Global regulations to prevent greenwashing

Greenwashing is the practice of making environmental claims (also called ‘green’ or ‘sustainability’ claims) that are either unclear or not well-substantiated. It matters because most consumers are prepared to pay more to buy ‘green’ products. They’ll also consider the environmental friendliness of products or brands in their buying decisions. However, many consumers are also skeptical about the claims made by companies — and rightly so. Regulators around the world are therefore stepping in to ensure the accuracy of green claims. In this rapidly changing space, what do you need to know? 

What is greenwashing?

The term greenwashing was coined in the 1980s by writer Jay Westerfield. He was traveling in Fiji and saw a notice in a resort asking visitors to pick up their towels to reduce their environmental impact. However, he also observed that the same resort was expanding and building more bungalows in new areas of the island. He used the term to describe the contrast between words and actions, and it has stuck.  

Unfortunately, however, so has the practice itself. Research carried out in 2020 found that, from the environmental claims analyzed, 53.3% were potentially misleading and 40% were considered unsubstantiated. Four in ten claims are not supported by any evidence. What’s more, at least half of the several hundred ‘green’ and ‘sustainable’ labels in current use have weak or no verification processes behind them. In Australia, the Australian Competition & Consumer Commission (ACCC) found in an internet sweep carried out between October and November 2022 that 55% of the 247 businesses reviewed were identified as having made concerning claims about their environmental credentials.   

Why does greenwashing matter?

Consumers want the products and brands they use to be more sustainable. Recent studies have suggested that people are prepared to pay a premium for more sustainable goods. Sustainability and environmental friendliness are big business these days. Most consumers are willing to pay a premium for products and brands that are more sustainable. However, for this to be viable, it’s essential that they can rely on the claims made by companies.  

The market for sustainable products is also growing rapidly and greenwashing distorts competition for this market. This has resulted in consumers becoming increasingly skeptical, and regulators now perceive the importance of regulating environmental claims to level the playing field. Voluntary codes and certifications have clearly not proven effective, and regulators are now stepping into the breach.  

Across the globe, there’s a growing number of sustainability related regulations aimed at combating greenwashing and regulating environmental claims. Companies are becoming liable for the information they provide and are required to provide proof that substantiates the claims they’re making. This shows the important role that regulators have in ensuring that companies have implemented more transparent and sustainable practices and clearly inform consumers and market authorities about them.  

It’s important to highlight that to support this exercise and comply with the upcoming requirements, environmental claims need to be seen beyond a marketing exercise and as an effort that brings different stakeholders and departments of the organization together. 

Regulations to prevent greenwashing

In the last few years, we’ve seen a spate of regulations and guidelines impacting greenwashing at the international level, such as the ‘Global Guidance on Environmental Claims’ of the World Federal of Advertisers (WFA) released in April 2022, and across multiple jurisdictions. Some are specific to environmental claims, and others are more general market regulations that will affect companies’ ability to make unsubstantiated claims in advertising or marketing materials. These regulations and guidance include: 

EU legislation 

In this topic, there are two important pieces of legislation in the EU that are worth referring to.  

The first one is the recently adopted Directive 2024/825, which amends the Unfair Commercial Practices Directive 2005/29/EC and the Consumer Rights Directive 2011/83/EC. It aims to empower consumers to make sustainable choices and protect them from deceptive marketing practices. The directive introduces the concepts of ‘environmental claim’ and ‘generic environmental claim’. An environmental claim encompasses any message or representation of a product, product category, brand, or trader within a commercial communication that states or implies that they have a positive or zero environmental impact, are less damaging in comparison to others, or have improved over time. A generic environmental claim is such a claim that is either not included on a sustainability label or not clear. 

To ensure that product information is clearer and more trustworthy, the directive has introduced further commercial practices considered misleading or unfair, such as making a generic environmental claim — for example ‘ecological’, ‘eco-friendly’ or ‘green’ — without proper proof. The directive regulates the use of sustainability labels, only allowing those based on official certification schemes or established by public authorities in the EU. 

It also focuses on making producers and consumers more aware of the durability of goods by requiring guarantee information to be more visible. The directive became effective on 26 March 2024. However, its requirements will apply to companies following its transposition by the Member States, which have until 27 March 2026 to adopt and publish the measures necessary to comply with it. Member States will have to apply those measures as of 27 September 2026. 

In addition, a proposal for a new Green Claims Directive was introduced in 2023, which aims to provide more specific rules on the substantiation and communication of explicit environmental claims. If approved, companies would be required to provide evidence to authorities to verify their environmental marketing claims before advertising their product. It also requires that EU countries assign verifiers to pre-approve the use of such claims, who would then have 30 days to assess the claims and their evidence. 

Companies would have to substantiate explicit environmental claims through an assessment, including accurate information, recognized scientific evidence, and proof that the claim isn’t equivalent to existing legal requirements on products. Special rules would apply to comparative environmental claims, and claims based solely on carbon offsetting schemes would be banned. 

The Parliament adopted its first reading position on 12 March 2024. The file will be followed up by the new Parliament after the European elections in June. 

Unique regulations or guidelines across Europe and in the UK 

Some countries in the EU and the UK have also implemented their own regulations or provided guidelines addressing environmental and green claims. 

For example:  

• Guidelines on sustainability claims in the Netherlands contain five ‘rules of thumb’ for businesses to consider when making environmental claims, including substantiating claims with facts, and making sure comparisons with other companies are fair. 

• A Green Claims Code was adopted in the UK in September 2021 in the framework of consumer protection law; it contains six points to consider, including being truthful and accurate, clear and unambiguous, and not hiding relevant information. 

• France introduced a Climate and Resilience Law in August 2021, which contains several provisions that will prevent greenwashing — for example, companies are prohibited to advertise that a product is carbon neutral unless making a report on greenhouse gas (GHG) emissions with direct and indirect emissions of the product easily accessible to the public, the approach through which GHG emissions from the product are primarily avoided, then reduced and finally compensated, and the modalities for offsetting residual GHG emissions. It also prohibits any advertising related to fossil fuels.
   

US revisions to the Green Guides for the use of Environmental Claims 

The US Federal Trade Commission announced a public consultation on revision of the Green Guides for the Use of Environmental Claims in December 2022. The guides provide advice on environmental marketing claims. The Commission is expecting comments to update provisions on carbon offsets and climate change, the use of the terms ‘recyclable’ and ‘recycled content’, and whether additional guidance is needed on the use of certain other terms, such as ‘organic’, ‘sustainable’, and ‘degradable’. The FTC closed the request for public comments on revisions to the Green Guides on 24 April 2023. The last revision of the Guides was adopted in 2012, but further information is expected to be released this year. 

China’s advertising language enforcement 

In March 2023, China published enforcement guidelines for absolute language enforcement in advertising. These guidelines go well beyond environmental claims, but will clearly have an impact on sustainability claims as well as any other language used in advertising. The guidelines provide clear guidance to regulators about enforcing misleading practices in advertising, especially around absolute terms (for example, ‘the best’, ‘national-level’ or ‘the most’). 

South Korea’s impending law on greenwashing

South Korea is poised to become the first Asian nation to pass a law specifically addressing greenwashing. Under the proposed Amendment to Environmental Technology and Industry Support Act, the Korean Ministry of Environment will be able to issue a 3 million Won (approximately USD 2,200) fine to companies that have misled the public about their environmental impacts and green credentials.  

Australia’s ACCC investigations into greenwashing claims 

In Australia, the Australian Competition and Consumer Commission (ACCC) published guidance on making environmental claims in December 2023. The guide includes the following eight principles companies are encouraged to follow to ensure they don’t breach the Australian Consumer Law (ACL) when making environmental claims:  

• Ensure claims are accurate and truthful;  

• Back up claims with evidence;  

• Not hide or omit important information;  

• Explain the claim’s conditions or qualifications;  

• Not use broad and unqualified claims;  

• Ensure language is clear and easily understandable;   

• Ensure visual elements do not give the wrong impression; and  

• Be direct and open about any sustainability transition.  

Companies that breach the ACL by making false green representations about their products may be subject to a fine of up to 50 million Australian dollars. 

The business risks of greenwashing

In our assessment, there are four key risks to businesses engaging in greenwashing: 
 

1. Damages to brand reputation and loss of consumer trust 

The first — and perhaps most important to many companies — is the risk to their brand reputation. Companies that have engaged in greenwashing are likely to find that environmentally-conscious consumers avoid their products. Studies have shown that consumer perceptions of greenwashing may damage brands. For example, research from the Harvard Business Review shows that companies perceived to be greenwashing suffer, on average, a 1.34% drop in their ACSI (American Customer Satisfaction Index) customer satisfaction score. 

One study found that greenwashing even led directly to what it described as ‘brand hate’. Results show that the effects of greenwashing are also likely to persist into the future, meaning these companies won’t qualify for any ‘green premium’ on their products for some time.  
 

2. Fines and costs of litigation 

Research shows that the number of lawsuits involving ESG-related issues has grown by 25% in the past 30 years, with more litigation involving supply chains and consumers increased interest in having accurate information about companies’ environmental and social responsibilities. 

Additionally, there is a growing number of product compliance regulations and specific greenwashing rules setting fines that could apply to companies found guilty of greenwashing. 

For example, the EU’s Green Claims Directive aims to require companies to substantiate and verify their environmental claims. Member States would be required to set penalties for non-compliance, including fines and confiscation of revenues. Set at a maximum of 4% of a company’s annual turnover, Member States can individually set increases for repeat offenders.
 

3. Loss of investors 

The awareness about sustainability is increasing not only among consumers, but also investors, particularly considering the importance of considering environmental, social, and governance (ESG) factors in investment decisions and the growth of sustainable investing. In December 2023, the European Securities and Markets Authority (ESMA) released a report entitled “The financial impact of greenwashing controversies”, emphasizing that these controversies are important for protecting investors, as they reflect public perceptions of greenwashing, which can harm the reputation of the firms involved and affect investor decisions. ESMA also noted that the number of greenwashing controversies involving European firms grew between 2020 and 2021.  

To ensure a trusted sustainable investment environment, fair competition, and guarantee funds invest in companies that act towards sustainability standards they claim, ESMA has also recently published guidelines on the naming of funds using ESG or sustainability-related terms and a “Final Report on Greenwashing” in June 2024, including risks and the supervision of sustainable finance policies. 

In this context, due to the growing influence of ESG factors in investment decisions, companies that have established environmental policies are expected to disclose how they implemented these policies fully. Failure to do so may lead to lower ratings and rankings, as well as result in inadequate disclosure for investors. 
 

4. Reduced market access 

Engaging in greenwashing could limit a company’s market share, either permanently or temporarily. If consumers decide to vote with their wallet, then companies found to have engaged in greenwashing will automatically lose access to that market. Research from GreenPrint’s 2021 Business of Sustainability Index shows that three-quarters of people in the USA consider the environmental-friendliness of a product when making purchasing decisions, making this a significant factor for consideration.

The proposed EU Green Claims Directive states that sanctions may include exclusion from public procurement processes within the EU for up to 12 months. Companies engaging in greenwashing may also be denied access to public funding, including grants, tendering processes, and concessions. The agreed text of the Corporate Sustainability Due Diligence Directive (CSDDD) states that Member States may take into account compliance with the requirements of the directive as an environmental condition for the award criteria of public and concession contracts. The lack of access to particular markets or parts of markets will unquestionably impact a company’s ability to compete — of course, the idea behind this sanction is to foster fair competition and prevent companies from unfair commercial practices. 

The future for greenwashing

The details of the regulatory actions taken to prevent greenwashing vary around the world. However, the central message is consistent: Regulators everywhere are determined to prevent greenwashing about their environmental credentials. The potential punishments and sanctions are now ramping up, ensuring there are serious consequences for incorrect or unsubstantiated claims. 

The bottom line is that companies need to ensure their environmental claims are the result of a transparent exercise, backed by evidence and proof of compliance with applicable regulations. Wherever you’re headquartered, and wherever you operate, consumer law is likely to cover the making of exaggerated or incorrect claims and financial market authorities now have a closer look into sustainability claims for investors. More importantly, regulators are on the lookout for greenwashing and prepared to act. The message is very clear, and nobody can afford to ignore it.