EU PROPOSES NEW RULES TO COMBAT GREENWASHING

On March 22, 2023, the European Commission published its proposed Directive on Green Claims.^[1] The proposal is the latest EU initiative to take aim at the practice of greenwashing, which the Commission found was misleading for consumers as well as unfair for companies working genuinely to improve their environmental performance.

The proposed Directive introduces new rules on the evidence that companies will have to produce to substantiate their green claims, along with a requirement that such claims be verified and certified by a third party before being publicized. Significant penalties may be imposed for non-compliance. The proposal also grants standing to interested parties to bring complaints against traders, including collective actions on behalf of consumers.

If adopted, the proposed Directive will impact all businesses selling their products in the EU, as well as bring about major changes to the way those products are packaged and advertised.

Key Takeaways

• The proposed new rules cover virtually all traders doing business in the EU, save where they fall under a more specific EU legal regime. An exemption is made for microenterprises.
• The proposal addresses “environmental claims,” meaning any voluntary message or representation made in the context of business-to-consumer (“B2C”) communications stating or implying that a product or trader has a positive, neutral or improved environmental impact.
• Specifically, the proposal targets explicit environmental claims, meaning environmental claims in textual form or contained in an environmental label.
• Traders will have to substantiate their environmental claims based on widely recognized scientific evidence, and take into account all relevant environmental impacts. The underlying assessment must be made accessible to consumers, for example by way of a weblink or QR code, and updated at least every five years.
• If a claim makes comparisons between products or traders, these comparisons must be fair and based on equivalent information and data.
• Claims or labels using aggregate scoring of a product or trader’s overall environmental impact (for example, on climate, biodiversity or water consumption) are not permitted, save under EU rules.
• All duly substantiated environmental claims and labels must be independently verified and certified before being made public.
• The proposal also introduces rules for environmental labelling schemes. All new public schemes by non-EU authorities will be subject to approval by the Commission, while private schemes must be approved at the national level.
• Penalties for non-compliance may include fines of up to 4% of the trader’s total annual turnover in the Member State(s) concerned, as well as confiscation of the relevant product or any revenues deriving from that product.
• Natural or legal persons regarded under EU or national law as having a legitimate interest will be entitled to submit complaints to competent national authorities concerning alleged infringements of the Directive. The decisions of national authorities will be subject to judicial review.
• The new rules could also give rise to collective actions on behalf of consumers under national laws implementing the EU Representative Actions Directive, posing a significant risk for business.
• At the same time, by harmonizing requirements across the EU, the proposed Directive should help to reduce legal uncertainty for traders engaged in cross-border commerce.

Background

According to a 2020 study carried out by the Commission on environmental claims, 53.3% of claims were vague or misleading, and 40% of claims were unsubstantiated.^[2] Climate-related claims—for example, that products or businesses are “carbon neutral” or will be “net-zero” by a given year—were identified as especially likely to mislead, notably due to lack of transparency about reliance on carbon credits generated outside a business’s own value chain (such as from forestry or renewable energy projects).^[3]

Environmental labels on the EU internal market were additionally found to be subject to different levels of robustness, transparency and supervision.^[4]

Against this background, the stated objectives of the proposed Directive are to protect and empower EU consumers, as well as to create a level playing field for businesses operating in the EU internal market.^[5]

The proposal also comes at a time when greenwashing or climate-washing litigation is gaining pace in the EU, with businesses increasingly being held to account before domestic courts and other bodies for propagating environmental or climate disinformation concerning their products or activities. Such claims have been brought by national regulators, consumers or consumer groups, environmental NGOs, and business competitors.^[6]

Relationship to Other EU Rules

The proposed Green Claims Directive is part of a set of interrelated initiatives to implement the European Green Deal, which recognizes that reliable, comparable and verifiable information empowers consumers to make more sustainable buying decisions.^[7]

In particular, the proposed Directive complements other EU rules on the provision of environmental information and consumer protection.^[8] These include, notably, the Unfair Commercial Practices Directive,^[9] which is currently being revised on the basis of a March 2022 proposal by the Commission for a Directive on empowering consumers for the green transition.^[10]

Whereas the Unfair Commercial Practices Directive sets out general rules (lex generalis) on all voluntary B2C practices in the EU, the proposed Green Claims Directive provides specific rules (lex specialis) on the substantiation, communication and verification of environmental claims. Further, whereas the revised Unfair Commercial Practices Directive deals with sustainability labels (covering environmental or social aspects, or both), the proposed Green Claims Directive focuses on environmental labels only.

The proposed new rules further build on existing initiatives by EU Member States to tackle greenwashing, such as, in France, the Circular Economy Law^[11] and Climate & Resilience Law.^[12]

Scope

The proposed Directive applies to “environmental claims,” meaning any voluntary message or representation (including labels, or brand, company or product names/logos) made in the context of a B2C communication stating or implying that a product or trader has a positive, neutral or improved environmental impact.^[13] Specifically, the proposal targets:

• “explicit environmental claims,” meaning any environmental claim in textual form or contained in an environmental label;^[14]
• “comparative explicit environmental claims,” meaning explicit environmental claims drawing comparisons to other products or traders (for example, stating or implying that a product or a trader is less harmful to the environment than another product or trader);^[15] and
• “environmental labels,” comprising a subset of environmental claims, and including any trust mark, quality mark or equivalent referring to the environmental aspects of a product, service or trader.^[16]

The proposal applies not only to EU-based traders, but also to non-EU traders operating within the EU internal market. An exemption is made for microenterprises (i.e., companies with fewer than 10 employees and an annual turnover not exceeding EUR 2 million).^[17] If a microenterprise nonetheless wishes to obtain certification under the Directive, it must comply with all relevant requirements.^[18] Further, all traders, regardless of size, remain subject to the general rules on environmental claims and sustainability labels under the Unfair Commercial Practices Directive.^[19]

The proposal does not apply to financial services^[20] or to claims regulated by other more specific regimes, such as the EU Ecolabel Regulation.^[21] The new rules also do not apply to environmental information supplied pursuant to the EU Taxonomy Regulation^[22] or the EU Accounting Directive^[23] (unless that information is repurposed in the form of a B2C communication, triggering the application of the proposed Green Claims Directive).

Requirements

Substantiation of claims

The proposed Directive requires all explicit environmental claims to be substantiated. The underlying assessment must:

• specify if the claim relates to the whole or part of a product, or to all or part of a trader’s activities;^[24]
• rely on “widely recognized scientific evidence”;^[25]
• consider the life cycle of the product or the overall activities of the trader;^[26]
• take into account all relevant environmental aspects or impacts in assessing environmental performance;^[27]
• demonstrate that any claimed benefit goes beyond minimum legal requirements^[28] or common practice in the relevant product group or sector;^[29]
• identify any negative environmental tradeoffs (e.g., savings in water consumption leading to a notable increase in GHG emissions);^[30]
• describe any carbon offsets relied on (and whether those offsets relate to emission reductions or removals);^[31] and
• include all relevant primary (company-specific) and secondary information.^[32]

Comparative explicit environmental claims are further required to demonstrate the equivalency of all information and data used to make the relevant comparison,^[33] which should also cover the same stages along the value chain.^[34]

Environmental labels must fulfil the same requirements as set out above.^[35]

The assessment must in all cases be made available in physical form or as a weblink, QR code or equivalent.^[36] Information must be reviewed and updated every five years, or whenever there are circumstances affecting the accuracy of a claim.^[37]

Communication of claims

When being communicated, environmental claims must include information on how the consumer should use a product in order to maximize that product’s expected environmental performance.^[38]

Commitments as to future environmental performance must be time-bound, and relate to improvements inside the trader’s own operations and value chains (rather than rely on carbon offsets, for example).^[39]
Claims presenting a cumulative environmental impact of a product or trader are not permitted unless based on rules established under EU law,^[40] in order to prevent aggregated indicators being used to obscure a product or trader’s actual impacts by diluting negative impacts with more positive impacts.^[41]

In addition, claims must meet the general requirements of the revised Unfair Commercial Practices Directive, meaning that:

• the overall presentation of a product—including wording, layout, color scheme, imagery, symbols or labels—should accurately depict the scale of any environmental benefit;^[42]
• generic environmental claims—such as “eco-friendly,” “green,” “carbon neutral,” “biodegradable” or “nature’s friend”—are barred unless based on recognized criteria established under EU law;^[43] and
• ‘self-certified’ sustainability labels (i.e., sustainability labels not based on a certification scheme or established by public authorities) are prohibited.^[44]

Verification of claims

Under the proposed Directive, Member States must appoint independent accredited third-party bodies^[45] to assess environmental claims and labels, and to issue certificates of conformity valid throughout the Union.^[46]
Importantly, certificates must be obtained before a claim is made public or a label is publicly displayed.^[47]

Environmental labelling schemes

The proposed Directive further details requirements for environmental labelling schemes, including as to:

• transparency and accessibility of information about the scheme’s decision-making bodies, requirements and procedures;^[48]
• the conditions for joining the scheme, which should be proportionate to companies’ size and turnover;^[49]
• the scheme’s requirements, which must have been developed by experts and reviewed by stakeholders;^[50]
• the existence of a complaint and dispute resolution mechanism;^[51] and
• procedures to deal with the consequences of non-compliance, including withdrawal or suspension in case of persistent and flagrant non-compliance.^[52]

The proposal also introduces measures to address the proliferation of labelling schemes (of which, according to Commission estimates, there are currently more than 200 in use in the EU).^[53] Thus, no new public schemes can be established in the EU, except under EU law.^[54] New public schemes by non-EU authorities will be subject to notification and approval by the Commission before entering the EU,^[55] while new private schemes (whether developed within the EU or externally) must be approved by Member States.^[56] In all cases, approval is conditional on proof of added value for the EU market.^[57]

The Commission shall publish and keep up to date a list of officially recognized environmental labels.^[58]

Enforcement and Consequences of Non-Compliance

Under the proposal, Member States are required to designate competent authorities with responsibility for ensuring compliance with the proposed Directive,^[59] including through regular checks of environmental claims and labels.^[60] The prior issuance of a certificate of conformity shall not prejudge the authorities’ own assessment of a claim.^[61] The findings of national authorities are to be made publicly available online.^[62]

Authorities will have full inspection and enforcement powers,^[63] including the power to access information,^[64] to start investigations or proceedings,^[65] to require traders to pursue appropriate remedies and take corrective action,^[66] to adopt injunctive relief^[67] and to impose penalties.^[68]

Penalties shall be effective, proportionate and dissuasive,^[69] having regard to several factors, including the nature, gravity, extent and duration of the infringement, as well as any previous infringements.^[70] They shall include:

• fines, totaling up to 4% of the trader’s annual turnover in the Member States concerned in case of cross-border infringements, and increasing in amount for repeat offenders;^[71]
• confiscation of the relevant product or of revenues gained by the trader from that product;^[72] and
• temporary exclusion for up to 12 months from public procurement processes and access to public funding.^[73]

Any claim or label not meeting the requirements of the proposed Directive will have to be removed, with any necessary changes to product packaging or advertising materials.[74]

Complaints and Dispute Resolution

Under the proposal, natural or legal persons with a legitimate interest will have standing to table complaints to the competent authorities and seek redress in national courts or other bodies concerning a trader’s non-compliance with the Directive.^[75] Non-governmental or other entities promoting human health or environmental or consumer protection and satisfying any national law requirements shall be deemed to have sufficient interest.^[76]

The new rules could also give rise to collective claims under the EU Representative Actions Directive,^[77] granting designated “qualified entities” (such as consumer organizations) standing to bring claims on behalf of consumers for breaches of EU consumer protection laws, including to seek injunctive relief and damages.^[78] Member States have flexibility to decide on key issues, such as the classification of qualified entities and whether actions will operate on an opt-in or opt-out basis. National laws implementing the Representative Actions Directive are set to become operative as of June 25, 2023.

Next Steps and Likely Impacts for Business

The proposed Directive will now be examined by the European Parliament and Council. Once the Directive is adopted in its final form and enters into force, Member States will have 18 months to transpose it into national law and 24 months to begin applying the relevant measures.

The proposal also foresees the Commission adopting delegated and implementing acts to supplement the provisions of the Directive, including as to the requirements for the substantiation, communication and verification of environmental claims,^[79] as well as for the approval of environmental labelling schemes.^[80] Businesses should therefore expect more detailed regulation.

It remains to be seen whether the provisions granting standing to interested parties to challenge environmental claims, together with the new right of collective action under the Representative Actions Directive, will lead to an uptick in greenwashing litigation in the EU. Mass actions, in particular, pose significant risks for businesses, which should pay careful attention to laws implementing the Representative Actions Directive in all countries in which those businesses operate.

The new rules on substantiation and verification of environmental claims, coupled with the risk of significant penalties for non-compliance, are likely to deter some traders from espousing their green credentials. At the same time, by contributing to the harmonization of requirements within the EU, the proposed Directive should reduce legal uncertainty for traders engaged in cross-border commerce, and offer a competitive advantage to companies making a genuine effort to improve their environmental performance. The Commission will be hoping that others may be incentivized to follow suit.

Further Information

Shearman & Sterling’s Environmental, Social & Governance (ESG) team provides advice and advocacy to companies across multiple impact areas. We would be pleased to answer any questions.