New greenwashing regulations are here to stay: here’s how CMOs, Chief Legal Officers, Reporting Teams and others should get on board with the rules and their spirit
by Anisha Vikram Shah, Senior Consulting Director
Companies and investors are facing a challenge in 2023. The strength and depth of their sustainability commitments will be under the microscope like never before, with consequences for failure looming in the form of anti-greenwashing enforcement, regulation and ESG litigation.
And this isn’t just a Corporate Affairs Director’s problem. It’s the CEO’s, the CFO’s, the CMO’s as well. Share price, balance sheet, reputation, and customer behaviour are all at risk. Because regulations are not just an accounting exercise. They represent the spirit of what progressive company values should be.
Mighty Earth’s complaint to the US Securities and Exchange Commission against JBS, the world’s largest meat processors, calling for an investigation into whether marketing bonds linked to its emissions reduction goals as “sustainable” or “green” amounts to securities fraud is the latest in a series of movements designed to protect investors and consumers from companies overclaiming on their sustainability credentials. Mighty Earth says that by already failing to meet its emissions target and continued emissions-generating deforestation, JBS is misleading investors.
In recent weeks, we have seen around 40% of the total value of so-called ‘dark green’ funds under the EU Sustainable Finance Disclosure Regulation (SFDR) downgraded as asset managers have reclassified a vast number of companies included within their ‘sustainable’ investment products. SFDR ‘Article 9’ funds are supposed to focus only on companies that have sustainability goals as their core objective. In effect, asset managers have been ‘cleaning house’ ahead of incoming rules that will greatly increase scrutiny of what’s badged as ‘dark green’ in investment product marketing.
Also last month, the UK Competition and Markets Authority’s decision to review eco claims made by household FMCG brands for potential greenwashing signals growing momentum to target misleading claims about consumer products. This move follows its greenwashing investigations related to environmental claims made by fashion brands ASOS, Boohoo and George at Asda.
Amid heightened scrutiny from consumers, advocacy groups and investors on companies’ environmental claims and overall ESG performance, regulators and policymakers are taking a harder stance. People care about this. Regulators are taking note.
New European Union rules due be published aim to tackle unsubstantiated, misleading, or simply false environmental claims, and provide a methodology to assess environmental impacts and substantiate claims. According to new research, half of green claims used to advertise products in the EU are untrue.
These rules build on the European Commission’s proposed amendments to two other directives – the Consumer Rights Directive and the Unfair Commercial Practices Directive – designed to help consumers make more informed environmental-friendly choices and strengthen their protections against unreliable environmental claims.
In parallel, the new European Sustainability Reporting Standards (ESRS) coming into effect from next year under the Corporate Sustainability Reporting Directive (CSRD) will require more than 50,000 companies across the EU (including the EU subsidiaries of UK and US multinationals) to fully disclose under 84 topic areas in annual statutory reporting. So ,there will be a vast amount of new disclosure on all aspects of ESG, all in the public domain, and all easily comparable with a company’s sustainability marketing claims.
In other words, companies currently greenwashing will have no place to hide.
How companies can respond
While the specific focus area of each regulation, environmental claims guidance and directive varies, the underlying theme is clear: businesses can no longer make claims they can’t substantiate. Terms like ‘eco-friendly,’ carbon-neutral’ and ‘better for the environment’ can no longer be part of the marketing lexicon. Instead, companies can expect to be held accountable for their environmental credentials or risk enforcement action from regulators or litigation and potential damage to their reputation in the long run.
Companies, however, should look beyond seeing this shift as a limitation and instead, embrace the opportunity to build and restore the trust that is being eroded in environmental claims, particularly for those leading the way on sustainability.
Beyond legislation, marketers and brand teams have a role to play in promoting sustainable products and practices, given the urgency of the green transition and the need to ensure that consumers are on board and investors can make sound decisions.
Sustainability and ESG considerations are complex and nuanced, and often fall outside the scope of marketing and brand managers when developing campaigns and assigning ‘green’ nomenclature or labelling to products. Financial and sustainability reporting teams likewise need to educate themselves on new reporting requirements as they pertain to greenwashing, including CSRD.
Companies can avoid greenwashing or over-claim by starting to ask the right questions and taking the following steps:
Assess your ‘green’ claims – can they be backed up by robust, credible, and up-to-date data and analysis.
Conduct a thorough risk assessment – to identify where there may be violations of green claims guidance or regulation in campaigns and marketing materials.
Take a company-wide view – beyond proving a singular claim is accurate, companies need to make sure the claim reflects ALL the company’s actions regarding that particular sustainability issue, i.e., they can’t tell only part of the story.
Set up a robust internal sign-off process for environmental claims – one that includes representatives from Sustainability, Technical, and Legal teams to provide the necessary context.
Have a detailed evidence trail (ideally with third-party assurance) for every aspect of a sustainability claim – while the methodologies regulators will consider when looking to substantiate green claims isn’t clear in all cases, one can assume data will underpin them.
Deliver internal training – to ensure relevant functions understand consumer laws around green claims, new and upcoming regulation, and the importance of compliance.
Don’t lose sight of creativity – marketing campaigns can and should still deliver the desired impact, just in an authentic and credible way.