Global crackdown on greenwashing: regulatory developments and trends

Greenwashing is the practice of making unsubstantiated, untrue, or misleading claims about the environmental benefits of a company's products and initiatives the company claims to be undertaking. Its goal is to create a false impression of environmental responsibility to attract customers and investors. Misleading statements are often included in marketing materials, company disclosures, and communications to clients or other public statements.

Until recently, addressing greenwashing was often governed by laws that are broadly applied. It was mostly embedded in overarching consumer protection laws, advertising rules, and trade regulations. The rise of ESG investing and attention to ESG factors have significantly contributed to the increased regulatory focus on greenwashing.

In general, 5 key factors accelerate the discussions on matters addressing greenwashing:

1. Demand for transparency and accountability: ESG investors want to put their money in companies that align with their values and have a positive impact on the planet and society. This demand has pressured companies to communicate their ESG performance but has also created the temptation and pressure for some to exaggerate their sustainability efforts.
2. Financial materiality of ESG: investors are recognizing that ESG factors can have material impact on a company's long-term risks and performance. Environmental risks, social unrest, or poor governance can translate into financial losses.
3. Preventing misallocation of capital: greenwashing can lead to a misallocation of capital, where funds intended for genuinely sustainable companies are diverted towards 'greenwashed' ones.
4. Increased scrutiny: the growth of ESG investing has brought sustainability issues into the spotlight. Companies can no longer make vague claims without being challenged by investors, regulators, and stakeholders who demand robust evidence.
5. Reputation as a competitor: companies with a strong ESG record can become more attractive to investors, talent, and consumers. This can lead to companies that haven't done the actual sustainability work to try and falsely project that good image.

# I. What sectors are usually implicated in greenwashing controversies?

While greenwashing can occur in any industry, here are the sectors that tend to be the most frequently implicated in greenwashing controversies:

• Energy: traditional oil and gas companies often face accusations of greenwashing when they highlight minor renewable initiatives while continuing core fossil fuel operations. Scrutiny also extends to claims around "clean" gas or misleading emissions reduction pledges as well as rebranding or repackaging their products to more ’natural’, ‘wholesome’ or ‘free of chemicals’
• Fashion (especially fast fashion¹): brands promoting clothing lines or products as "sustainable," "eco-friendly," or made from recycled materials frequently have their claims challenged. Issues arise from small percentages of recycled content being exaggerated, or the lack of transparency around their complex supply chains.
• Food and beverage: terms like "natural," "organic," and "farm-fresh" are often misapplied. Animal product companies might emphasize selected welfare practices while obscuring broader impacts. Plant-based alternatives may also overstate their environmental benefits or nutritional value.
• Consumer goods: sectors like cleaning products, cosmetics, and personal care face growing scrutiny. Vague terms like "green," "earth-friendly," “recycled packaging,” or even "plant-based" can be used with little supporting evidence.
• Finance: financial institutions face a unique form of greenwashing. This involves marketing investment funds as "ESG" or "sustainable" when the underlying holdings don't align with those claims. It also includes downplaying the climate risks within asset portfolios.
• Transportation: automakers can overstate the fuel efficiency or "green" credentials of their vehicles. Airlines are increasingly criticized for promoting carbon offset programs or future technologies while minimizing the real impact of flying.

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# II. What are some of the notable regulations addressing greenwashing?

# 1. EU Directive to Empower Consumers for the Green Transition (Empowering Consumers Directive)

• Entered into force on March 2024, the Empowering Consumers Directive amended the EU’s Unfair Commercial Practices Directive and the Consumer Rights Directive. It has 3 main mandates:
  • Environmental claims such as "eco-friendly" or "green" must be supported by clear and sufficient evidence. General or vague statements are not allowed.
  • Sustainability labels are only permitted if they are either issued by a public authority or are based on an approved certification scheme.
  • Claims that a product is climate neutral, has reduced impact, or a positive effect due to carbon offsetting are strictly prohibited.
• It applies to all voluntary commercial practices in business-to-consumer (B2C) transactions throughout the product lifecycle, including marketing and communication by financial institutions. However, it does not cover information that companies are already legally obligated to provide under existing EU or national laws. This includes specific disclosures required by banking regulations or those mandated under the Sustainable Finance Disclosure Regulation (SFDR).

# 2. EU Green Claims Directive (GCD)

• GCD is a proposed regulation in March 2023 designed to combat greenwashing and protect consumers from misleading environmental claims about products and services.
• It aims to establish a clear and standardized framework for businesses to substantiate their "green" claims, ensuring they are based on reliable evidence and methodologies.
• It aims to:
  • Ensure that environmental claims are backed by credible scientific evidence and assessments.
  • Make environmental information easily accessible and understandable for consumers.
  • Enable consumers to compare the environmental performance of different products and services.
• GCD applies to all voluntary environmental claims made in B2C commercial practices. It covers claims about products, services, and organizations and includes claims made before, during, and after a transaction. It does not apply to mandatory environmental information required by other EU laws and does not cover claims made in business-to-business (B2B) transactions.

# 3. Swiss guidelines on commercial communication with an environmental or climate reference

• This guideline was published in December 2023 by the Swiss Commission for Fairness (SLK) and aims to clarify how companies should communicate environmental claims in their advertising. It outlines the requirements for fair commercial communication under the Swiss Unfair Competition Act.
• It does not introduce new regulations but instead clarifies existing rules. The key points of the guidelines include:
  • Environmental claims must be clear, specific, and easily understood by consumers.
  • Claims must be accurate and based on verifiable evidence and companies must provide transparent explanations for their environmental claims, including details on the methodology and data used to support them.
  • Claims should go beyond legal requirements or industry norms, demonstrating a genuine commitment to environmental improvement.
  • Advertisements should clearly state whether the claim refers to current practices or future goals.

# 4. US Guides for the Use of Environmental Claims (Green Guides)

• The Green Guides are a set of guidelines issued by the Federal Trade Commission (FTC). It was first issued in 1992 and have been revised several times since then to keep up with changing consumer perceptions and marketing practices.
• While not a legally binding regulation, they are used by the FTC as a basis for enforcement actions against companies that make false or misleading environmental claims. The FTC has the authority to impose fines and other penalties on companies that violate the Green Guides.
• In summary, the key points of the Green Guides include:
  • General principles: provide overarching principles that apply to all environmental marketing claims. These principles emphasize the importance of truthfulness, accuracy, and substantiation of claims.
  • Specific guidance: offer specific guidance on the use of various environmental terms and claims, such as "recyclable," "biodegradable," "compostable," and "carbon neutral.
  • Qualifying claims: advise marketers on how to qualify their environmental claims to avoid misleading consumers. For example, if a product is not entirely recyclable, the claim should be qualified to indicate the percentage of recyclable content.

# 5. UK Anti-greenwashing rule (AGR)

• Enforced on May 31, 2024 as part of the highly anticipated Sustainable Disclosure Requirements (SDR) package, it applies to all authorized firms of Financial Conduct Authority (FCA) that make sustainability-related claims about their products and services.
• There are 4 considerations that in-scope companies must adhere to when making sustainability and environmental claims. It must be:
  • Correct and capable of being substantiated through evidence. Claims must be supported by robust evidence and data. Firms must be able to demonstrate that their products and services genuinely deliver on their environmental promises.
  • Clear and presented in a way that can be understood. All sustainability-related claims must be presented in a way that is fair, clear, and not misleading to consumers. This means that firms must provide accurate and complete information about the environmental impact of their products and services.
  • Complete – they should not omit key information and should take into account the life-cycle of the product or service. Companies in scope must avoid cherry-picking positive aspects while ignoring negative environmental impacts at other stages of the life cycle.
  • Fair and meaningful in relation to any comparisons to other products or services. Companies in scope must be prevented from making misleading comparisons that could unfairly disadvantage competitors or exaggerate the environmental benefits of their own offerings.

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