New EU legislation to combat greenwashing

New EU legislation to combat greenwashing will increase focus on companies’ marketing practices and sustainability reporting. A proposal from the European Commission includes amendments to the Unfair Commercial Practices Directive (UCPD) and the Consumer Rights Directive empowering consumers for the green transition through better protection against unfair practices and better information. Alongside, the upcoming Corporate Sustainability Reporting Directive (CSRD) will increase transparency on companies’ impact on sustainability and will oblige companies to disclose comprehensive data to better enable examination of companies’ sustainability efforts.

Have you ever seen an advertisement connecting a company to colors, symbols or impressions insinuating that the company’s level of sustainability is above average or that the company highly cares about the environment?

If your answer is “yes”, then you may have been exposed to greenwashing.

Examples of such claims in marketing materials are “environmentally friendly”, “green”, “organic”, “pollutant free”, “zero emission”, “conscious” and “climate neutral”.

Greenwashing is a form of misleading marketing of activities or products that are presented as more environmentally friendly and sustainable than they are. When companies greenwash, they pretend (either on purpose or in good faith) to be more environmentally conscious for marketing purposes without in fact making any notable sustainability efforts.

As the focus on sustainability increases and as some companies abuse positive associations to “green” solutions and products, EU legislators are seeking to combat greenwashing to avoid ultimately diluting genuine sustainability claims and causing overall harm to consumer trust within the field of sustainability.

In this newsletter, we introduce two recent legislative initiatives that works to take on the issue of greenwashing and the lack of reliable sustainability data.

Unfair Commercial Practices Directive (“UCPD”)

The Unfair Commercial Practices Directive (No. 2005/29) concerns unfair business-to-consumer commercial practices and establishes a legal basis to ensure that companies do not use environmental claims in ways that are unfair to consumers. Thus, the UCPD is not specifically aimed at environmental marketing. However, the Directive contains general rules on misleading marketing which in some cases may apply to certain environmental marketing cases.

On 30 March 2022 the European Commission proposed^[1] amending two directives including the UCPD and the Consumer Rights Directive.^[2] The proposal aims at enhancing consumer rights and contribute to a circular, clean and green EU economy by enabling consumers to take informed purchasing decisions and therefore contribute to more sustainable consumption. Also, the proposal targets unfair commercial practices that mislead consumers away from sustainable consumption choices and ensures a better and more consistent application of EU consumer rules.

The amendments of the UCPD could, if adopted by the EU legislator, result in a ban on greenwashing and planned obsolescence of products. Currently, the UCPD contains neither a definition of environmental claims nor an explicit prohibition on greenwashing. The Commission proposes to extend the list of product characteristics which a company cannot mislead consumers about to include environmental or social impacts, durability and reparability. In addition, new practices are added which are considered misleading on a case-by-case basis, such as making an environmental claim about future environmental performance without clear, objective and verifiable obligations and targets and without an independent monitoring system. Among the new practices on the list of prohibited unfair commercial practices are:

• Not informing about features used to limit durability i.e., software which stopes or downgrades the functionality of a product.
• Making generic and vague environmental claims.
• Making an environmental claim about the entire product when it only concerns a certain aspect of the product.
• Using an optional sustainability label which is not based on a third-party verification or established by public authorities.
• Not informing that a product has limited functionality when using consumables, spare parts or accessories that are not supplied by the original manufacturer.

The proposed amendments intend to provide more legal certainty for companies regarding greenwashing and obsolescence of products and ensuring that environmental claims are fair. This will encourage competition towards more environmentally sustainable products and thus reduce negative impacts on the environment.

The proposal is still in the process being discussed by the European Parliament and the Council and is therefore not yet adopted.

Corporate Sustainability Directive (“CSRD”)

The very recently adopted Corporate Sustainability Reporting Directive (No. 2021/0104) is another important initiative from the EU, the purpose of which is to ensure better, more in-depth and more comparable reporting on sustainability matters and thereby effectively also seeking to limit greenwashing.

The CSRD will enhance transparency on sustainabilty as it will require around 50,000 European companies provide standardized reporting on environmental, social and governance (“ESG”) matters. The standardized reporting requirements along with a new requirement for formal assurance (through audit), will better enable examination and scrutiny of specific data behind a companys sustainabilty claims, including environmental and climate claims.

The CSRD will replace the current Non-Financial Reporting Directive (“NFRD”)^[3] and extend the scope of the reporting requirements for those companies to which it applies. Like the NFRD, the CSRD is expected to be transposed into Danish law through first of all the Danish Financial Statements Act, where non-financial reporting requirements are currently primarily reflected in section 99a.

The CSRD will become effective:

• for large companies of public interest (including notably listed companies) with more than 500 employes that are already covered by the NFRD, from the financial year starting 1 January 2024;
• for large companies not currently covered by the NFRD, which exceed two of the following thresholds: (a) balance sheet total exceeding EUR 20 million, (b) net turnover exceeding EUR 40 million, and (c) more than 250 employees, from the financial year starting from 1 Janury 2025;
• for listed SMEs as well as small and non-complex credit institutions, from the financial year starting 1 January 2026; and
• for Non-EU companies with a net turnover of more than EUR 150 million in the EU for each of the last two consecutive years and which have an EU branch or subsidiary, from the financial year starting 1 January 2028.

Information to be included in the reporting must cover specific data points related to ESG matters, which are to be further specified and set out in mandatory European Sustainability Reporting Standards (ESRS). The ESRS standards are still being developed, however first drafts have been published. These cover, among other things, environmental matters such as climate changes, pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy. The standards will require that the disclosed information is understandable, relevant, representative, verifiable and comparable.

Further, companies will be required to digitally “tag” the disclosed information to ensure machine readability and again, easier comparability. Companies must ensure that all information is published in a dedicated section of the management report.

On 28 November 2022, the EU Council finally approved and adopted the CSRD. The CSRD will then enter into force 20 days after publication. EU member states will have 18 months to transpose it into national law.

[1] Proposal for amending Directives 2005/29/EC and 2011/83/EU (COM/2022/143 final)

[2] Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council.

[3] Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups