Climate change has provoked a rapid transition in global business practices and prompted companies to focus on sustainability. But as more companies emphasize sustainable operations, the expectations and understanding of what constitutes real climate action have shifted dramatically. Earlier in 2023, the European Union and the United Kingdom enacted new legislation to curb “greenwashing.” The new rules are designed to stop companies from providing misleading statements about the environmental benefits of their products, services, or operations.
Understanding and navigating these changes and requirements can be complex for companies, but it’s crucial for your sustainability efforts and your business’s reputation. Here’s your guide to what the laws entail, who they impact, and what it means for businesses going forward.
Laws and sanctions defining greenwashing
New European anti-greenwashing laws—one from the UK’s Competition and Markets Authority (CMA) and the other, the EU’s proposed Green Claims Directive—were introduced primarily due to two intertwined factors: the heightened focus on environmental sustainability worldwide and the growing prevalence of misleading greenwashing claims.
To appeal to an increasingly environmentally-conscious customer base, businesses often portray their products or services as more eco-friendly than they are. But consumers and organizations have caught on, and now there’s a push for greater transparency. In fact, the Advertising Standards Authority recently banned several ads for exaggerating sustainability efforts and misleading language. For example, HSBC couldn’t claim they were helping clients transition to net-zero without disclosing their funding of oil and gas companies. And airline Lufthansa couldn’t say anything about protecting the climate without concrete initiatives to back the statement.
Misinformation—like the above examples—undermines genuine efforts toward sustainable development and can lead to a damaging misallocation of resources, which is, after all, what ESG is all about: understanding financially material risks and opportunities so capital markets can price risk. To curb this practice and enforce a higher level of corporate accountability, the region has decided to legislate against greenwashing. The UK’s proposed new rules would require businesses to be more transparent about their environmental claims, while the EU’s proposed Green Claims Directive would set out a framework for businesses to make environmental claims that are accurate, clear, and substantiated.
Understanding the legal requirements: A closer look at what the laws require
The new laws cover an array of requirements, all designed to ensure that environmental claims by companies are accurate, reliable, and backed by substantial evidence. Critically, to ensure that the laws are effective, companies could receive penalties—significant fines and public disclosure of the company’s non-compliance.
In general, the EU Green Claims Directive is a more stringent set of rules than the UK’s Green Claims Code. This is because the Directive aims to create a single set of rules for all businesses operating in the EU to protect consumers and level the playing field for businesses. Despite a few differences, these laws largely function similarly and require many of the same rules. We’ll talk about them as a similar force in this post because the differences are minimal in action, and companies in both the UK and EU will have to make the same changes to meet the market where it’s at.
Here are key changes that the rules will require for impacted companies:
- Environmental claims must be backed by data – Companies must ensure that their environmental claims align with the actual environmental impact of their products or services—and face severe penalties for misleading or unsubstantiated claims. This means, for instance, that estimates are no longer accepted. If a business claims to have reduced its carbon footprint by 20%, it has to prove it. It must collect data—such as detailed records of energy use, waste production, and greenhouse gas emissions—and use this to calculate its carbon footprint.
- Full transparency and evidence – Companies are required to disclose details and define the terms of their environmental impact. For example, suppose a company claims its product is made with “100% sustainable materials.” The company must now provide clear, accessible evidence of this. It needs to clearly define what it considers “sustainable,” disclose the material sources, and present proof of their sustainability, such as certificates from recognized bodies or data from lifecycle analyses (LCA).
- Requires auditing and assurance – Companies must have their environmental claims audited by an independent third party to verify their accuracy. This might involve hiring an external environmental consultancy, independent auditor, or CPA to review their data collection methods, check their calculations, and verify the truth of their claims.
- Demands real reduction targets – The laws require businesses to set concrete, measurable targets to reduce their environmental impact and demonstrate progress towards these targets. The effect is twofold:
a. Tracked and reported targets –For example, if a company has a fleet of delivery vehicles, it might set a target to switch a certain percentage to electric vehicles by a specific date. It should then regularly report on its progress towards this target.
b. Reduction—not carbon offsets – If a company has relied on carbon offsetting to achieve its climate targets—for example, by investing in tree-planting schemes to offset its own carbon emissions—this is no longer allowed. Instead, the company will need to reduce its actual emissions, perhaps by investing in renewable energy sources, improving energy efficiency, or redesigning its products to be less carbon-intensive.
Ultimately, the law outlines specific ways companies must walk the walk, not just talk the talk when it comes to sustainability efforts.
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The reach of the anti-greenwashing laws
The EU and UK anti-greenwashing laws primarily impact all businesses operating within the jurisdictions of the European Union and the United Kingdom. However, its reach isn’t confined to these geographical boundaries. Global corporations that conduct business or trade in these regions must also align their practices with the laws. This could include manufacturers, suppliers, retailers, or service providers across sectors, irrespective of size.
In short, more and more companies will feel the trickle-down effects. Moreover, given the EU and UK’s global reach, the laws could serve as a model for other countries and regions. This means multinationals need to adjust their green marketing strategies, not just for the UK and the EU, but potentially on a global scale.
These laws demand will significant changes and require businesses to rethink their strategies. However, these changes are not just about legal compliance; they represent the continued and necessary shift towards a more sustainable, responsible, and transparent business environment. Compliance with this set of greenwashing laws can be viewed as a competitive advantage that fosters trust and loyalty among environmentally conscious consumers, investors, and other stakeholders.
Safeguarding your sustainability efforts: Embrace external resources
The best way to comply with these new laws—and future ones—is to create a controlled system for climate data collection and reporting, as well as external verification processes.
Carbon accounting software like Sustain.Life, offer the power and flexibility of in-house experts or consultant services at a fraction of the price. They use precise emissions factors—which should employ rigorous methodologies, be location-specific, represent activity data (like burning fuel), or use spend-based proxies as a secondary method—to measure and report climate impact accurately.
Additionally, independent verification of environmental claims is now necessary and can be done via a third-party auditor. Businesses should hire external auditors well-versed in environmental standards and regulations to review their environmental data and validate their sustainability claims. Pursuing recognized certifications can also bolster a company’s credibility and demonstrate its commitment to environmental stewardship.
Another significant aspect of these greenwashing laws is the emphasis on setting tangible, measurable targets that reduce a company’s environmental impact.
Lastly, businesses need to adopt transparent and regular reporting practices. Adhering to recognized reporting standards, such as the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB), can ensure these reports are thorough, comparable, and transparent. To effectively communicate their environmental efforts, businesses should also develop a clear communication strategy, which might involve publishing comprehensive annual sustainability reports as well as regular updates on the company website, social media posts, and mentions in annual shareholder reports.
Stakeholder expectations, specifically investors, have changed. They expect companies to disclose material risks and environmental performance because investors and capital markets find this information decision-critical. Different markets have different expectations (Europe has essentially codified GRI into law, whereas the U.S. anchors on the financial materiality approach of SASB), and selecting a platform that will facilitate these disclosures for your key stakeholders is critical. However, it’s also crucial to understand that these steps are not just about complying with legal requirements. They represent a commitment to genuine environmental responsibility, one that can align a business’s operations with the principles of sustainable development, build trust with stakeholders, and solidify its reputation as a sustainability leader.
The future of sustainability: Why compliance matters
Regulation is just catching up with existing market demands. Investors have been asking companies for this information for years, and it has become so relevant to investment decisions that regulators are now codifying laws for consistency in financial markets and national goals and policies.
These greenwashing laws may be the first of their kind, but the fight against greenwashing is an issue that all stakeholders—customers, investors, or regulators—are increasingly vigilant about. The EU and UK anti-greenwashing laws send a clear message that sincerity and transparency in environmental commitments are no longer optional—but a compulsory part of conducting business. They set a high bar for corporate environmental responsibility, one that businesses globally would do well to meet or exceed.
Companies should view requirements like these not as burdens but as opportunities—to reinvent their processes, innovate with sustainable solutions, and build a more sustainable brand. By doing so, they’ll meet regulatory demands and engender their stakeholders’ trust and loyalty, which can be a competitive edge in an increasingly eco-conscious market. With external software, technology, and auditing solutions, businesses can make this transition more effective and ensure their sustainability initiatives are green in name and in action.
Sources
1. GOV.UK, “Greenwashing: CMA puts businesses on notice,” https://www.gov.uk/government/news/greenwashing-cma-puts-businesses-on-notice Accessed on July 20, 2023
2. European Commission, “Proposal for a Directive on Green Claims,” https://environment.ec.europa.eu/publications/proposal-directive-green-claims_en Accessed on July 20, 2023
3. Bloomberg, “6 Ads Banned for Greenwashing by the UK's Advertising Watchdog,” https://www.bloomberg.com/news/articles/2023-05-27/six-examples-of-greenwashing-from-the-uk-s-advertising-authority Accessed on July 20, 2023
4. Covington, “The Green Claims Global Drive: Developments in the UK, US and EU,” https://www.globalpolicywatch.com/2023/05/the-green-claims-global-drive-developments-in-the-uk-us-and-eu/ Accessed on July 20, 2023
