EU to introduce new rules on greenwashing

On 19 September 2023, the European Parliament and Council reached a provisional agreement on new rules governing environmental claims. This follows the European Commission's proposal for a Directive (the Green Claims Directive) which was published in March 2023. Specifically, the Directive aims to prevent companies making unclear or unsubstantiated environmental claims (so-called "greenwashing") and using labels that are not credible. The end goal is to enable consumers to make sustainable choices.

The provisional deal needs final approval from the Parliament and the Council. The parliamentary committees responsible for the file are expected to consider the draft report on 9 November 2023. This will be followed by a vote in committee in mid-February 2024 and at a plenary session (expected to be) in March 2024. 

Key takeaways

• The Green Claims Directive is designed to improve the reliability of information provided to consumers and facilitate the choice of products offering better environmental performance.
• Environmental claims may only be made if they meet certain minimum criteria and are independently verified by a third party assessment body.
• Traders may use environmental labels which are robust, transparent, reliable, independently verified and regularly reviewed.
• Another aim of the new rules is to create a level playing field for businesses in the EU and to have a positive impact on global value chains which involve production processes in non-EU Member States.
• Cost analysis carried out by the European Commission shows that the costs of ex ante regulation will be significantly lower than the costs of enforcement.
• Traders should be mindful that, besides attracting public enforcement, greenwashing practices may give rise to damage claims before civil courts.

Background

Consumers are increasingly interested in sustainable products and making responsible decisions to limit their environmental impact. Claims about how sustainable or "green" a product is have therefore become an important element of competition to attract business. 

In a 2020 study, the European Commission found that 53.3% of the 150 environmental claims examined were vague, misleading or unfounded and 40% were unsubstantiated. The study also identified over 230 "green" labels within the EU with significantly different levels of transparency, supervision and robustness. 

The European Commission is seeking to update EU consumer law to protect and empower consumers to actively contribute to the green transition, as well as encourage the adoption of sustainable practices throughout global value chains. The European Commission proposed two circular economy packages in March and November 2022, which included legislation on:

• ecodesign for sustainable products;
• sustainable and circular textiles;
• packaging and packaging waste;
• biodegradable, biobased and compostable plastics; and
• certification of carbon removals.

One focus of this is to ensure that consumers (and genuinely sustainable companies) are protected against false environmental claims.

In turn, the Green Claims Directive's focus is to ensure that consumers (and genuinely sustainable companies) are protected against false environmental claims. It has three main goals:

• harmonising minimum requirements for traders to provide evidence when making voluntary environmental claims;
• an EU labelling scheme; and
• new enforcement procedures and penalties for non-compliance.

The Green Claims Directive proposals 

Relationship with the Unfair Commercial Practices Directive

The Green Claims Directive complements the European Commission's proposal for a Directive on empowering consumers for the green transition, including proposed changes to the Unfair Commercial Practices Directive (UCPD) and the Consumer Rights Directive (CRD). In the event of a conflict, the Green Claims Directive will prevail over the UCPD.

The amended UCPD includes obligations applicable to all voluntary business-to-consumer commercial practices and includes "environmental" or "social" impact, "durability" and "reparability" in the list of product characteristics about which a trader should not deceive a consumer. The amended UCPD also added four specific practices associated with greenwashing and included certain environmental claims in the list of potentially misleading actions. 

The Green Claims Directive will apply to voluntary business-to-consumer claims (including in the form of an environmental label) relating to environmental impact, aspects or performance of a product or the trader itself and provides more specific rules than the UCPD. 

The provisional agreement between the European Parliament and the Council proposes to update the existing EU list of banned commercial practices to include several problematic marketing habits related to greenwashing and early obsolescence of goods, including:

• making an environmental claim which cannot be substantiated in accordance with legal requirements; or
• claiming that a product has a neutral, reduced or positive greenhouse gas emissions’ impact on the environment based on carbon offsetting.

The provisional agreement also proposes a harmonised label with information on a product's durability and additional banned commercial practices.

Requirements on substantiating and communicating claims 

The Green Claims Directive introduces minimum requirements relating to the substantiation and communication of environmental claims. Claims which do not meet these minimum criteria will be forbidden. 

In particular, traders will be required to substantiate explicit environmental claims which will need to be independently verified by a third party assessment body and proven with scientific evidence (Article 3 of the Green Claims Directive). This will help businesses to identify environmental impacts that are actually relevant to their product and any possible trade-offs. 

The assessment should be able to demonstrate the significant impacts, aspects of performance of a product and whether the:

• claim (in relation to the whole or part of the product) is accurate;
• claim goes beyond legal requirements;
• product performs better than what is common practice;
• positive effects lead to a significant worsening of another impact (e.g. whether there any trade-offs);
• any greenhouse gas offset is reported in a transparent manner (i.e. when making a claim that a product is carbon neutral, companies will need to explain if this is achieved by the product itself or through offsetting); and
• assessment relies on accurate company-specific information or secondary information where company-specific information is not available.

There are additional requirements in Article 4 for comparative claims, i.e. claims which state or imply that the product or trader is more environmentally sustainable than another trader or its products. 

Article 5 of the Green Claims Directive requires traders to communicate the exact environmental impacts, aspects or performance covered by the explicit environmental claims and the underlying studies or calculations. This provision is designed to ensure that environmental claims are made in relation to products or traders whose environmental benefits go beyond what is considered common practice. As a result, claims should only be made in relation to environmental aspects which, have been assessed in compliance with the Green Claims Directive's requirements, and are genuinely significant for the product or trader. Where relevant, the claim should also include information on how consumers should use the product to decrease the environmental impact. 

Similarly, it would be considered misleading if an environmental claim did not make clear that achieving the environmental benefits leads to negative trade-offs or other negative environmental impacts. 

Environmental claims relating to future performance must include a time-bound commitment for the improvements in their own operations and value chains and should not rely on offsetting of greenhouse gas emissions or other environmental impacts. 

The European Commission has assessed that the cost of substantiating claims will range from EUR 500 for a simple claim to EUR 8,000 for claims relating to a product's environmental footprint to EUR 54,000 for claims relating to a company's environmental footprint. Claims will need to reviewed every five years to ensure compliance. These costs will be borne by the company wishing to make the claim. 

Requirements on EU environmental labelling 

The Green Claims Directive also regulates requirements on environmental labels, i.e. sustainability labels which predominantly (or exclusively) relate to the environmental aspects of a product, process or trader. 

The requirements for environmental labelling schemes are set out in Article 8 of the Directive and relate to the:

• transparency and accessibility of information;
• underlying criteria for the award of labels;
• existence of dispute resolution mechanisms; and
• non-compliance procedures.

Sustainability labels based on self-certification will be banned as one of the goals of the Directive is to ensure that environmental labels are robust, transparent and reliable. Independent verification is therefore important. Once the Directive has been transposed into national law, it will only be possible to establish environmental labelling schemes under EU law. This means that it will not be possible for public authorities to create new national and regional labelling schemes within the EU. New private schemes and new schemes established in non-EU countries will be subject to a pre-approval process. In order to be approved, the scheme will need to offer "added value" compared to existing EU, national or regional schemes. 

Existing labelling schemes may continue to exist provided they mee the requirements of the Green Claims Directive. 

By establishing minimum standards for, and preventing the proliferation of, environmental labelling schemes, the Green Claims Directive should improve consumers' confidence in, and understanding of, labels.

Exemptions

The Green Claims Directive rules will not apply to claims and labels which are regulated under other legislation, such as environmental claims for organically certified products. 

In addition, microenterprises (i.e. companies with fewer than 10 employees and annual turnover of less than EUR 2 million) will not be subject to the obligations, unless they wish to use a certificate recognised across the EU. 

Non-EU traders will need to comply with the Green Claims Directive requirements to the extent they make environmental claims to EU consumers. 

Monitoring and enforcement

As the Green Claims Directive will need to be implemented into EU Member States' national laws, national authorities will be primarily responsible for monitoring compliance by traders. Under the Directive, regulators should be able to impose fines of up to 4% of the company's total annual revenue in the affected Member State(s) for widespread infringements with an EU-wide effect. Any penalties imposed should reflect the nature and gravity of the infringement.

Fines should effectively deprive the non-compliant trader of the economic benefit obtained by using the misleading or unsubstantiated environmental claim or non-compliant environmental labelling scheme. 

In addition, the relevant products (or resulting revenues) should be confiscated or there should be a temporary ban on selling the relevant products or services within the EU. 

The European Commission also envisages that "qualified entities" such as consumer protection organisations will be able to bring civil actions to protect the collective interest of consumers, as a result of the Representative Actions Directive (EU) 2020/1828. 

Interplay between public enforcement and damages actions

Companies should be mindful that public enforcement against greenwashing may not be the end of the matter. The Green Claims Directive provides that the type and level of penalties to be imposed should take into account any action taken by the trader to mitigate or remedy the damage suffered by consumers.

However, private damages actions are on the rise. The Volkswagen emission scandal is probably the most prominent class action launched by consumer associations in various jurisdictions to date, resulting in hundreds of millions of Euros of damages being awarded to consumers that have been misled by the automaker.   

Timeline

Following the provisional deal between the European Parliament and Council, the Green Claims Directive now needs final approval by both bodies. MEPs are expected to vote in November 2023. 

Once adopted, the new EU rules will have to be incorporated by Member States into their domestic law, and must then apply within 24 months from their adoption (which is expected to be in March 2024). 

Comment

As part of the EU's legislative packages to support the EU Green Deal, the Green Claims Directive is designed to contribute to the creation of a circular and green economy within the EU by empowering consumers to make better informed purchasing decisions and therefore play an active role in the ecological transition. 

The Green Claims Directive will provide consumers with tools to recognise green products and enable them to choose to support genuinely eco-friendly, innovative businesses. The introduction of minimum criteria for all environmental claims and labels will improve the reliability of the information provided to consumers and help protect consumers from greenwashing and misleading environmental claims. This will also benefit businesses which are genuinely striving to improve their environmental credentials. 

With thanks to Nicolò Tucci of Ashurst for his contribution.