Greenwashing in the EU: new legislation laying down minimum requirements

Greenwashing – the practice of marketing or advertising that a product or business has an environmental impact in a way that is misleading or inaccurate – is a growing issue in the EU.

According to a 2020 study by the European Commission, over 50 per cent of the environmental claims in commerce that were examined were found to be vague, misleading and even completely unfounded. In a sweep by the Consumer Protection Cooperation Network (CPC) the same year, it was found that almost 60 per cent of the traders did not provide sufficient information on their websites to enable customers and consumers to judge the accuracy of an environmental claim.

Greenwashing misleads consumers and can impact a brand’s reputation as a result. Those customers and clients who have actively made the choice to be more sustainable are faced with the unfortunate reality that their choices are not being honoured by the companies they are choosing.

This is a problem. Consumers and their behaviour will have a massive impact on the success of plans to make the EU climate neutral. A European Green Deal, a set of policy initiatives with the overall goal of making the EU climate neutral by 2050, is currently being rolled out in Europe. The deal has three key goals: to ensure there are no net emissions of greenhouse gases in Europe by 2050, to decouple economic growth from resource use, and to leave no person and no place behind during the transition to making the EU climate neutral.

However, there is already a lack of consumer trust in businesses and when combined with this, greenwashing is becoming a real challenge for the deal’s implementation. Companies taking part in greenwashing counteract the objectives of the European Green Deal to empower consumers to play an active role in the ecological transition and make better informed decisions. If consumers don’t trust that the brands they are working with or buying from are doing their best to uphold the principles in the European Green Deal, they are likely to lose the motivation to make greener choices.

There is increasing pressure on businesses to demonstrate climate impact for profit, and because of this greenwashing is set to grow and spread. While some steps have been taken to combat greenwashing on a governmental and Europe-wide level, there needs to be a stronger collective effort. Businesses should not only be reacting to laws and regulations in this space – instead they should be making a concentrated effort to diminish the normalised process of greenwashing. This is where the Green Claims Directive, a new directive being proposed by the EU Commission to tackle greenwashing, comes in.

Introducing the Green Claims Directive

On 22 March 2023, the European Commission released a proposal for the Green Claims Directive, which regulates the substantiation, communication and verification of voluntary environmental claims and labels used by traders that market products to EU consumers. The directive is set to complement the European Commission’s March 2022 proposal to amend the EU Unfair Commercial Practices Directive (UCPD) and the Consumer Rights Directive.

The purpose of the Green Claims Directive is to tackle two key issues that impact a consumer’s opportunities to make well-informed, environmentally conscious decisions: (1) the practice of traders making unclear or not well-substantiated environmental claims, i.e., greenwashing; and (2) sustainability labels that lack transparency and credibility.

The proposal introduces minimum requirements regarding the substantiation and communication of voluntary, explicit environmental claims by businesses. Explicit environmental claims are defined as those written as text, or those contained in a sustainability label. It also proposes that such claims should be subject to third-party verification prior to being communicated in commercial materials. The directive is going to be applicable to all traders in the EU that are making explicit environmental claims about products or businesses in business-to-consumer (B2C) practices, except micro-entities (businesses with an annual turnover of less than €2m).

Some of the regulatory requirements set out in the directive are as follows:

• Substantiating explicit environmental claims: Traders must ensure that explicit environmental claims are substantiated in accordance with the minimum requirements laid down in the proposal. For example, all kinds of claims must rely on recognised scientific evidence and use accurate information. In addition, claims regarding environmental performance in relation to the market standard, or its significance during the product lifecycle, must also be substantiated. All requirements will also apply where two products or businesses are compared to each other.
   
• Communication of an explicit environmental claim to the public: Traders must fulfil certain requirements when communicating an explicit environmental claim. Besides the claim being substantiated, information on the product or trader that is subject to the claim shall be made available via a weblink, QR code or something comparable. This includes, for example, information on the environmental aspects covered by the claim, international standards and information on underlying studies or calculations used to measure the climate impact.
   
• Minimum requirements for environmental labelling schemes: Specific requirements are set out for environmental labelling schemes, in which the sustainability or environmental impact of a product or business is voluntarily certified. Schemes such as these must provide information relating to the operations, requirements, compliance procedures and the scientific accuracy, etc., of the labelling scheme. Some of this information must be accessible for free, and it must be understandable and sufficiently detailed. Environmental labelling schemes also have to be regularly reviewed and verified by a third-party.
   
• Verification and enforcement processes: The European Commission’s member states will have to set up verification and enforcement processes to evaluate compliance with the provisions of the directive. These processes must be performed by independent verifiers, who cannot act in any way that may entail a conflict of interest.

The Green Claims Directive has been formally proposed by the European Commission. Now, the European Parliament and Council are in the process of considering the adoption of the directive. Once the directive has entered into force, all member states will have 18 months to enact domestic legislation to ensure its provisions are implemented across all traders.

How to ensure compliance

Not being fully compliant with the Green Claims Directive, once it comes into play, opens a business up to risk exposure due to being non-compliant. Obviously, depending on the industry and the conditions of the marketplace, not being fully compliant may entail an increased risk exposure. There is also a risk of potential consumer bad will. Given the fact that there will be independent verifiers at play who will ensure compliance, businesses cannot treat the requirements posed as a paper tiger and ignore them.

Businesses need to ensure they prepare themselves for compliance ahead of the Green Claims Directive coming into force, and there are a number of steps they can take to do so.

The first of these is that all marketing and advertising materials that are either currently being used, or that are planned to be used in upcoming marketing campaigns, must be reviewed thoroughly for potential greenwashing language or content. This includes verifying what explicit environmental claims are being made in said marketing and advertising materials, through stating what exactly the company is doing to action its claims.

Any environmental labelling scheme must also be reviewed and verified, as well as other third-party sources used when making an environmental claim. Under the new directive, new labelling schemes must set higher targets for environmental impact than existing ones, and must also be pre-approved by the member state. Figures from the European Commission show that there are 230 sustainability labels and 100 green energy labels in the EU, and half of all green labels offer weak or non-existent verification.

The next step is gathering and mapping out information throughout a business’s supply chain, to substantiate the claims made in all of their materials. For bigger companies with a long supply chain in particular, there is a danger that suppliers could be accidentally or deliberately guilty of greenwashing.

Finally, make sure that trade secrets are not exposed by mistake. Trade secrets do not have to be disclosed under the provisions of the directive, so it is for the businesses looking to become compliant to ensure that they are protected. For many business leaders this will not necessarily be something they are experts on, so businesses can enlist the help of intellectual property professionals to help protect their undisclosed know-how and business information, as they get compliant.

Undertaking these measures to ensure compliance is highly advisable for all business leaders. It will not only ensure they are compliant with the Green Claims Directive, but also will allow them to take full advantage of the possibilities in being a market leader in a more sustainability driven marketplace.

What traders can gain from complying with the directive

Having more robust, substantiated materials can only benefit a company. Those traders and companies that take the Green Claims Directive seriously and make sure their environmental impacts are clearly and accurately communicated will reduce the risks associated with making unrealistic or incorrect claims about their sustainability credentials.

The directive will include penalties for non-compliance. Those companies that fail to comply could have to go through a legal investigation, and may be fined up to four per cent of annual turnover. This could be a significant loss.

As touched on before, complying with the directive will also increase consumer trust and brand loyalty. The focus on sustainability and reducing the environmental impact is only ever increasing, and many clients and customers are being much more selective about the companies they choose to work with or buy from.

Another benefit to ensuring all green claims are accurate and substantiated is the chance to futureproof through improved strategic planning. Substantiating green claims will result in significantly more data that a business can use in its business planning. Extra data on environmental impacts will allow businesses to develop new insights, and use them to identify new areas for development within the company.

Beyond the law – accepting responsibility

Greenwashing can create a false sense of purpose and accomplishment for a business, which could end up creating inertia against taking real action. Companies need to be setting industry standards and not allowing greenwashing to undermine real efforts against climate change.

While there has been significant progress in the implementation of new laws, such as the Green Claims Directive, there is still a long way to go in ensuring it becomes adopted and is implemented in the national legislation of the EU member states.

Ultimately, businesses should have the same level of responsibility to end greenwashing as regulatory bodies. There should not be a huge dependence on waiting for laws to come into force.

Businesses should be campaigning for change and leading by example. By committing to transparency and taking responsibility for their environmental impact, businesses can hugely influence the market they operate in.

Matti Lindberg is an associate at Rouse
rouse.com