ESG: Regulators adopt focus on tackling greenwashing

Rachael JohnsonThursday 5 January 2023

Recent investigations by the Netherlands Authority for Consumers and Markets (ACM) highlight how regulators are taking action against ‘greenwashing’ – the making of false or misleading claims about the green or sustainable credentials of a product. Regulators across jurisdictions are increasingly focused on tackling this practice.

In September the ACM announced that sporting goods retail chain Decathlon and clothing retail chain H&M had ‘made commitments to [ACM] promising to adjust or no longer use sustainability claims on their clothes and/or websites’, as well as to inform consumers more clearly to minimise the risk of misleading practices. An ACM investigation led to the brands’ commitments and to their donations of €400,000 and €500,000 respectively to different sustainable causes ‘to compensate for their use of unclear and insufficiently substantiated sustainability claims’. Consequently, ACM won’t be imposing sanctions.

H&M acknowledges that ‘the information on sustainability on our website could have been provided more clearly and [been] more comprehensive. Changes are being made through which we commit to better informing our customers about the composition of our products and thus improving our sustainability communications.’ The company highlighted that the ACM’s concerns weren’t about providing false information.

Michael Showalter, a partner at ArentFox Schiff, says that US regulators have been more focused on greenwashing related to securities, compared to product-related greenwashing. He explains there’s ‘concerted regulatory focus from the US Securities and Exchange Commission and other financial regulators happening at least at a nascent level, while product-related greenwashing issues are not advancing at the same speed – at least federally’.

Gerbrich Kozijn, a senior enforcement official at the ACM, says the ACM ‘chose clothing and the energy sector because […] behavioural studies showed that consumers mostly paid attention to sustainability’ in those sectors. The ACM, she says, aims to create a level playing field, ‘so that businesses who are green can honestly claim their sustainability performance’. As Parker Aranha highlights, greenwashing is ‘bad for those businesses who are innovating’ as ‘there’s a risk of them being drowned out’.

Ouiam Zirar, also a senior enforcement official at the ACM, believes it’s important to acknowledge that ‘companies are the ones with the power of information, not consumers’. As consumers begin to demand more green or sustainable products, ‘companies need to be honest about their green claims or broader sustainability claims’, she says.

Tackling greenwashing also helps to build and maintain consumer trust in green products. Tonje Drevland is Head of Section, Supervisory Department, at the Norwegian Consumer Authority (NCA). She says that as consumer demand for more environmentally friendly products has grown, so too has ‘green’ marketing, and believes it’s hard for consumers to determine whether green claims are true. ‘If we do not work to prevent false green claims on behalf of the consumers,’ she says, ‘consumers may lose trust in green claims in general.’ This could undermine efforts to develop and sell legitimate green and sustainable products.

She highlights work the NCA has done on the use of the Higg Material Sustainability Index (MSI) in the clothing industry. Following an investigation into a Norwegian clothing company’s use of the data tool in its marketing, the NCA ‘concluded that the trader’s use of Higg MSI data in marketing was misleading, and therefore prohibited under the Norwegian Marketing Control Act’.

Restoring consumer trust is central to the UK Financial Conduct Authority’s (FCA) work on greenwashing. Mark Manning, a technical specialist in sustainable finance and stewardship at the FCA, says consumers want to invest in funds that have a sustainability aspect but ‘they don’t know which products to trust’. The FCA is proposing rules on greenwashing for companies that offer sustainable or green funds. These include a general anti-greenwashing rule covering all regulated companies to address misleading marketing. There would also be three categories of sustainable investment product labels and restrictions on how terms such as ‘sustainable’ or ‘green’ can be used for products that don’t qualify for these labels.

Manning says applications to the FCA’s funds authorisation gateway ‘that really were not of the quality we would expect’ prompted it to write to fund managers in 2021. Its proposed rules followed. The regulator’s work is also informed by research on how consumers understand information and make decisions.

The structure that regulation offers can also help businesses assess their exposure to greenwashing risk. Manning argues the FCA’s proposed rules could boost companies’ confidence in their labelling of sustainable products by giving them a framework through which they can evidence their claims.

Parker Aranha says the CMA has advised the UK government on how the country’s consumer protection regime could better support its net zero and sustainability goals – for example, by implementing statutory definitions of environmental terms that are commonly used in marketing and labelling, such as ‘carbon-neutral’ or ‘biodegradable’. She believes that ‘businesses would welcome some degree of standardisation’ as ‘it would be helpful to consumers and […] regulators to have that kind of firm standard to hold people to’.

Some regulators have published guidance for companies on making green claims. For example, the ACM’s sustainability claims guidelines outline five rules of thumb for businesses. The CMA has also produced a green claims code. Lina Pimentel, former Co-Chair of the IBA Environment, Health and Safety Law Committee and a partner at Mattos Filho in Brazil, argues that ‘the rules related to responsible disclosure of sustainability information are part of a great transition of our economy based on awareness of […] the impact of goods and services.’

Parker Aranha stresses that any evidence used to back up green claims should be robust and up to date. Businesses should also engage with their audience. ‘Test what you’re saying,’ she says, ‘because very often consumers will draw different conclusions from what you’re saying than you might expect.’

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