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Jennifer Munnings

In 9fin’s latest ESG Educational, we delve into the proposed EU Green Claims Directive and its implications for LevFin companies. 

The European Commission released a proposal on 22 March 2023 that would require all consumer goods and services sold in the EU with environmental claims to be backed by science and undergo third-party verification. The EU Green Claims Directive seeks to clamp down on greenwashing and false advertising on consumer goods labels by targeting generic environmental claims.

Consumer goods companies within the LevFin universe like Hunkemoller, Armacell, Holland & Barrett, and Upfield that have sustainability claims attached to their products may be impacted by the proposed Directive and will be required to substantiate their claims with science and independent verification to remain compliant. 

In 2021, Upfield introduced a carbon label to a variety of its products to show the environmental benefits of plant-based products. This label would fall under the proposed Directive and would require scientific backing for the displayed product emissions as it aims to limit generic sustainability claims.

Airline companies that advertise carbon-neutral flights like Air France KLM, Lufthansa, and SAS Group will similarly be subject to the proposed Directive. Airlines’ carbon offsetting schemes that allow passengers to purchase offsets have already come under scrutiny for greenwashing which is likely to increase under the Directive. Airlines that advertise carbon neutral flights will be required to provide scientific backing for their emissions claims and disclose the types of offsets used. 

Consumers are increasingly willing to pay a premium for products with sustainability claims. However, a 2020 study conducted by the EC found that, of the products assessed, 53% of environmental claims provided vague, misleading or unfounded information about their environmental impact and 40% of claims were completely unsubstantiated. 

As a result, the proposal aims to protect consumers and companies from greenwashing and ensure that consumers can make informed decisions. 

The Directive proposes amending what is considered in the Unfair Commercial Practices Directive and introduces new rules designed to complement existing EU sustainability claims regulations. These are:

Preventing generic environmental claims that cannot be scientifically substantiated. Environmental claims will require accredited third-party verification 

Prohibiting environmental claims about an entire product when it concerns only a specific aspect of the product

Requiring comparative claims that imply a product performs better or worse than another product to be substantiated based on the Directive’s criteria

Displaying ecolabels based on self-certification and sustainability labels that are not based on a certification scheme or not established by public authorities

Presenting a legal requirement as a distinctive feature of the product

The Directive also extends to carbon offsetting and requires companies to disclose if environmental claims are dependent on offsets and the types of offsets used. 

The proposed regulation is designed to act as a safety net to cover all sectors where environmental claims or labels are unregulated at the EU level. Therefore, it does not impact sectors like financial services that are governed by existing EU regulations. 

The EU Directive argues that green claims have a competitive factor and register greater returns than standard products and thus require significant measures to address greenwashing. 

In the UK, the Competition and Markets Authority (CMA) announced in January 2023 that it is undergoing an examination of environmental claims made on household products after it found that 91% of all dishwashing items and 100% of toilet products had green claims. In a similar investigation of the fashion sector in 2022, it took enforcement action against fashion brands like Asos, Boohoo, and George at Asda for unsubstantiated environmental claims. 

The Directive comes amongst a flurry of EU regulations designed to encourage more sustainable consumption. 

Consumer goods products and services that are not compliant with the proposed regulation will be subject to enforcement action including fines up to a maximum of 4% of annual turnover, confiscation of revenue, and possible exclusion from public procurement for up to 12 months. 

The gravity of the penalty may differ across European states, but all are required to consider the nature, gravity, extent, and duration of the infringement, its character, the financial strength of the responsible party, and the economic benefits derived from the infringement in determining their penalty regimes.

While the proposal has drawn some praise from environmental groups — with a programme manager at the Environmental Coalition Standards calling it a “big win” — other environmental groups have criticised the lack of standardised methodology to substantiate claims fearing that companies will choose methodologies that suit their objectives. 

The debate surrounding a standardised methodology delayed the publication of the Directive by a year. The EC and Consumer Groups argued that a singular standardised methodology does not equitably capture the environmental impact of all products. 

The Directive seeks to limit the number of existing ecolabel schemes by banning labels that lack third-party verification and establishing minimum criteria for existing environmental label schemes. 

New labelling schemes need to meet a set of minimum criteria, be approved by an EU member state, and add significant value compared to the existing national or regional schemes. Public schemes at the national or regional level are also prohibited and can only be developed at the EU level. 

The EU assessed 232 active ecolabels and found almost half of them have weak verification or lack verification altogether. Each ecolabel also uses unique methodologies which impact their comparability and reliability, validating the concerns of environmental groups. 

The Directive has also been criticised for allowing aggregated product environmental footprint (PEF) scores. PEF scores calculate the environmental impact of a product and combine different categories like water and land use into a single score. However, the scores can obscure negative impacts because bad scores in one area can be overshadowed by good scores in another. 

The EC aims to address these concerns by standardising and codifying verification methodologies and labelling schemes in the future, although provided no timeline.

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Green Claims Directive — EU to cull consumer goods mislabelling mischief

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