The Green Claims Directive proposal: the EU arms up against greenwashing
The European Commission (EC) has prompted surprise with the publication of a Green Claims Directive proposal in the end of March 2023. Despite our forecast that greenwashing would have been a major subject this year, we could not have imagined such a rapid initiative from the EU institutions.
The Green Claims Directive proposal aims to address greenwashing by ensuring reliable, comparable, and verifiable environmental information “whether the claim relates to a product’s aspects, impact, or performance, or to the trader itself”. Targeting environmental labels and claims, this would be a brand-new piece of law, alongside and in synch with the changes proposed a year ago to the Unfair Commercial Practices Directive (UCPD) to ban greenwashing practices. The key difference is the setting of minimum requirements for substantiation, communication and verification of such claims, by which the Commission wishes to enhance consumers’ trust. Thus, the Green Claims Directive will do prevention when the UCPD will do repression. Claims will be expected to be both based on an assessment relying on “recognized scientific evidence” and verified by an accredited and independent third party before any commercial communication. This is somehow an authorization regime. Though financial services are out of the proposed scope, it will have ripple effects on sustainable finance, and numerous items can be helpful for designing products and calibrating claims. Concomitantly, the ESAs, especially the ESMA, are reviewing the answers provided by market participants to a call for evidence upon 2022 EC’s request for input on greenwashing.
1) The EU’s progressive attempt to tackle greenwashing: from punishing to preventing
(A) Regulating what is not already
The scope of application of the Directive is very broad. An “explicit environmental claim voluntarily made” is considered as “any message or representation” related to the positive or neutral (present or future) environmental aspects, impact, or performance of a product or the trader itself. Whether is it textual (e.g., the brand’s name), or graphic (e.g., the color used), the scope includes comparative claims, labels, and labelling schemes formats. It should be made “voluntarily” in the context of commercial communication, meaning that they are used in a context of business-to-consumer relationship. This definition thus excludes environmental claims already regulated or substantiated by rules established in the EU or under national. For instance, claims made under Taxonomy Regulation or the Corporate Sustainability Reporting Directive (CSRD)’s requirements, as well as the EU Ecolabel, or ecodesign requirements for energy-related products, are excluded. The Directive shall therefore not apply to sustainability information either mandatorily or voluntarily disclosed for financial products or services, nor claims made in the context of green loans or green bonds.
Under this definition, environmental claims are required to be “clear and unambiguous regarding which aspects of the product or trader they refer to and should not omit or hide important information about the environmental performance”. Therefore, the scale of achievement for now or in the future shall not overstate the environmental benefits. Any elements comprised in the claim, that can be the wording, the imagery, the colors, sounds or symbols, must deliver truthful representation of the product or company’s environmental performance.
(B) Helping the EU edifice by providing legal certainty against greenwashing
The Green Claim Directive introduces specific rules for unregulated green claims established on a triptyque of minimum requirements: substantiation, communication, and verification. In a nutshell, any environmental claim would need to be both based on an assessment relying on “recognized scientific evidence” and ex-ante. The claim would be verified by an accredited and independent third party. Any demonstration requirement (about whether the claim is accurate for the whole product or only for parts of it), as well as the delivered certificate of conformity by the accredited verifier, will have to be disclosed before the claim is being communicated i.e., used towards consumers. Therefore, it aims to provide legal certainty for environmental claims, labels, and labelling scheme.
This came as technical discussions are still ongoing on the Commission March 2022 directive proposal on empowering consumers for the green transition. This proposal will strengthen consumer protection against untrustworthy or false environmental claims banning ‘greenwashing' practices that are able to negatively affect their transactional or purchasing decisions. It therefore amends the Unfair Commercial Practices Directive (UCPD) by adding new categories to the existing list of prohibited unfair commercial practices, namely:
- Displaying a sustainability label which is not based on a certification scheme or not established by public authorities;
- Making a generic environmental claim for which the trader is not able to demonstrate recognised excellent environmental performance relevant to the claim;
- Making an environmental claim about the entire product when it concerns only a certain aspect of the product; and
- Presenting requirements imposed by law on all products in the relevant product category on the Union market as a distinctive feature of the trader’s offer.
Together with the changes made to the UCPD, they complement each other and aim to establish a clear regime for environmental claims, including environmental labels. While the UCPD amendments will protect consumers in litigation cases, the Green Claims Directive proposal should ensure market integrity (ex-ante or by design, although sanctions can also be adopted ex-post). A 2020 study conducted by the Commission found that 53.3% of examined environmental claims by companies in the EU were vague or misleading, and 40% were completely unsubstantiated.
2) The duty to demonstrate is based on a triptyque: substantiation, communication and verification
(A) The general regime
In this perspective, companies would face tougher and challenging rules when making any environmental claim. Compliance with the minimum requirements triptyque is required: substantiate, verify, and communicate. Those standards shall apply whether the claim is about comparing, is isolated or consists in a labelling scheme.
According to the Commission’s words, substantiating amounts to demonstrate the environmental claim’s truthfulness by providing a number of information. Each specific aspect (e.g., durability, reusability, or reparability) shall be based on an assessment relying on “recognized scientific evidence”. The company must justify how the claim goes beyond what is required under environmental law, as well as performing better than usual similar products or entities. Claims relying on carbon offsets have been particularly scrutinised due to their keen nature to overestimation and greenwashing practice. Besides warning against their use, the Commission sets particular rules when substantiation relies on carbon offsets. This includes to dissociate offsets used by the company and offsets substantiating the claim, as well as specify the share of total emissions that are addressed through offsetting.
Other methodological aspects to substantiate the claim are also tackled by the Commission which prohibits the use of any aggregated indicator of environmental impacts that would not be established in the EU law. This must be very impactful, especially on the label market as such practice is highly misleading, drowning environmental adverse impacts within the final positive aggregated score. Besides, the Commission adopts a Do No Significant Harm (DNSH) approach and requires identifying if the claimed green effect is not at the same time worsening another environmental impact. Finally, the EC reminds that claims’ substantiation shall be tackled from a lifecycle perspective, and even include (where relevant) a time-bound commitment for improvements when it relates to future environmental performance. At least, this is coherent with the mandatory review and update of the claim’s substantiation fixed at every 5 years.
Indeed, the claim or labelling scheme shall be ex-ante verified and certified by independent national accredited bodies, through the issuance of a certification of conformity. The verification process must be carried out each time the environmental claim’s substantiation is reviewed. Where the certificate of conformity allows the claim to be communicated, any substantiation requirement such as the underlying studies or calculations used, as well as the delivered certificate, will have to be disclosed before the claim is being used towards consumers. The burden will especially lie in the fact that “every claim “, which corresponds to any piece of environmental credit, should undertake the provided substantiation and verification process. Exhaustive required information shall be made publicly available (physically on in the form of a weblink), but the Commission asks for the businesses to additionally make an understandable and easily accessible summary of these to make it digestible and understandable.
Though the Green Claim Directive comes to prevent greenwashing practices, it has set a penalty regime in case of breach. Penalties inflicted to companies would be imposed by the designated Member States’ competent authority and can take the form of fines, confiscation revenues but also of temporary exclusion from public procurement for a maximum period of 12 months. This is heavy. Thus, to consider the appropriate sanction, Member States must take several criteria into account such as the duration and the economic benefits derived from the infringement, as well as its intentional or negligent character. As held in the numerous debates on greenwashing, intentionality remains a key component to qualify deception, and therefore may worsen the penalty. But it remains challenging to demonstrate. As each Member States would appoint its own competent authority, the proposal mentions the penalties shall be harmonised through the EU, when it is the same trader and the same infringement.
(B) Addressing the proliferation of ecolabelling schemes problem
In addition to this common set of requirements, some very specific environmental claims are asked additional substantiation efforts in order to comply. The Green Claim Directive provides guidance for establishing fair benchmark when using comparative environmental claims. Explicitly assessed against another product or trader, the information and data used for their environmental assessment, as well as the coverage of environmental impacts, aspects or performances must be equivalent.
As for new environmental labelling schemes, the Green Directive proposal draws the lessons on the proliferation of ecolabelling schemes. Indeed, the above-mentioned Commission study showed that there were at the time 232 (or more) active ecolabels in the EU. The assessment also found that almost half of them had weak or no verification and certification aspects, added to the heterogeneity in methodologies used to demonstrate their environmental credit. Therefore, following the proposal on empowering consumers, the Green Claims Directive Proposal is banning labels based on self-certification i.e., not based on a certification scheme, nor established by public authorities. The environmental labelling scheme must notably have been developed by experts that can ensure their scientific robustness and comprise a complaint and dispute resolution mechanism in place.
The new rule is that now Member States must set up a procedure for the approval of new environmental labelling schemes based on the above-mentioned substantiating and verifying minimum requirements. To avoid further proliferation of ecolabels, new regional or national labelling schemes become prohibited on the one hand and shall only be established under the EU law. However, provided that already existing public labels meet all Directive’s requirements, they might continue to be awarded. On the other hand, the issuance of new labels established by private operators will be required to bring added value in its environmental ambition, notably comprising environmental aspects, impacts or performance to comply – and exist. The new labels’ rationale must be assessed against what already exists in the EU and at national scale.
3) A very ambitious directive, though it should be hard to enforce, for businesses as for the EU
Businesses will be bearing the cost of substantiation and communication of their claims. In fact, the Commission precises that according to “the nature and complexity of the claim, the related substantiation cost can vary significantly” also depending on the number of claims the company is willing to revendicate. This will have an automatic accountability effect for businesses, whether it is about the nature of the chosen claim or even about making a claim at all. Anyway, already existing green claims that would not meet these minimum criteria will have to be removed – though we do not know by whom, further requiring adjustments to the product (the Commission gives the example of a sticker covering the claim) until all these products have been sold. Such decision could thereby significantly increase incurred reputational risks. Accompanied with an increase in businesses’ administrative burden, this should result in an overall reduced appetite in bearing such claims which obviously is the Commission’s foreseen effect. We might nevertheless see the “green hushing” phenomenon – the fact of hiding what you do “green” fearing to being accused of greenwashing – whether grow significantly or being drowned in a broader knock-on effect.
However, as the associated additional costs could disproportionally penalize small-scaled companies, the Commission excludes microenterprises (i.e., fewer than 10 employees and with annual turnover not exceeding €2 million) from the scope of application of the proposal, unless they request the third-party verification with the aim of receiving a certificate of conformity as outlined by the Directive.
Ultimately, the directive should have a positive impact on already “virtuous” practices and companies which will be valued. We can anticipate a driving effect for more environmental-friendly activities’ reliability even outside the EU as non-EU environmental labelling schemes or claims directed towards European consumers must comply.
Looking at the foreseen effects on claims’ quality and products’ environmental performance, the Commission has set indicators for “monitoring progress and achievements”. For instance, environmental performance of products and organizations’ improvement should be assessed by keeping track on the evolution of benchmark values or even evolution of consumption footprint in the EU. As a safety net for all sectors where environmental claims or labels are unregulated at EU level, the intended impacts should somehow ultimately affect consumers’ behavior that the Directive also seeks to monitor through the level on consumer trust in these markets.
The Green Claims Directive therefore paves the way for a framework to fight against greenwashing, released within a context of increased supervision to tighten the definition of what is “green” or not. It should be cross-sectoral structuring, and financial products, though not covered, are facing similar issues related to green claims. The EU mobilization to fight against greenwashing is definitely underway. We ignore the likelihood of this proposal to be politically adopted. Furthermore, is this text only usable? the constraining nature of the Green Claims Directive proposal lives the door open for lively debates in the EU until its adoption (no date has been communicated yet); for now, the public consultation has just open for a few weeks – until the 19 May 2023. It is besides expected that together with the review of the Unfair Commercial Practices Directive they may be transposed jointly by the Member States (i.e., within the two years following the Green Claims Directive adoption). The Commission has additionally mentioned that it should adopt delegated acts to enhance implementation and provide details regarding claim’s verification and certification.