Greenwashing, and how to avoid it

Regulatory overview

Legal background

EU law currently gives no clear definition of the term “sustainable”, but we see increasing clarity at national level, where it’s used as an umbrella term to cover both environmental and ethical claims. “Environmental” (or “green”) claims mean actively suggesting that a product or a service is environmentally friendly, or less damaging than a previous version or competitor’s offering. The difference could be in its composition, manufacturing or production process, safe disposal routes, or reduced energy consumption and pollution from its use. “Ethical” claims indicate that a company acts in accordance with certain ethical standards on, for example, animal welfare or labour conditions.

Guidelines

Making sustainability claims is not wholly risk-free: there’s a thin line between legitimate (and common) advertising exaggeration, and misleading consumers by overstating sustainability performance – i.e., “greenwashing”. Forms of greenwashing include exaggerated or incorrect claims, or those intentionally formulated to mislead: for instance, a company might mispresent the qualities of its product, or make claims that are irrelevant or can’t be substantiated. Although the greenwashing concept originally applied only to environmental claims, it has now broadened to include other aspects of sustainability, such as ethical conduct.

Regulators in Europe are increasingly taking action against greenwashing, as well as steps to assist companies in making accurate claims. In January 2021, the Netherlands Authority for Consumers and Markets (ACM) published its Guidelines on Sustainability Claims, containing rules of thumb to help companies formulate and substantiate the sustainability credentials of their products and services.

Meanwhile, the European Commission (EC) has launched the Initiative on Substantiating Green Claims (see below) as part of the European Green Deal, while the Netherlands’ Advertising Authority (RCC) is revising its Environmental Advertising Code, to be relaunched as a Sustainability Advertising Code. Several other national authorities have subsequently published guidelines for making sustainability claims, such as the UK’s Competition and Markets Authority (Guidance for making environmental claims) and Norway’s Consumer Authority (Guidance on sustainability claims).

Enforcement

The European Unfair Commercial Practices Directive (UCPD) prohibits misleading commercial practices, which are considered to include the use of sustainability claims in advertising. If a company’s sustainability claims fail to comply with the Guidelines on Sustainability Claims, the ACM can take enforcement action, under the rules of the UCPD.

Action to prevent greenwashing is currently a priority for the ACM, which last year investigated sustainability claims made in the energy, retail and dairy sectors, and required more than 170 companies to correct their sustainability claims. The ACM can penalise misleading sustainability claims with fines up to €900,000, or a percentage of the annual turnover, for each violation.

Factors to consider

ACM Guidelines on Sustainability Claims

The ACM guidelines contain five key principles:

Principle 1: Make clear what sustainability benefits the product or service offers;

Principle 2: Substantiate your sustainability claims with facts, and keep them up to date;

Principle 3: Comparisons with other products, services, or companies must be fair;

Principle 4: Be honest and specific about your company’s efforts with regard to sustainability; and

Principle 5: Make sure that visual claims and labels are useful to consumers, and not confusing.

Whether a sustainability claim actually is misleading depends on the specific circumstances, so following these principles does not necessarily guarantee that a claim won’t be considered misleading. Professional advice might be needed.

The five principles are illustrated with practical examples of how sustainability claims can be incorrect or misleading. For instance, with regard to Principle 3: if a company claims that its sneakers contain “20% more recycled materials”, it’s unclear what the comparison is with, e.g., a previous version of the sneakers, or a competitor’s product. Hence, the company must clarify the comparison.

The ACM recently investigated the clothing and energy sector and found that, among others, Decathlon and H&M used terms such as “Eco-design” and “Conscious” to describe products, but without directly identifying their sustainability benefits. As a result, the ACM announced that it will now monitor the clothing sector closely, and impose fines where violation is found. The ACM guidelines, and the launch of this investigation, reflect the increasing focus of national consumer authorities on greenwashing, and their willingness to take enforcement action.

EC Initiative on Substantiating Green Claims
EC and national consumer authorities regularly “sweep” commercial websites, to identify breaches of EU consumer law in online markets and, in 2020, for the first time ever, the sweep focused on misleading sustainability claims. Against this background, the EC is proposing to legislate against greenwashing, to be followed by a proposal requiring green claims to be substantiated. Similarly, the European Green Deal requires companies to substantiate green claims against a standard methodology, in order to prevent greenwashing.

One such methodology is a Life Cycle Assessment (LCA), which measures the quantitative impacts of a product, production process or organisation on the environment. It analyses impacts from each phase of a product’s life cycle, including extraction of raw materials, product manufacture, distribution, usage and ultimate disposal. Based on the LCA approach, the EC has developed two standards: Product Environmental Footprint (PEF), and Organisation Environmental Footprint (OEF).

The EC’s proposed Initiative on Substantiating Green Claims will require companies to authenticate their claims by using such standard methods to quantify them. Once all companies adopt a single, consistent standard, the EC expects those claims to become reliable, comparable and verifiable across the EU.

The Initiative was due in the second quarter of 2022, but we continue to await its publication. Although the transition period for compliance is currently unknown, businesses wishing to avoid accusations of greenwashing – and possible enforcement action – should start to review their sustainability claims now and be ready to adapt them once the proposal is published.

The way ahead

Greenwashing is becoming an important business topic, and a significant element in the law on misleading commercial practices. Climate change is getting more attention than ever, with consumers and investors increasingly demanding sustainable products and services. As a result, we expect environmental and ethical claims, and thus greenwashing, to increase, while national authorities seem ready to become more active with both scrutiny and sanctions. Compliance will become a baseline requirement, but companies that are ahead of the game will have the opportunity to be seen as authentic leaders on sustainability.

We monitor these developments closely and will inform you once the EC publishes its proposed initiative. Meanwhile, if you have any questions about phrasing green claims, aligning your claims across European countries, or the green claims guidelines discussed here, please get in touch with our specialists in sustainability law.

Green Claims Directive

The European Commission aims to combat false and misleading environmental claims by companies (“greenwashing”). In line with this aim, the European Commission adopted a legislative proposal for a Directive on the substantiation and communication of explicit environmental claims (‘Green Claims Directive’) on 22 March 2023.

The introduction of harmonized rules on environmental claims will prevent the proliferation of different labels and methods and requires that environmental claims are reliable, comparable and verifiable. The Green Claims Directive not only prevents consumers from being misled but also offers your business the benefit of establishing a level playing field, for information about the environmental performance of products.

National authorities responsible for the enforcement of the Green Claims Directive will be given extensive investigative and remedial powers, including the power to impose fines and other penalties of at least 4% of the company’s annual turnover. Companies should therefore prepare themselves for the upcoming changes by assessing their current practices in light of the new requirements, amending them if necessary and starting to design an environmental claims management framework.