Key Takeaways:
- Without robust and enforceable ESG clauses, companies risk regulatory fines, litigation, and loss of consumer trust.
- One of the most effective ways to mitigate greenwashing in contracts is through well-drafted ESG provisions.
- A frequent mistake in ESG contract drafting is including vague language that lacks clear, enforceable obligations.
Greenwashing–making misleading or unsubstantiated sustainability claims–is not a new phenomenon. Without robust and enforceable ESG clauses, companies risk regulatory fines, litigation, and loss of consumer trust.
One of the most effective ways to mitigate greenwashing in contracts is through well-drafted ESG provisions. In this article, we will go over recent examples of greenwashing, examples weak and strong clauses to prevent greenwashing, and a clause drafting checklist.
Recent Examples of Greenwashing
One of the most infamous cases was Volkswagen’s 2015 emissions scandal, in which it installed software in diesel vehicles to manipulate emissions tests, making them appear more environmentally friendly than they were. Aside from a prominent article on Wikipedia, this deception led to approximately $30 billion in fines and settlements, lawsuits against executives (former CEO Winterkorn’s commended in September 2024), and severe reputational damage.
More recently, companies across various industries have faced similar scrutiny. Delta Air Lines is being sued for claiming to be the “world’s first carbon-neutral airline,” despite allegedly relying on carbon offsets that may not effectively counteract emissions. ExxonMobil has been accused of misleading the public about its environmental impact, while Tyson Foods is facing legal action for making sustainability promises that allegedly lack concrete implementation plans.
These cases underscore the importance of ensuring contractual ESG commitments align with corporate sustainability claims.
Common Pitfalls That Lead to Greenwashing In Contracts
Greenwashing is not always by design, as in the Volkswagen emissions scandal. Many companies inadvertently expose themselves to greenwashing claims due to poorly drafted contracts.
The most common pitfalls include:
(i) vague and unenforceable clauses;
(ii) failure to include verification mechanisms; and
(iii) misalignment of marketing and contractual obligations.
Vague and unenforceable clauses
One of the most frequent mistakes in ESG contract drafting is including vague language that lacks clear, enforceable obligations. Companies often use aspirational wording such as “best efforts,” “aim to,” or “strive for” without defining specific targets or measurement criteria. This ambiguity makes it difficult to assess compliance and can lead to accusations of greenwashing in contracts.
Example of a weak clause:
“Supplier shall make reasonable efforts to minimize environmental impact.”
The problem with this clause is that “reasonable efforts” is subjective and open to interpretation. In addition, there is no measurable target, timeframe, or consequence for non-compliance. And lastly, there’s no definition of how “minimizing environmental impact” will be assessed.
Example of a stronger clause:
“Supplier shall reduce its carbon emissions by 15% by 2026, based on verified Scope 1 and Scope 2 emissions calculations, as audited by an accredited third-party.”
This clause is better because it provides quantifiable, objective targets and timeframes.
Failure to include verification mechanisms
Even when ESG obligations are clearly defined, the absence of verification mechanisms can render them ineffective. Without monitoring, reporting, or auditing requirements, there is no way to confirm whether a party is fulfilling its ESG commitments.
Example of a weak clause:
“The supplier shall comply with applicable sustainability standards and ensure reduction of carbon emissions.”
This clause is problematic for several reasons. There is no requirement for reporting or external validation. In addition, there is no mechanism to verify compliance with “sustainability standards. Like the first example, there are no consequences for failing to meet obligations.
Example of a stronger clause:
“Supplier shall submit an annual ESG compliance report, including carbon footprint data, energy efficiency measures and waste management policies, no later than 31 March of each calendar year. This report must be verified by an independent third-party auditor and provided to Buyer within 30 days of the reporting period’s conclusion. Failure to submit the verified report by the specified deadline shall constitute a material breach of contract, entitling the buyer to withhold payments, impose a penalty of 5% of the contract value, or terminate the agreement at its discretion.”
Notice in this stronger clause that the drafter included a consequence for failure to meet the ESG obligations. Namely, material breach of the agreement.
Misalignment of marketing and contractual obligations
A frequent source of greenwashing claims arises when a company’s ESG marketing claims do not match its actual contractual commitments. This particularly happens when there is a lack of cross-departmental communication and marketing and legal each proceed with their own agenda.
Many businesses promote ambitious sustainability goals to consumers and investors, but these are not reflected in their supply chain agreements or internal policies. This misalignment creates legal and reputational risks if stakeholders discover discrepancies between public statements and business practices.
Example of a misalignment:
A company publicly commits to “100% sustainable sourcing by 2030,” but its supplier contracts contain no enforceable sustainability criteria or monitoring requirements.
The issue with this public commitment is that it creates potential liability under false advertising and consumer protection laws. It also increases reputational risk if watchdog groups or regulators challenge ESG claims. In addition, it leaves the company exposed to shareholder lawsuits if sustainability targets are not met.
Example of how contracts can align with this public statement:
“The Supplier must adhere to the Company’s Responsible Sourcing Policy (Appendix G), which among others requires compliance with the Science Based Targets initiative (SBTi) and annual third-party sustainability audits, as attached in Appendix F to this Agreement. If the Supplier fails to meet targets for two consecutive years, the Company may terminate this Agreement.”
Here, the drafter included an out if the supplier failed to meet the targets for two years.
ESG Clause Drafting Checklist
The pitfalls discussed above demonstrate how ESG provisions can fail. However, avoiding these mistakes is possible with the right contract design. All your clauses should be Specific, Measurable and Enforceable. Below is a practical SME Checklist that you can apply to ensure that your ESG commitments are not just words but enforceable obligations.
| ESG Drafting Principle | Best Practice |
| Specific | avoid vague terms like “reasonable efforts;” set clear, quantitative targets |
| Measurable | require regular reporting and independent verification |
| Enforceable | specify consequences for non-compliance, such as penalties or contract termination |
Moving from risk to resilience: strengthening ESG contracts
Greenwashing allegations can be costly, both financially and reputationally. From Volkswagen to Delta Air Lines, a company’s failure to align sustainability commitments with contractual obligations has led to regulatory scrutiny, lawsuits, and consumer backlash.
To mitigate these risks, businesses must ensure that ESG commitments are not just marketing statements but enforceable obligations. The SME Checklist provides a simple but powerful tool to assess and improve ESG clauses, ensuring that they are Specific, Measurable, and Enforceable.
With regulatory scrutiny increasing worldwide, companies cannot afford to overlook the strength of their ESG provisions. For in-house counsel, contract drafters and compliance officers, the message is clear: ESG claims must be backed by legally enforceable provisions. The time to review and strengthen your ESG contracts is now – before regulators, courts, or consumers force you to do so.
For more insights, check out Harald Sippel’s guest column, ESG Contracts, which he publishes on a monthly basis through Contract Nerds.
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