory or public action for greenwashing behaviour appear to be less significant as the general sentiment on sustainability is less strong. Furthermore, due to costs and difficulties in proving that greenwashing statements are untrue, these types of proceedings by the public are still at their infancy.

Nonetheless, environmental activists can still use public pressure and the media to advocate against companies that greenwash, which can still cause substantial reputational damage to companies caught in its throes.

For a summary of the Hong Kong regulator's various efforts to address the issue of reliable disclosures, please see our ESG Guide – Hong Kong. 

Authored by Mark Lin and Stephanie Tsui.