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As buyers become increasingly aware of how their purchasing decisions affect the environment, the demand for sustainable products and services that align with the Sustainable Development Goals (SDGs) is on the rise. However, not all businesses are genuinely committed to sustainability. According to a study conducted by Harvard Business Review, 42% of green claims made by companies in Europe were found to be exaggerated, false or deceptive (1).
Misleading claims not only harm the environment but can also damage a company’s reputation irreversibly and negatively impact their customers’ experience. For example, in 2014, the Royal Dutch Shell [SHEL:LN] and Lego GBP68m toy set partnership was terminated following a Greenpeace campaign which exposed Shell’s hidden plans to drill for oil in the Arctic (2).
Termed ‘Greenwashing’ in the 1980s by Jay Westerveld, the name implies dishonest practices used by businesses to portray themselves as more sustainable or ‘green’ when they are not (3).
To address the flaws of unreliable, dishonest, and confusing green marketing, the European Commission proposed the “Green Claims Directive” (GCD) last Wednesday. This proposal aims to close the gaps in the Sustainable Product Initiative introduced last year, the proposed methodology will help businesses make truthful and accurate environmental claims and provide consumers with the transparency they deserve (4).
Given the shortcomings of current green claims, addressing greenwashing has been set as a priority under the New Circular Economy Action Plan (CEAP). Moreover, the recently adopted Green Deal Industrial Plan (GDIP) has made it clear that consumers should have the right to know the sustainability, durability, and carbon footprint of products and services to support better-informed decision-making before making a purchase or investment (5).
To best serve consumers, the GCD is expected to have a significant impact on the operation of businesses across various industries in the EU. To tackle greenwashing in Europe, strict rules for green claims would be created, supported by third-party verification, and accurate information about those green claims made available to consumers via physical and digital formats (6).
What is being proposed?
The directive consists of a series of measures that will significantly enhance the verifiability of green claims made by businesses.
First, the new substantiation requirements will force businesses to support their green claims with scientific evidence and accurate reporting of any greenhouse gas offsets. This will ensure that consumers can trust any product they buy has a measurable positive impact on the environment, in terms of carbon footprint, water use, and waste generation.
Second, to enhance transparency, the GCD proposes the use of QR codes or web links on product packaging that connects users to a website where they can obtain more detailed information about the product or service. The QR code will also be able to verify the ‘certificate of conformity’. Recognized across all Member States, the certificate will ensure that any green claims are verified by an accredited body, providing businesses and clients with added assurance on the validity of green claims.
Third, the GCD seeks to reduce the proliferation of environmental labeling schemes in the EU, which can often be confusing for consumers. This will include revising third-country labeling schemes (e.g., products coming from the US) and prohibiting public authorities from establishing new labeling schemes at the EU level. Private labeling schemes will also be required to demonstrate added value compared to existing schemes before gaining approval.
Fourth, the GCD outlines additional requirements for comparative claims to ensure they are reliable and informative for consumers. This includes using equivalent information or data for assessment and explaining the impact of improvement on other aspects and impacts.
Finally, the GCD includes provisions for Member States to enforce the new rules on green claims. Competent authorities in each Member State will oversee enforcement, establish penalties for non-compliance, and provide access to courts or independent bodies for review of counter decisions or claims against prosecution (7) (8).
Overall, this comprehensive package of measures should transform the way businesses in the EU market their products. The additional layer of compliance that the GCD seeks to add to company reporting should also drive businesses towards more sustainable practices.
Wider implications of the GCD for ESG.
Europe’s leadership in the growing ESG investment market is accelerating according to financial research firm Morningstar [MORN:US]. In the third quarter of 2021, Europe accounted for 77% of net inflows into ESG-focused investment products. This growth has partly been driven by the introduction of the Sustainable Finance Disclosure Regulation (SFDR) which has emphasized the incentive to invest sustainably but also tackle the rising issue of greenwashing scandals in the industry by mandating that asset managers accurately report their ESG performance figures (9).
Despite the implementation of the SFDR, some critics have pointed out that EU regulations have not gone far enough in addressing the issue of greenwashing. Fund managers and consultants interviewed by Reuters have lamented the fact that the current EU rules, despite demanding more transparency and disclosure, have fallen short of making it easier to identify greenwashing (10).
Nonetheless, McKinsey & Company suggests the upward trend in new active regulations should lead to more accurate ESG reporting and disclosure frameworks by companies, distinguishing those that report their green claims accurately from those that don’t (11).
The GCD is an essential regulation in the fight against greenwashing and a necessary step towards pushing the EU to a more sustainable future. By establishing clear guidelines for robust ESG reporting and enforcing compliance at the national level across Member States, the GCD has the potential to bring a shift towards greater transparency and accountability in business reporting. As consumers become more aware of the impact their purchases or investments have on the environment, the GCD can provide a roadmap for companies to follow to meet the growing demand for green products and services.
https://kpmg.com/xx/en/home/insights/2022/04/esg-addressing-greenwashing-in-financial-services.html
https://www.cnbc.com/2023/03/24/climate-a-greenwashing-crackdown-in-europe-hasnt-gone-down-well.html
https://eeb.org/eu-commission-prepares-to-crack-down-on-greenwashing-with-new-green-claims-law/
https://www.lexology.com/library/detail.aspx?g=ccb7e656-a876-472b-a780-0595afc9566d
https://environment.ec.europa.eu/topics/circular-economy/green-claims_en
https://environment.ec.europa.eu/publications/proposal-directive-green-claims_en
https://www.mckinsey.com/capabilities/sustainability/our-insights/does-esg-really-matter-and-why
