At a glance:
- The European Commission has proposed the Green Claims Directive to address greenwashing concerns by tackling the risk of companies misleading EU consumers over environmental claims.
- The proposed requirements would apply to the vast majority of EU operating companies, but sectors that have existing or forthcoming rules on environmental claims (such as financial services) would be exempt.
- Under the proposed rules, companies will need to substantiate environmental claims using life cycle assessment, communicate them accurately and holistically, and have them externally verified. Common phrases such as ‘net zero’, ‘carbon neutral’ and ‘eco-friendly’ would be prohibited in advertisements, in social media posts or on packaging unless they were sufficiently substantiated and verified.
- To meet the new requirements, companies will need to have a robust environmental claims management framework. This is likely to require changes to be made to key elements of their operating model, from organisational capabilities to data management and technology; and enhancements to governance structures.
- As well as fulfilling regulatory requirements, more robust management of environmental claims could help companies to reduce reputational and litigations risks, and support brand value. It may also generate new insights and guide better decision-making. However, some companies may conclude that it is more cost effective for them instead to limit the environmental claims made.
On 22 March 2023, the European Commission published its proposal for the Green Claims Directive. The Directive aims to eliminate misleading environmental messaging across EU markets and address greenwashing concerns by setting out the EU’s first set of detailed rules for how companies should market their environmental impacts and performance. The new requirements will necessitate significant changes to the way many companies currently evidence and communicate their environmental claims, as well as how they manage information related to their environmental credentials.
Once the Directive enters into force, Member States will have 18 months to transpose it into national legislation. We estimate therefore that in principle the requirements will apply from 2026, although this timeline may change depending on the speed of EU negotiations on the final text. For example, we anticipate many elements of the proposal to be perceived as controversial which could slow the negotiations down.
In this blog, we assess the principal implications of the Directive. We begin by outlining the proposed requirements. We then explore what would be needed for a company to develop a new or enhanced environmental claims management framework, and to refine its operating model to meet the proposed requirements. Finally, we consider some of the key factors a company will weigh up when deciding whether to invest to meet the new requirements or to scale back (or stop) making environmental claims.
What types of claims and which companies are affected by the Green Claims Directive?
The proposed scope of the Directive is broad. It would apply to claims made voluntarily to consumers in the EU about a product, service or organisation that state or imply a positive effect on the environment. Well-known examples of these types of claims include ‘carbon neutral, ‘net zero’ and ‘packaging made from recycled plastic bottles’. The Directive would not apply to mandatory claims and claims that are already covered by existing regulations.These include labels marketing organic food and feed, labels relating to the fuel economy and carbon emissions of cars and energy efficiency of products, and annual sustainability reporting. Companies operating in sectors that have existing or upcoming rules on environmental claims (such as financial services) would also be exempt.
The proposed requirements would apply to the vast majority of EU operating companies, from SMEs to large public companies, and across industries. This includes companies based outside the EU that target EU consumers. Only micro-SMEs (companies that have fewer than 10 employees or generate less than €2 million annual turnover) would be exempt from the rules.
What are the key requirements?
The proposed Directive sets out new minimum norms for how companies substantiate, communicate and verify their environmental claims to consumers in the EU. It also contains measures to control the increasing number of environmental labels and to ensure the reliability of existing labels. Based on the current proposal, summarised below are the requirements that we believe present key business implications (please click on the header's image to access slides that list the proposed requirements in more detail):
Figure 1. A select summary of the requirements proposed in the Green Claims Directive.*The specific form of the verification certificate would be defined in the future via an implementing act.
What steps will companies need to take to meet the new requirements?
To comply with the proposed rules, a company will need to have a robust environmental claims management framework that focuses on integrity, transparency and verification of data. The framework will need to incorporate new – or build on existing – processes to gather and analyse environmental data across the value chain, to ensure the company can meet the requirements related to substantiation. A key part of this will be conducting life cycle assessments (LCAs).
The data collected can be used to develop the company’s messaging of environmental claims. This messaging will also need to be supported by internal guidelines on communications updated based on the new requirements, to ensure environmental claims are correctly communicated.
The whole process will need to be underpinned by an external verification system, completed by an accredited third-party, to ensure alignment with the new requirements.
To build a sufficiently robust environmental claims management framework, companies will likely need to make changes to key elements of their operating model, including processes and controls, data management, and technology. They would also need to develop their organisational capabilities and people. These changes could include, for example, setting up a dedicated team (or in smaller companies, assigning a person) to oversee the environmental management framework process. The team would need to leverage expertise from across the business, including from risk management, and align with internal audit. Companies will also need to consider how to upskill other teams within the business, especially teams working within marketing and external communications. Under the new requirements, these teams will have a lead role in developing accurate, complete and defensible environmental claims.
Companies are likely to face considerable challenges implementing these changes, from knowledge and data gaps to significantly increased costs. For example, companies must account for the costs of calculating environmental footprints for different products within and across product lines and geographies, as well as additional compliance costs, including costs associated with the implementation of new operational processes. Companies choosing to use an optional verified environmental labelling scheme to demonstrate to consumers their environmental credentials are also likely to face further increases in costs as label providers pass on their own compliance cost increases.
Updating governance processes to align the board with these changes is critical. Companies can look to review their governance, including roles, responsibilities, management information as well as remuneration of executives, to create stronger accountability for ensuring the requirements are met. To streamline this task and other operational changes, companies can learn from how they currently verify sensitive or confidential information and leverage other regulatory responses, such as existing financial reporting requirements.
How should companies proceed?
In its current form, the new Directive would likely necessitate a significant and costly compliance exercise. Many companies may already have processes in place to substantiate to some degree environmental claims that they make. They can build on these processes, although the gap between current capabilities and future requirements is likely to be large. Companies can also consider other regulatory requirements being introduced that will incentivise or require investment in similar areas of the organisation to the Green Claims Directive, such as the Corporate Sustainability Due Diligence Directive, or new Extended Producer Responsibility requirements.
There are also likely to be additional benefits from meeting the new requirements. For example, companies that clearly and accurately communicate their environmental impacts and performance will reduce the reputational and liability risks of making incorrect claims. One consideration is the direct penalties for non-compliance under the Directive: infringing companies could face legal investigations and be fined up to 4% of annual turnover. These steps will in turn help preserve brand value and enhance consumer loyalty. According to Deloitte’s latest consumer survey, 40% of UK adults chose brands that demonstrated environmentally sustainable practices and values.
Implementing an environmental claims management framework could also generate strategic planning benefits. For example, the additional data about products and organisational activities generated, and the enhanced organisational connectivity across the business, could be drawn on to integrate new insights into decision-making and identify new areas for innovation and development. The outputs can also improve organisational transparency; enhance relationships with key stakeholders, such as suppliers and investors; and support transition planning and execution.
That said, given the nature of the requirements, some companies may conclude that the better option for them is to stop (or else significantly reduce) making environmental claims – even though that is likely to have a business impact given growing customer demand for alignment of product and services to being green. The proposed requirements are likely to be particularly onerous for SMEs, so that the Directive could in practice have an adverse effect on competition.
What can companies do now?
As EU policymakers start negotiations on the Green Claims Directive, companies can identify how the upcoming rules are likely to affect them by considering how they currently evidence and communicate environmental claims. For those companies wishing to leverage the benefits of clear and accurate environmental claims, they have the opportunity to take action now by beginning to design an environmental claims management framework. They will though need to balance the benefit of early actions against the risk that the final rules are materially different from the current proposal.
For companies that decide not to take steps now to develop a framework, they can still review the environmental claims they make, including to ensure compliance requirements in the future are more manageable, and recognising that all their stakeholders – not just policymakers and regulators – are concerned about greenwashing.