GREENWASHING AND THE EVOLVING CONTOUR OF DIRECTOR LIABILITY: A CORPORATE GOVERNANCE PERSPECTIVE UNDER THE COMPANIES ACT

ABSTRACT

Within the modern corporate world, there has been a paradigm shift where ESG criteria have moved from being voluntary corporate social responsibility (CSR) policies to mandatory financial compliance. As such, there is an increasingly prevalent form of deception referred to as greenwashing, where corporations use false, misleading, or even deceptive statements about their green credentials to attract funding and inflate their market value. In this research paper, the changing paradigm within the Indian context of corporate law is investigated by exploring the phenomenon of greenwashing, which has moved beyond being a marketing malpractice to become a major corporate governance problem that gives rise to personal statutory liability for directors. Through the analysis of Section 166 of The Companies Act, 2013, together with SEBI’s Business Responsibility and Sustainability Reporting (BRSR) regime, the paper shows that directors cannot escape statutory liability through passive governance anymore. In the process, the paper highlights some loopholes in the present enforcement regime, such as the lack of specialised verification standards, and suggests possible solutions, including mandatory green audits.

Keywords: Corporate Governance, ESG Compliance, Director Liability, Greenwashing, SEBI BRSR, Fiduciary Duties, Companies Act 2013, Market Manipulation, Green Finance

INTRODUCTION & THE ECO-LEGAL PARADIGM SHIFT

The fundamental cornerstone of conventional corporate law has always been linked with the maximisation of shareholder wealth. For many decades, the legal framework guiding corporate boards has always worked on a stringent binary premise, such that profits were for the equity shareholders while environmental concerns were left in the periphery as voluntary philanthropic acts. This classical theory, which was advocated by prominent economic scholars like Milton Friedman holds that the only social obligation of corporations is to make a profit within the rules of the game. However, the contemporary corporate environment poses an existential threat to this ancient theory. Currently, there is a paradigm shift in both global and local capital markets in terms of the fact that a company’s commercial value can no longer be purely intrinsically related to its financial balance sheets alone, but rather its ESG performance.

This transformative phenomenon has made sustainable metrics extremely profitable in the financial world. Institutional investors, sovereign wealth funds, and multinational banks rely on ESG performance indexes as their main instrument of risk assessment before they invest billions of dollars into capital. A good ESG rating shows that a company is efficiently managed, protected against climate risks and does not have any forthcoming regulatory penalties. Therefore, companies with high ESG ratings benefit from privileged capital access, low financing costs through green bonds, and enhanced brand value among highly aware consumers. The financial sector has monetised ecological responsibility and turned "doing good" into an essential aspect of corporate existence and capital gathering.

However, this powerful incentive system has led to the emergence of a very serious form of corporate malpractice: greenwashing. This term means spreading misleading, unproven, or greatly exaggerated information in order to create a distorted picture of corporate environmental responsibility. Greenwashing distorts market processes and diverts capital needed for ecological rehabilitation. When a company lies about its carbon footprint or eco-friendliness, it distorts the process of fair competition.

The primary legal premise of this research paper is based on the argument that greenwashing does not merely constitute an oversight in PR or simple marketing hype; rather, it marks a serious failure in corporate governance and is a complex form of financial fraud. In the context of Indian legal statutes, the scope of legal scrutiny is moving swiftly from the conceptual corporation to the individual natural person sitting in the boardroom. The purpose of this paper is to analyse the implications of increasing fiduciary obligations of directors within Indian law.

THE INDIAN STATUTORY AND REGULATORY MATRIX

For one to be able to see how greenwashing translates to individual liability, one needs to look at the statutory provisions regulating corporate management in India. Legislative intent to tie the activities of companies with social and environmental considerations is clearly reflected in the Companies Act, 2013, as well as in capital market regulations.

1. Section 166 of The Companies Act, 2013: Codification of Fiduciary Duties

Before 2013, the duties of corporate directors in India were generally uncodified and were mainly guided by common law notions of care, skill, honesty and diligence. The Companies Act, 2013, changed this scenario completely by codifying the fiduciary duties of directors under Section 166. Particularly, under Section 166(2), a director of a company shall act in good faith in furtherance of the objects of the company in the best interest of the company, its employees, its shareholders, the community and the environment.

The deliberate use of the phrase "and for the protection of the environment" is a revolutionary statutory change in corporate law. As a result of making the protection of the environment equivalent to the rights of stakeholders like the company's shareholders, employees, and people from the community at large, the legislature made it clear that the statutory duty of a director is multistakeholder and not simply shareholder-focused. The legislative change was heavily informed by India's enviable record in environmental law, grounded in Article 21 of the Constitution (Right to Life and a Clean Environment). Therefore, the approval of strategies by the board of directors that will be environmentally detrimental and any approvals for environmental degradation in disclosure to enhance the price of shares are an actionable breach of statutory duties under Section 166(2).

2. The SEBI BRSR Reporting Structure: From Narrative to Data

While the Companies Act created the substantive law, the The Securities and Exchange Board of India (SEBI) created the procedural mechanism of enforcement of that law for listed companies. The SEBI realised that the laxity and vague nature of the earlier Business Responsibility Reports (BRRs) created loopholes for greenwashing through PR campaigns.

Based on the existing 2026 mandates, the BRSR framework compels the top 1,000 companies listed by market capitalisation to stop using aspirational qualitative essay-style disclosures and instead present the absolute, measurable, and verifiable information in nine different principles aligned with the National Guidelines on Responsible Business Conduct (NGRBC). Notably, starting with the fiscal year 2025-2026, the SEBI increased the mandate for the assurance of reporting from third-party entities to the top 500 firms, while the rest of the top 1,000 would be included in the mandatory assurance process by fiscal year 2026-2027. Among others, those disclosures include specific information on greenhouse gas (GHG) emissions (Scope 1, Scope 2, and Scope 3 emissions), water consumption efficiencies, waste management lifecycles, and sustainable procurement.

Notably, Because the disclosure is part of the official filing in compliance with regulatory requirements, it has the same legal standing as the financial statements themselves. Once a company presents fraudulent information in the BRSR filing in order to inflate the stock performance or gain investment from ESG-compliant funds, it engages in market manipulation.

DECODING THE MECHANISMS OF DIRECTOR LIABILITY

Wherein the enterprise indulges in greenwashing, the legal fiction known as the corporate veil cannot be relied upon as a shield against the liability of the directors, who might either be active participants or have wilfully been negligent by ignoring the false representation. The personal liability of directors in India arising out of greenwashing can thus emerge from the following legal avenues:

1. Corporate Fraud Under Section 447

In case the management of a corporation uses misleading data about environmental parameters to trick lending institutions into providing green loans, or even if it leads to the sale of the shares to investors, who believe that the shares carry a higher value on account of the greenwashing, then such an act amounts to the definition of fraud as provided under Section 447 of the Companies Act, 2013.

The liability of a director arises when it is proven that he approved the corporate finances or sustainability profiles of the company while fully aware that all the claims about the green nature of those profiles are entirely baseless. The punishments according to Section 447 are extremely stringent and include imprisonment of six months to ten years, along with an individual fine equal to the value of the fraud committed.

2. Negligence and Breach of Due Care under Section 166(3) and (4)

Where a director has not been responsible for conducting a greenwashing operation, it is not possible for him to use ignorance as his defence according to corporate governance standards. According to Section 166(3), a director is required to discharge his duties with reasonable care, diligence, skill, and independent judgment. Moreover, Section 166(4) does not allow a director to place himself in a position where there is either a direct or indirect conflict of interest.

Where a misleading claim is made by the executive management in an attempt to increase their sales or seek capital, and the independent or non-executive director just approves that report without any reasonable level of professional scepticism, they have not fulfilled their statutory duty of care. During a period when the ESG information affects the financial stability, reputation, and regulatory status of the company, rubber-stamping such reports would be considered professional negligence by directors. 

3. Consumer Protection Authority (CCPA) Guidelines, 2024

An important statutory framework was provided through the Central Consumer Protection Authority (CCPA) Guidelines for Prevention and Regulation of Greenwashing or Misleading Environmental Claims, 2024. Under these guidelines, it has been explicitly mentioned that no company can use phrases such as “green,” “clean,” “sustainable,” or “eco-friendly” without any scientific evidence.

According to these regulations, if an organisation is found indulging in greenwashing activities, then according to The Consumer Protection Act, CCPA, has the power to impose penalties on such an organisation, which may range anywhere between ₹10 Lakh to ₹50 Lakh. Moreover, it triggers the criminal liabilities clause, which subjects the organisation’s management to heavy penalties.

ILLUSTRATIVE MATRIX AND CASE STUDY DISSECTION

1. Illustration of Fiduciary Breach and Fraud

In order to fully comprehend how theoretical corporate governance responsibilities can be converted into tangible legal liabilities; one must witness the application of these tenets in the context of real-world compliance.

Statutory Illustration: Company X is a large-scale manufacturing company that is planning to raise a sum of ₹500 Crores in Green Bonds approved by SEBI in order to finance a novel "zero-emission" factory. Being keen to get the advantage of low-interest rates and investments from the ESG-focused institutions, the Board of Directors approves a prospectus that says the company managed to reduce carbon intensity by 40% with the help of some unique recycling technology. While in fact, there is no such technology, and the company simply transferred manufacturing processes with the highest emission rates to a non-listed subsidiary.

Legal Analysis & Liabilities

The Executive Directors should be prosecuted straightaway for Corporate Fraud as per Section 447 of the Companies Act, 2013. As they had knowledge of the concealment and intentionally used a material misstatement for a dishonest advantage in finances (lower cost of borrowing), they have fulfilled all requirements of mens rea for corporate fraud. They will be criminally imprisoned mandatorily for a period varying between six months and ten years, along with a personal fine of ₹500 Crores, equivalent to the aggregate value of the fraud.

The Independent Directors cannot defend themselves by claiming that they were unaware of the truth or innocently relying on the executive management. Pursuant to Section 166(3), they are personally and strictly liable for a serious violation of their statutory duty of care, diligence, and independent judgment. In neglecting to ask for verification of engineering logs or carbon metrics in order to pass the prospectus, they have moved from passive monitoring to negligent conduct.

The Corporate Body undergoes concurrent legal action by SEBI for engaging in misleading and fraudulent activities in the market. It leads to the compulsory withdrawal of the entire bond prospectus, a freeze on the corporate assets, and serious monetary fines under the SEBI (LODR) Regulations, along with huge losses in terms of its market value.

2. Global and Domestic Case Studies

The DWS / Deutsche Bank Case (Global Warning Shot)

In an exemplary global enforcement case, German asset management firm DWS paid a fine of $25 million to the U.S. Securities and Exchange Commission (SEC) for greenwashing activities. It was established through the course of the investigation by regulators that the firm had indulged in greenwashing by exaggerating the extent of integration of ESG considerations into its core investing processes and by marketing regular funds as sustainable.

Importantly, the repercussions of this regulatory action led to the ouster of the CEO of the company and massive criminal searches conducted at the corporate office of the firm. This case illustrated to the global financial community that the practice of greenwashing is now considered by modern-day regulators as not just a simple marketing hyperbole, but a fundamental financial misrepresentation and market deception.

CCPA Enforcement Actions against FMCG Brands (2024-2026)

With the implementation of the Guidelines for Prevention and Regulation of Greenwashing or Misleading Environmental Claims, 2024, the CCPA began stringent actions against several leading FMCG and detergent brands operating in India. They were identified to be indulging in marketing products under absolute labels of "100% natural," "chemical free," and "no plastic impact" despite not being able to back their claims with any scientific data.

The CCPA imposed heavy penalties on such marketing violations and ensured that these misleading advertisements were withdrawn. The incident prompted immediate revision of marketing practices at a board level in Indian public and private enterprises to show that marketing practices are just as rigorous as financial books.

Change in the Jurisprudence of the National Green Tribunal (NGT)

The National Green Tribunal (NGT) in case laws like Vardhaman Kaushik v. Union of India has used the doctrine of the Polluter Pays Principle and the Precautionary Principle repeatedly. These principles from environmental laws were traditionally imposed on the company's account as environmental compensations.

However, the use of these principles alongside Section 166(2) of the Companies Act makes a hybrid jurisprudence. Systematic and conscious violation of environmental rules of the board will make it a deliberate violation of the individual obligation of a director under the environmental law.

SYSTEMIC GAPS AND RESTRUCTURING RECOMMENDATIONS

1. The Gaps in Enforcement

The Gap in Judicial Interpretation and the Weakening of Section 166(2)

Traditionally, in India, the provision of the “protection of the environment” in Section 166(2) has been treated by the courts as merely an advisory or directory provision and not a penalty or criminal one. There is a clear lack of judicial precedence whereby there has been a criminal prosecution and personal liability of a corporate director on the basis of Section 166(2) only on account of its environmental element, without financial embezzlement or disastrous incidents such as the Bhopal Gas Leak case precedent.

Since the judicial system does not have a specific commercial-environmental branch to deal with issues of corporate greenwashing, they tend to fall within the jurisdiction of either commercial litigation or environmental PILs. This creates an opportunity for corporate boards to wriggle out of any personal liabilities by claiming that environmental issues belong to the purview of administrative environmental boards, such as the Central Pollution Control Board.

Technical Skills Shortage in Auditing Frameworks of Corporations

There exists a significant technical skills shortage in the current auditing frameworks of corporations. While statutory auditors have the necessary technical skills in understanding the balance sheets, ledger accounts, and transaction trails, they lack the highly advanced scientific skills for evaluating technical claims in ESG, which include:

• Estimation of Scope 1, 2, and 3 carbon intensity reductions.

• Biodiversity impact points assessment in supply chains.

• Evaluation of the life cycle assessment of products that claim to be biodegradable.

This makes it easy for greenwashing practices to go undetected by the current audit committees of corporations due to the lack of a technical filter.

2. Strategic Suggestions for Reform

Mandatory Institutionalisation of Independent Green Audits

Whereas the law requires an independent audit of the financials of the company by a certified Chartered Accountant, the corporate regulations have to be changed to include a mandatory "Green Audit" which is to be done by certified environmental scientists, sustainability engineers, and certified carbon auditors. The Green Audit Report has to be annexed to the financial reports of the firm, giving a verified account of the true ecological footprint of the firm compared to what it says in the advertisements.

Creation of a Board-level Sustainability Committee

There is a need to change The Companies Act, 2013, to include a mandatory "Sustainability Committee" in high-emitting corporations, similar to the Audit Committee in section 177. The sustainability committee should be made up mostly of independent directors and have sufficient qualifications in terms of environmental or social governance. The committee should oversee ESG and BRSR disclosures without any mediation, removing the possibility of a defence of plausible deniability in case of greenwashing.

Explicit Definition of “Green” Vocabulary and Global Harmonisation

There is a need for an explicit and definitive legal taxonomy, issued by the MCA in partnership with SEBI, which will precisely define the meaning of terms such as "sustainable", "eco-friendly", or "carbon-neutral". Such a definition will need to be harmonised with global benchmarks like those set by the ISSB frameworks of IFRS S1 and IFRS S2. The objective is to eliminate subjectivity associated with these terms to prevent any greenwashing efforts from corporate boardrooms.

CONCLUSION

1. The Death of Voluntary Compliance and Aspirational Public Relations

The modern corporate environment has seen the irreversible emergence of a new paradigm in corporate governance: the age of considering environmental, social, and governance responsibility as something voluntary on behalf of corporations, a mere social responsibility side project, or an ideal public relations afterthought has come to an end. All the legal, regulatory, and systematic considerations raised within this research paper reveal one crucial and irrevocable truth: greenwashing is not just a mistake in marketing or an overstatement made in public relations, but a corporate governance mistake and a very sophisticated form of financial crime. For years and years, corporations had the privilege to work within the framework of a shareholder primacy model, successfully outsourcing their ecological responsibilities to gain profits. However, nowadays this protection is long gone due to statutory development.

Because regulatory bodies such as SEBI, through its BRSR Core, require sustainability data to be exact, verifiable, and independent of third parties, and because environmental protection as a fiduciary duty is clearly laid down in Section 166(2) of the Companies Act, 2013, as being on par with the fiduciary duty to maximise wealth for the benefit of shareholders, the legal spotlight can no longer be on the nebulous corporation but must now be on the flesh-and-blood individuals who sit at the helm of the company. From here on out, directors cannot escape their fiduciary obligations by relying on vague terminology, elaborate chains in the supply chain, or passive involvement.

2. The Shifting Legal Landscape and Directorial Exposure

The legal definition of fiduciary duties under Section 166 in India has created a multi-stakeholder governance structure whereby directors are personally responsible to the community and the environment. Whereby a company's board of directors authorises or permits misleading communications to raise finances through green bonds to secure lower interest rates or to artificially increase their stock value, it becomes an entirely different case that amounts to corporate fraud under Section 447 and professional misconduct under Section 166(3). In cases where the domestic regulators, such as the CCPA, have started enforcing the 2024 Greenwashing Guidelines, together with global warning shots such as the SEC's landmark suit against DWS/Deutsche Bank, it is clear that the regulators are treating the misstatement of sustainable practices with the same prosecutorial severity as financial fraud and accounting manipulation. The corporate veil no longer protects directors who rubber-stamp the false carbon metrics and environmental claims. In today's era, when capital allocation is tied to ESG compliance, any failure by a director to authenticate the environmental claims renders them liable to serious civil suits for damages and permanent disqualification from being on boards, alongside criminal penalties in the form of prison terms.

3. Institutional Reforms for Robust Governance

For the maintenance of integrity within the marketplace and to prevent individual statutory liability for corporate board members, three systemic changes need to be implemented within corporate governance:

Independent "Green Audit": Corporations must incorporate an independent audit performed by trained environmental scientists and sustainability engineers to scientifically confirm the accuracy of BRSR data.

Board-Level Sustainability Committees: Mirroring the mandatory Audit Committee under Section 177, high-emission public companies should be legally required to maintain a Sustainability Committee of independent directors to oversee ESG disclosures and eliminate the defence of plausible deniability. 

Standardisation of Technical Taxonomy: The Ministry of Corporate Affairs (MCA) and SEBI must establish explicit statutory definitions for green terms, harmonising domestic metrics with global standards like the International Sustainability Standards Board (ISSB) frameworks (IFRS S1 and IFRS S2) to streamline global climate financing. 

In conclusion, considering ESG compliance in equal measure to financial reporting is not only ethically sound but also statutorily imperative in protecting oneself from civil and criminal responsibility in today’s corporate world.

BIBLIOGRAPHY

The Companies Act, 2013, § 166, No. 18, Acts of Parliament, 2013 (India). 

1. Ibid, § 166(2).

2. The Companies Act, 2013, § 166, No. 18, Acts of Parliament, 2013 (India).

3. Ibid, § 166(3) & § 166(4).

4. The Companies Act, 2013, § 177 & § 447 (detailing the definition, scope, and criminal penal consequences of corporate fraud).

5. Central Consumer Protection Authority, Guidelines for Prevention and Regulation of Greenwashing or Misleading Environmental Claims, 2024, Ministry of Consumer Affairs, Food and Public Distribution (India).

6. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, Notification No. SEBI/LAD-NRO/GN/2015-16/013.

7. SEBI Circular No. SEBI/HO/CFD/CMD-2/P/CIR/2021/562 (introducing the Business Responsibility and Sustainability Reporting framework).

8. The Consumer Protection Act, 2019, No. 35 of 2019, Acts of Parliament, 2019 (India).

9. Hanuman Vitamin Foods Pvt. Ltd. v. Commissioner of Central Excise, (1994) 4 SCC 

10. Vardhaman Kaushik v. Union of India, National Green Tribunal, Original Application No. 21 of 2014.

11. International Sustainability Standards Board (ISSB), IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information & IFRS S2: Climate-related Disclosures (2023).

12. Dr. M.K. Sharma, Corporate Governance and Environmental Compliance in India, 14(2) Journal of Indian Legal Studies 145, 152-158 (2025).