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Commentary

A Level Playing Field for Green Claims

Dr Torsten Schwarze, Partner at Morgan Lewis, explains how two EU directives will shape Europe’s legal framework to restrict greenwashing.

The European Commission has initiated two directives with the intent of clarifying and unifying the EU’s legal framework on environmental claims: the EmpCo Directive and Green Claims Directive.

ESG compliance is becoming increasingly important for companies, and the development of technologies and products to help reduce their carbon footprint has become a priority for many. Progress in this area is actively marketed by many companies hoping to achieve competitive advantages by labeling their products as ‘green’, ‘sustainable’, ‘recyclable’, or ‘climate neutral’.

Not surprisingly, such general green claims are often the object of litigation, as plaintiffs allege such statements as being misleading, deceptive, or simply false. While the German courts are still struggling to find common ground on these issues and a clarifying decision of the Federal Supreme Court (Bundesgerichtshof) may not be expected before June 2024[1], Brussels has initiated two directives aimed at clarifying and unifying the legal framework on environmental claims.

The first – Directive (EU) 2024/825 of the European Parliament and of the Council amending Directives 2005/29/EC and 2011/83/EU as regards empowering consumers for the green transition through better protection against unfair practices and through better information (the EmpCo Directive) – aims to improve product information and ban greenwashing and other unfair commercial practices.

The commission is currently working on a proposal for a second directive on substantiation and communication of explicit environmental claims (the Green Claims Directive, and, together with the EmpCo Directive, the directives), which shall complement and operationalise the EmpCo Directive. In this article, we summarise the content of both and explain how they are intended to interact in the EU’s fight against greenwashing.

The EmpCo Directive – legislative process

Published in the EU Official Journal on 6 March, 2024 and entered into force on 26 March, 2024, EU member states will have 24 months to implement the EmpCo Directive’s regulations. Starting 27 September, 2026, the new directive must be applied by the member states.

Germany has announced its intention for a quick transposition of the EmpCo Directive by amending the German Act against Unfair Competition, which shall be accomplished independently from the legislative process regarding the Green Claims Directive, whereas other EU member states, such as Austria, plan to implement the EmpCo Directive in conjunction with the Green Claims Directive.

Content and scope of the EmpCo Directive

The EmpCo Directive aims to empower consumers to make more informed purchasing decisions and thus contribute to more sustainable consumption patterns by banning unfounded durability claims and prompts to replace consumables earlier than strictly necessary, as well as the promotion of goods as repairable when they are actually not.

It also introduces new rules to ban misleading advertising, prohibits a number of practices related to greenwashing, and expands the so-called blacklist in Annex 1 of Directive 2005/29/EC (the Unfair Commercial Practices Directive).

The EmpCo Directive prohibits generic environmental claims unless excellent environmental performance relevant to the claim can be demonstrated. “Generic environmental claims” are defined as “any environmental claim made in written or oral form, including through audiovisual media, that is not included on a sustainability label and where the specification of the claim is not provided in clear and prominent terms on the same medium.” Examples of such generic environmental claims include ‘environmentally friendly’, ‘eco-friendly’, ‘green’, ‘nature’s friend’, ‘climate friendly’, and ‘biodegradable’.

Excellent environmental performance can be demonstrated by the compliance of products with officially recognised ecolabelling schemes of the member states, such as EN ISO 14024 or Regulation (EC) No. 66/2010, or if the product achieves top environmental performance for specific characteristics under other applicable EU law, provided that the recognised environmental performance is relevant to the entire green claim.

Claims such as ‘sustainable’ or ‘responsible’ cannot be exclusively justified with an excellent environmental performance as they also relate to other characteristics of the product such as social aspects, ie, even if evidence for an excellent environmental performance of a product can be provided, such claims should be avoided if insufficient evidence is available for other characteristics.

Environmental claims that refer to the entire product, where only a certain part of the product fulfils the claim, will also be prohibited (eg, if only part of the packaging is recyclable, this must be explicitly disclosed and the respective information must be easily accessible).

Environmental claims are not per se prohibited. Rather, they may be used when a specification for such claim is provided in clear and prominent terms on the same medium, such as the same advertising spot, the product’s packaging, or an online selling interface. Specified claims are not considered to be generic. The difficulty will be in such cases to determine when a specification is sufficient.

Claims that a product has a neutral, reduced, or positive impact on the environment with regard to greenhouse gas (GHG) emissions will be considered as misleading commercial practices when such claims are based on the offsetting of GHG emissions. Such claims should only be allowed if they are based on the actual lifecycle impact of the product in question and not on the offsetting of GHG emissions.

However, companies should be allowed to use environmental claims related to their entire business (ie, including eventual offsetting activities) so long as such information is provided in a non-misleading manner. In other words, the EmpCo Directive does not intend to ban investments in offsetting activities. Rather, such activities will remain critical for many industries to achieve their carbon reduction targets. However, the directive intends to increase transparency for customers by requiring companies to be specific about product-related information.

Environmental claims often focus on future performance in the form of a transition to carbon or climate neutrality by a certain date. Such claims will be prohibited under the EmpCo Directive if they are not supported by clear, objective, publicly available, and verifiable commitments and targets set out by the companies in a detailed and realistic implementation plan, which must be regularly verified by an independent third-party expert.

Using environmental or sustainability labels to promote or set apart a product should no longer be allowed unless the label is based on a certification scheme or established by a public authority. The EmpCo Directive aims to reduce the large number of environmental labels issued by different public and private organisations which are used in the EU and which require compliance with different and noncomparable criteria.

Certification schemes for such labels will have to be transparent, fair, and non-discriminatory, and compliance with the applicable criteria should be subject to objective monitoring by an independent third party.

The provisions of the EmpCo Directive will be uniformly relevant for all companies that market products to consumers in the EU irrespective of their size and place of establishment.

The Green Claims Directive – legislative process

On 22 March, 2023, the European Commission issued its proposal for a Green Claims Directive. On 12 March, 2024, the European Parliament adopted its standpoint on the commission’s proposal and suggested certain amendments to the proposal. Now, only the decision of the European Council is necessary to enact the Green Claims Directive.

In light of the upcoming European elections in June 2024, it is assumed that the council will take up this topic after the elections. Following the decision of the council and the publication of the directive in the Official Journal, member states will have two years for the transposition of the directive into national law.

Content and scope of the Green Claims Directive

The main objective of the Green Claims Directive is to compel companies to substantiate their voluntary green claims. Further, it will harmonise the requirements for sustainability and environmental labels.

According to the Green Claims Directive, prior to issuing an explicit environmental claim, companies must assess whether they can fulfill the substantiation requirements provided for in the directive.

This includes which part of the products is concerned, the scientific ground of the claim, the importance for the lifecycle of the product, complete information on the environmental impact, a demonstration that a claim is not equivalent to requirements imposed by law on products within the product group or traders within the sector; interdependency between the improvement of the “environmental impact, environmental aspects or environmental performance subject to the claim lead[ing] to significant harm in relation to environmental impacts on climate change, resource consumption and circularity, sustainable use and protection of water and marine resources, pollution, biodiversity, animal welfare and ecosystems”; disaggregation of GHG emission offsets from GHG emissions as additional reductions or removals; and specification whether the offsets relate to emission reductions or removals.

All information should be based on primary information, and only if such information is not available can secondary information be used. The Green Claims Directive requires that provided information must be easily accessible (which is a requirement already applied by the German courts).

The Green Claims Directive will introduce a new verification requirement prior to publishing a green claim. Before the claim is made public, a verification must be undertaken by an accredited third-party conformity assessment body. If the conformity assessment is positive and a certificate of conformity is issued, such certificate of conformity shall be recognised by all member states’ competent authorities for the enforcement of the Green Claims Directive. To ensure a uniform certification system, the commission plans to adopt further technical standards providing details on the form of the certificate and technical means for its issuance.

Within five years of submission of the necessary information for the verification, companies will have to review whether it still meets the mandatory requirements and, if not, update the information. The updated claim will then be again subject to a verification process.

The European Parliament further announced that green claims based solely on carbon offset schemes shall remain banned. Advertising with offsets and carbon removal programmes shall nevertheless be possible if the company has reduced its emissions as far as possible and the offset and removal programs are only used for the remainder emissions, which cannot be reduced.

Carbon credits issued under such schemes must be certified and meet high integrity requirements. This clarifies the position under the EmpCo Direction which also bans product-related green claims if the claimed effects are only achieved through offsetting mechanisms, but does not prohibit the use of offsetting mechanisms as such.

Different from the EmpCo Directive, the Green Claims Directive includes sanctions for companies not complying with the regulation, including fines with a maximum amount of 4% of the company’s annual turnover in the member states concerned. In addition, the member states shall allow for the confiscation of revenues gained by the company from a transaction with the relevant product and the temporary exclusion from the participation in public procurement processes and from access to public funding, including tendering procedures, grants, and concessions.

Violations of the directive’s requirements shall be made publicly available. Further, the Green Claims Directive will allow qualified entities such as consumer or environmental associations to bring action under the Green Claims Directive.

The Green Claims Directive proposal further sets out requirements for environmental labels and labelling schemes. Such schemes should certify if a product, process, or trader complies with the requirement for an environmental label. The labelling schemes shall contain information about the issuer of the respective label, the objectives, the requirements, and the procedures to monitor compliance of the relevant environmental labelling scheme in an accessible and comprehensible form. Schemes must be regularly checked and verified by an independent third-party institution.

The proposal also includes restrictions for the establishment of new environmental labelling schemes by public authorities in third countries when they are used on the EU market. Such schemes shall be subject to approval by the commission prior to their use on the EU market. After a certain period, environmental labelling schemes may only be established under EU law. Private national schemes will only be allowed if the national competent authority approves its outstanding positive impact.

Different from the EmpCo Directive, the Green Claims Directive exempts certain small companies (companies with less than 10 workers and less than €2 million annual turnover) from its application. Further, it is proposed by the EU Parliament that companies with less than 250 workers shall have an additional year to comply with the directive’s requirements. Similar to the EmpCo Directive, the Green Claims Directive will also apply to companies established outside the EU if they are active on the European market.

The Green Claims Directive will be subsidiary to other European regulations regulating sustainability information for specific areas, such as the EU Taxonomy Regulation in the area of financial services.

How do the directives interact?

According to the European Parliament’s press release of 11 March, 2024, the Green Claims Directive aims to complete and perfect the EmpCo Directive. While the EmpCo Directive refers to generic environmental claims, the Green Claims Directive focuses on explicit environmental claims and their specification. Consequently, both directives will have to be read together, and it is likely that many member states will transpose them in one legal act.

The EmpCo Directive does not specify how companies are supposed to substantiate their explicit environmental claims. The Green Claims Directive proposal intends to fill this gap by setting out a catalogue of information to be provided by the companies and introducing a verification requirement for green claims so that companies can rely on the verification certificate issued by a competent authority of a member state.

However, according to the Green Claims Directive, the assessment of a green claim by a competent authority does not guarantee that a court would not come to a different conclusion when making the same assessment.

Practical impact for companies and investors

The directives will have a significant impact on companies that intend to use green claims for product or company statements in Europe.

They restrict the freedom to use generic buzzwords for such statements which will generally be banned as being too broad, imprecise, and therefore misleading. On the other hand, there is currently no uniform standard for the formulation of green claims, and, in particular, generic statements are often subject to court review with different courts in different member states setting different standards. Therefore, the application of the directives should increase legal certainty in this area and hopefully create a level playing field for companies on the EU market.

Much of this effect will depend on the transposition of the directives by the member states. Companies will benefit from this potential only if uniform national standards on the entire EU market are achieved. This positive effect will come at a high price as companies will have to bear the costs arising from the verification process of their green claims.

In this respect, many questions are still open. For example, the specific requirements of the verification process or the appointment of the independent verification providers will have to be decided under the national law of the member states even though it is expected that commission regulatory technical standards will provide further details on this issue.

The national implementation of the verification process will be relevant for the recognition of verification decisions in the other member states and it remains to be seen whether member states will try to goldplate their systems or, on the opposite, try to establish comparably low standards to gain competitive advantages.

Generally, companies should evaluate their current advertisement strategies in light of the provisions of the new directives and implement an effective risk-management system to prepare for the new regulations. If they wish to continue using green claims for their public statements, companies should closely monitor national developments regarding the transposition of the verification process and start collecting the documentation necessary to verify such claims.

Being in compliance with the rules of the directives before their actual legal effectiveness will be advantageous for companies to continue marketing the achievements and successes of their environmental efforts when the stricter rules of the directives become effective.

Greenwashing risks also matter for investors in relevant companies as they may not only impact the value of the investment but also lead to compliance or reputational risks for the investor itself. Therefore, greenwashing risks should be an essential part of the investor due diligence process where investors may need external support to verify the accurateness and credibility of the data presented by target companies.

Following an investment decision, investors should continue to regularly review the environmental compliance of their portfolio companies and use their influence in the companies to ensure that they develop, maintain and constantly update an effective and appropriate environmental compliance strategy.

This article was co-written by Michelle Schneider, Associate at Morgan Lewis.

[1] Under file number I ZR 98/23, a complaint against a sweets manufacturer that labeled its products as ‘climate neutral’ is pending, which is challenged by the German Agency to Combat Unfair Competition (Wettbewerbszentrale), an independent association of the German industry founded to foster fair competition.

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