The dangers of greenwashing:
ensuring compliance with new sustainability regulations
What are the changes?
Greenwashing is the attempt to make something appear more sustainable or environmentally friendly than it is. Common greenwashing tactics, include the use of vague language and ambiguous terms such as ‘green’, ‘eco-friendly’, ‘sustainable’ or misleading imagery such as the colour green or a logo that has a recyclability connotation, often in combination with hollow claims and selective information. These practices have become much more prevalent in recent years.
Businesses need to be far more robust and diligent about the statements they make (internally and externally) about their green credentials. A recent report by Compare Ethics highlights that almost half of large companies in the UK could be exposed to heavy fines if they fail to deal with the wave of new UK and EU regulations.
What are the challenges for businesses?
There is no single source of legislation/regulation that governs greenwashing in the UK. The current legislation is evolving and changes are likely to come into force this year, which makes it more difficult for businesses to navigate. That challenge is compounded by differing and changing regulation outside of the UK internationally:
1.
The UK regulators comprise the Competition and Market Authority (CMA), the Advertising Standards Authority (ASA), and the Financial Conduct Authority (FCA).
The principal UK regulator is the CMA, which in relation to competition issues, has the power to fine companies up to 10% of their global turnover. The CMA’s powers will be greatly extended by the Digital Markets, Competition and Consumers Bill, which is expected to come into force in later part of 2024 and will tackle misleading advertising – including greenwashing. This legislation will allow the CMA to decide for itself whether consumer law has been infringed, without the need to go to court, as is currently the case. Where it concludes that there has been a breach, it will be able to impose fines directly of up to 10% of global annual turnover on businesses, or up to £300,000 for individuals found to be engaging in greenwashing which breach consumer protection laws.
Greenwashing is high on the CMA’s agenda following its review environmental claims made across hundreds of websites, that indicated that 40% of green claims made on companies' websites could be misleading for consumers. This followed with the publication of the Green Claims Code and high-profile investigations of companies such as Boohoo, ASOS, and George in 2002, which in March 2024 resulted in signed formal agreements from those organisations that commit them to change the way they display, describe, and promote their green credentials.
2.
Following the ASA’s guidance on the use of misleading environmental and social claims in advertising in 2021, it has since issued a sustained flow of rulings banning ads across all sectors, although a significant proportion of these rulings have been against businesses in the energy, aviation and food and drinks industries.
In June last year, the ASA issued a series of rulings banning certain advertisements run by three major energy companies. The adverts, which highlighted the companies' clean energy initiatives, were deemed to misleadingly omit material information about the balance of the companies' current activities. The ASA considered that they breached rules under the UK Code of Broadcast Advertising (BCAP Code) and the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (CAP Code). The ASA also said the advertisements could not appear in their current forms again.
3.
Britain's financial watchdog, the FCA, also stepped up its activity. In May 2024 an anti-greenwashing rule will come into effect for sustainability-related product claims as well as rules for naming and marketing funds based on their sustainability characteristics, and for the use of new sustainable investment product labelling. These sustainability disclosure requirements were initially developed for retail investors but new proposals extend them to investments for consumers, which would cover claims on retail products from savings accounts to mortgages.
A global shift: ECGTD and the Green Claims Directive
It is not just in the UK where the regulatory landscape is getting tougher. The European Parliament voted to implement The Empowering Consumers for the Green Transition Directive (ECGTD) aimed at banning greenwashing. Amongst other things, it looks to improve consumer information about environmentally friendly delivery options, conformity guarantees, the length of time for which software updates will be supplied, and information about repairability. It also restricts the use of sustainability labels unless they are based on a certification scheme or established by a public authority.
The Green Claims Directive, which requires that green claims in the European market be verified by an independent third party, has also recently been passed. Under these rules, phrases such as ‘net zero’ and ‘eco-friendly’ are banned unless they can be verified. Adverts, packaging, and social media are all under its remit.
What it will affect?
UK businesses are facing an increase in domestic regulations, and many could be significantly impacted by the new EU laws directed at ending greenwashing.
The Green Claims Directive is part of the EU’s Green Deal: a package of more than 70 regulations that UK retail businesses looking to export abroad will also have to contend with in the next three years. Businesses that fail to verify their entire product supply chains and meet necessary compliance measures are at risk of facing product delays at the border. According to Compare Ethics, this could amount to some 1.6 million UK goods getting stuck at the EU border, something they say could be equivalent of £193 billion worth of goods.
Investors are also becoming increasingly vigilant and are holding businesses to account. Failure to take greenwashing seriously can result in legal action from investors seeking to protect their own regulatory obligations.
Companies that are caught greenwashing risk losing consumer trust and loyalty, which can have long-term negative effects on sales and brand value.
What actions should your business take?
During the transposition period into national legislation, UK businesses must familiarise themselves with the emerging regulations and how this might impact their business and operations, making any necessary adjustments to comply with these new standards.
“Irwin Mitchell’s recent Beyond Words report revealed that FTSE 350 businesses are taking net zero and environmental sustainability more seriously than ever, however less than a handful of businesses referred to greenwashing. Whether or not this points to a general apathy towards greenwashing is hard to say, but there are signs that many businesses are not fully prepared.
“In the face of evolving sustainability regulations, businesses must prioritise thorough verification of their green claims to avoid falling into the trap of greenwashing. Compliance is no longer a mere regulatory requirement but a crucial aspect of maintaining consumer trust and avoiding significant financial penalties.
“However, by investing in the necessary procedures and technologies, businesses can ensure they meet the standards set forth by the CMA and other regulatory bodies.”