Few mishaps make a legal department or public relations team scramble to check their disclosure reports like seeing a good old fashioned case of greenwashing.

Take, for instance, the now infamous case of the Volkswagen Beetle with diesel engines.

It was revealed in September that the German car-maker had over the past six years installed “defeat devices” into 11 million vehicles, including 500,000 in the United States, allowing the automobiles to cheat on emissions tests and produce nitrogen oxide up to 40 times the legal limit.

Now, Volkswagen is facing up to $18 billion in penalties in the USA, could face potential investigations from numerous entities, and has lost the trust of many scorned customers.

Not an unfamiliar story, the Volkswagen scandal serves as a cautionary tale for boards, managers, and investors, serving as a reminder that the corporate sustainable disclosure process is not one to be taken lightly with consumers, investors and other shareholders.

While a company’s ESG disclosure practices (or lack thereof) may not always affect 11 million products and lead to a very global public excoriation, it’s crucial for boards and executives to understand that  disclosure, corporate social responsibility and good governance practices are all factors that are intricately linked  – and are undeniably impactful upon one another.

Beyond Reputation, There are Potential Legal Ramifications

From a reputational and possibly even a legal liability standpoint there is a substantial risk when companies disclose information that turns out to not be accurate or verifiable, according to Dan Goelzer, Partner at Baker & McKenzie.

“The theme we use when talking to clients is that you need to put controls and procedures in place around this information with the kind of rigor that you bring to bear with respect to your disclosure in securities law filings,” Goelzer said. “I think there is a lot of risk in this area, reputational and perhaps extending beyond reputational.”

David Hackett, partner at Baker McKenzie, said risks can extend past reputational, with the potential for various legal claims, including class action litigation. However, even in the absence of legal risk, a company may still face major challenges – even when the company itself isn’t the greenwashing culprit.  Increasingly, major companies are experiencing reputational hits due to problems associated with their suppliers or vendors.

“One concern is that once there is a problem and you’re in the news, it affects you and your customers.  It impacts company reputation and shareholder value.  Where it’s starting to become a bigger issue is business-to-business sales,” Hackett said. “Companies cannot afford to have a major supplier that is saddled with reputational issues because it’s not only going to spill all over that supplier but is likely to negatively impact the company contracting with it.  If it’s a supplier for a household name like GE, GM, McDonalds, or Apple, it’s a big problem.  Even though the alleged issue may pertain solely to the supplier, the media makes it a story about GE, not GE’s supplier. Often times, you have to read to the end of the story before you even find out the name of the supplier.”