How Misaligned Commitments on Social Issues Create Risks for Your Company

• Jurisdiction: United States,Federal
• Citation: Vol. 1 No. 1
• Publication year: 2024

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Tanya C. Nesbitt and Kerem Bilge ^*

In this article, the authors examine "social washing" and offer some steps that companies should consider using to avoid accusations of social washing and mitigate potential violations of existing human rights laws.

The "S" in "ESG" (environmental, social, and governance) includes an extensive list of factors like workplace culture; environmental justice; health and safety; policies on diversity, equity, and inclusion; labor standards; data privacy; human rights; racial justice; and product safety. ¹ In the past several years, consumers and shareholders have become increasingly focused on company performance in these areas and any perceived disconnects between a company's stated commitments to social action and its actions. The failure to follow through on stated social commitments, even if negligent, can create valuation risk for a company and mislead investors who prioritize this non-financial factor in investment decisions. These perceived disconnects can also capture the attention of plaintiffs and regulators who seek legal remedies to align company practices with stated goals.

Social washing, like its older sibling greenwashing, also relates to the lack of substantiation and veracity in an entity's ESG credentials. ² Greenwashing, however, resolves solely around misleading environmental benefit claims about a product, policy, or activity, whereas social washing strictly relates to the misalignment between a company's perceived commitment to social issues and its actions. ³

Some examples of social washing include:

■ Internal hiring practices that may intentionally or unintentionally undermine publicly stated diversity, equity, and inclusion goals. ⁴
■ Public commitments to fair and unethical labor standards that fail to disclose the use of forced or child labor in the supply chain.

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■ Capitalizing on momentum from social activism without thoughtful support or intentional advocacy for that community's well-being.
■ Failing to substantiate the impact of an investment on human rights or labor rights.

Social washing can potentially mislead a company's investors and consumers by distorting information regarding socially responsible aspects of a company's products or services. Social washing practices can also lead to severe reputational damage, affecting consumer trust and loyalty. Companies must ensure that their claims about social action are accurate and well substantiated. Transparency, authenticity, and a genuine commitment to meaningful change are crucial to avoiding legal and reputational risks associated with social washing.

U.S. Reaction to the Rise of Social Washing

The sourcing of products or services from suppliers that employ forced and/or child labor continues to be a persistent source of vulnerability for corporations. This type of social washing can result in significant civil penalties, detentions, or seizures of products that can potentially disrupt a company's entire supply chain. To crack down on this practice, Congress passed the Uyghur Forced Labor Prevention Act (UFLPA) in 2021, which banned the importation of goods with forced labor and created a rebuttable presumption that all goods imported into the country that contain inputs made in Xinjiang, China, or by certain entities that are named in the U.S. Customs and Border Protection's "entity list," contain forced labor. ⁵ The U.S. Customs and Border Protection is authorized by the UFLPA to seize shipments containing various products, including solar panels and apparel imported from Xinjiang.

More recently, Congress narrowed its focus to specific industries and began an inquiry into allegations of deforestation and forced labor in the supply chain of American and multi-national automotive makers and tier 1 suppliers. ⁶ Although the auto industry relies on a complex supply chain that sources thousands of components from across the world, it is ultimately the corporation that bears the burden of conducting due diligence to ensure social...