On January 17, the European Parliament approved new legislation aimed at curbing greenwashing by businesses. The Directive on Empowering Consumers for the Green Transition will ban exaggerated and unfounded claims relating to a company’s environmentally friendly actions, including carbon neutral claims. While the regulations will take up to two years to go into effect in the European Union, the rise in greenwashing regulation should serve as a further warning to companies, both in the EU and the United States, as to the dangers of overzealous environmental statements in consumer marketing and ESG/ sustainability reports.
As global concerns rise over the impacts of climate change, there has been a significant increase in consumer interest in supporting businesses that are environmentally friendly. This rise in consumer interest, as well as pressures from financial investors and other parties, have pushed businesses to take climate friendly stances. However, there is a growing, and reasonable, concern that businesses are exaggerating their environmentally friendly actions in what is known as greenwashing.
Traditionally, greenwashing was done through marketing. When the customer base wanted environmentally friendly companies, companies benefited by making themselves appear greener. In recent years, the phrase climate washing has developed as a subset of greenwashing that directly addresses the exaggeration of claims relating to climate change and greenhouse gas emissions. For decades, greenwashing frustrated environmental activists who wanted actual change by companies. However, as environmental, social, and governance investing grew, so did the legal pitfalls of greenwashing. Shifting from just clever marketing campaigns to misleading investors.
The ECGT is just the latest in an increasingly complex regulatory scheme relating to climate action by businesses. The last four years have seen dramatic global shifts in the regulatory schemes relating to climate change and the environment, stemming from the Paris Agreement and actions by the United Nations. The U.S. Securities and Exchange Commission has increased enforcement of greenwashing claims made to investors by publicly traded entities and funds. In October, the SEC released a new rule that imposed harsher reporting standards on ESG funds, which has arguably slowed the development of new ESG funds. The EU adopted a new sustainable reporting scheme for businesses, with a focus on GHG emissions. A similar proposal by the SEC is anticipated in the coming months, although the precise timeline has not been released and it continues to face delays.
While the EU’s ECGT is specifically targeted towards marketing to consumers, the legislation highlights a broader crackdown on greenwashing in all outward facing activities of a business. The ECGT states that “ensuring that environmental claims are fair, understandable and reliable will allow traders to operate on a level playing field and will enable consumers to choose products that are genuinely better for the environment than competing products.”
There is also a legal argument to be made that privately held companies that voluntarily publish ESG or sustainability reports are doing so as a marketing tool and, therefore, those reports fall under consumer protection regulations. In the U.S., some states are expanding their consumer protections to include greenwashing claims.
The ECGT bans generic environmental claims “without recognised excellent environmental performance which is relevant to the claim.” Examples of problematic language in the legislation are “‘environmentally friendly’, ‘eco-friendly’, ‘green’, ‘nature’s friend’, ‘ecological’, ‘environmentally correct’, ‘climate friendly’, ‘gentle on the environment’, ‘carbon friendly’, ‘energy efficient’, ‘biodegradable’, ‘biobased’ or similar statements that suggest or create the impression of excellent environmental performance.”
The legislation also bans the use of GHG emissions offsetting as a basis for claiming that a product has a positive impact on the environment. “Examples of such claims are ‘climate neutral’, ‘CO2 neutral certified’, ‘carbon positive’, ‘climate net zero’, ‘climate compensated’, ‘reduced climate impact’, ‘limited CO2 footprint’ among others.”
Legislation passed by the EU Parliament must be subsequently adopted by the member states before becoming enforceable law. Member states are given up to two years to adopt the ECGT, although they may enact it sooner.
While the ECGT is limited to businesses that have a marketing presence in the EU, the legislation should serve as a warning to businesses globally of the forthcoming legal hazards to unfounded environmental claims. Greenwashing is quickly moving from a simple marketing gimmick to a legal liability.