EU Cracks Down on Greenwashing: What is Greenwashing and What Businesses Need to Know

With a growing focus on sustainability and environmental responsibilities, we have heard a lot of sustainability-related terms from the advertisement of consumer products or even some financial products, but do you really believe it?

Investors and consumers are increasingly seeking out sustainable products and services. However, a deceptive marketing tactic known as greenwashing can mislead them. Greenwashing describes when companies make exaggerated or unsubstantiated claims about their environmental performance.

What is Greenwashing?

Greenwashing, a term coined in 1986 by environmentalist Jay Westerveld, is the deceptive practice of making false or misleading claims about a company’s environmental impact. This can be done through outright lies or through subtler tactics, like promoting a minor eco-friendly practice while ignoring more significant environmental damage. This allows companies to continue polluting or expanding harmful activities while projecting a sustainable image.

Greenwashing has become a major concern as environmentalism gains traction. Consumers are increasingly willing to pay a premium for sustainable products, and the financial sector is factoring environmental risks into its decisions. Companies, aware of this shift, have become more sophisticated in their greenwashing tactics.

Exemplifying the deceptive nature of greenwashing are practices employed by companies in the fashion and fossil fuel industries. H&M’s “Conscious Collection” utilises a limited amount of recycled materials to create a facade of sustainability, while their core fast-fashion model continues to generate significant environmental burdens through resource depletion and textile waste. Similarly, BP’s “carbon footprint” campaign strategically diverted attention from their own substantial greenhouse gas emissions by promoting a consumer-centric calculator. These tactics highlight the calculated strategies greenwashing employs to manipulate public perception and deflect responsibility for environmental harm.

Today, the European Union (EU) is taking a leading role in cracking down on greenwashing with several key initiatives. Regulations and Guidelines issued by the EU, not only about environmental protection, but also presenting a significant opportunity for companies to demonstrate their commitment to sustainability and turn it into a potential profit driver.

Table of Contents

The Initiatives EU Took to Tackle Greenwashing

1. Guideline on Funds’ Names

On 14 May 2024, the European Securities and Markets Authority (ESMA) has established stricter anti-greenwashing guidelines on what qualifies a fund to be labelled as sustainability related terms. Now, any fund using sustainability or environment, social and governance (ESG) related terms in its name must invest at least 80% of its assets that meet ESG and sustainability objectives in accordance with the binding elements of the investment strategy.

Additionally, a new category has been created for transition-related funds that invest in companies actively working towards becoming more sustainable, even if they still rely on fossil fuels to some extent. The transition-related terms include words such as “improving”, “progression”, “evolution”, “transformation”, and any related words. These new regulations aim to protect investors from being misled and empower them to make informed choices by ensuring fund labels accurately reflect their environmental impact.

2. Green Claim Regulation

The European Parliament has adopted a new Green Claims Regulation that would require companies to provide verifiable evidence to support their “biodegradable,” “water-saving,” and other eco-friendly marketing terms. This would empower consumers to make informed choices by ensuring the environmental benefits advertised are actually true. The proposal also tasks EU countries with assigning verifiers to pre-approve the use of these claims, further solidifying transparency and preventing greenwashing in the marketplace.

3. Requirement for Sustainability Reporting

The ESMA is proposing adjustments to the upcoming European Sustainability Reporting Standards (ESRS), particularly among small and medium-sized enterprises (SMEs) to prevent greenwashing. While the EU’s Corporate Sustainability Reporting Directive (CSRD) mandates sustainability reporting for larger companies, ESMA suggests to include a requirement for SMEs to report on their positive sustainability impacts and opportunities.

Challenges for Companies
  1. Increasing Scrutiny: NGOs and environmental activists are becoming increasingly adept at identifying greenwashing. Companies must be prepared for close scrutiny of their environmental claims to prevent brand damage.
  2. Consumer Expectations: Consumers are demanding more than just vague sustainability statements. Companies need to be transparent about their environmental impact and demonstrate concrete actions they are taking to improve.
  3. Supply Chain Complexity: For many companies, a significant portion of their environmental impact lies within their supply chains. Ensuring sustainable practices throughout the supply chain can be complex and require collaboration with suppliers.

 

Turning the Challenges into Profit Driver
  1. Embrace Transparency: The EU regulations are an opportunity to showcase companies’ sustainability efforts. Be upfront about your environmental impact and highlight areas for improvement. Consumers appreciate honesty and are willing to reward companies that are demonstrably working towards a sustainable future.
  2. Focus on Action: Implement concrete actions to reduce your environmental impact, such as reducing waste, using recycled materials, and adopting energy-efficient practices. These actions can also optimize companies’ operations and reduce the unnecessary costs.
  3. Substantiate Your Claims: Back up your green marketing claims with verifiable data. Invest in life cycle assessments to understand your environmental footprint and identify areas for improvement. Partner with independent certifiers to validate your sustainability efforts.

Sustainability is considered as a new focus which has only occurred the last century. It is a milestone towards the coexisting initiatives between nature and human, raising public awareness of humans’ impacts on the environment. Some business owners might see it as opportunities bringing potential profit. However, the system of sustainability management is still yet to be completed, laws and regulations need to be carried out to prevent those negative practices such as greenwashing. Greenwashing not only deceives consumers and investors but also hinders genuine efforts towards sustainability, the EU’s regulations work as a model to stop such misleading practices.

BBC comprises a team of passionate practitioners implementing solutions for sustainability and avoid greenwashing. Our consultants have extensive knowledge and experience in greenhouse gas emissions management, ESG, and sustainability, helping you solve your problems with innovative, sustainable solutions.

Contact us to help you avoid greenwashing.

 

Resource:

  1. ESMA Guideline on Funds’ Names using ESG or Sustainability-related Terms
Author
Lee Shu Hong
Lee Shu Hong

ESG and Sustainability Consultant

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