European Parliament adopts new rules on green claims

• The European Parliament has adopted its position on new rules for explicit environmental claims and environmental labels.
  
  
• The new rules outline required information to be provided to authorities and the public before publishing an explicit environmental claim, in addition to details on third-party verification and penalties.
  
  
• Businesses will want to assess potential risks associated with their environmental, social and governance (ESG) communications and associated communications strategy.

Executive summary

The European Union is proposing to reinforce regulatory measures against false or misleading environmental claims, commonly known as "greenwashing." To stop the growing trend of companies promoting their products, services and business as more environmentally friendly than is factually true and to help create a competitive and sustainable market, regulators are proposing a ban on false environmental claims. Businesses wanting to publish explicit environmental claims will be required to conduct extensive assessments and provide supporting documentation.

The aim of the Green Claims Directive (GCD or Directive) is to prevent false or misleading advertising from hindering the green transition. Under the GCD, only companies that have verified their claims as environmentally friendly can reap commercial benefits from using green claims. The GCD and other related greenwashing regulations could well pave the way for an increasing number of greenwashing litigation cases around the world.

The GCD applies to explicit environmental claims that companies make about their products or the company itself in business-to-consumer commercial practices. The Directive provides conditions for how such claims are to be substantiated and communicated and detailed requirements for the approval of environmental labels, third-party verification of claims, and penalties for companies found to be noncompliant.

On 12 March 2024, the European Parliament adopted its position, providing its view on claims covered, expectations on operationalisations of the rules and implementation timeline. The Directive will be taken up further after the European Parliament elections in early June. If the European Parliament and Council of the European Union reach an agreement, EU Member States will be required to implement the directive into national law within 24 months and proceed to apply the measures within 36 months.

Detailed discussion

Overview of GCD requirements

The proposed GCD will complement and operationalize the ban on greenwashing recently adopted by the European Parliament under the "Empowering Consumers for the Green Transition" Directive. The Directive references improving product information on durability and repairability for consumers, protecting consumers from greenwashing and premature obsolescence, and facilitating repair.

Under the proposed GCD rules, businesses will be required to substantiate explicit environmental claims before publishing, providing consumers with transparent, reliable, and valuable information. The Directive outlines specific requirements for substantiating explicit environmental claims — for example, by requiring lifecycle considerations, disclosing scientific evidence and explaining any deviation from law or industry and sector standards.

Information must be disclosed together with the product, through use of a URL or QR code. In general, the disclosure information is expected to cover:

• Environmental aspects, impact and performance included in the claim
  
  
• Relevant EU or international standards used as part of the substantiation
  
  
• How improvements related to the claim are achieved
  
  
• Information on greenhouse gas (GHG) off-setting
  
  
• Underlying studies or calculations used to assess, measure and monitor impacts, aspects or performance
  
  
• Certificate of conformity
  
  
• In case of comparative advertising, appropriate comparative data

The rules place greater emphasis on considering the relative significance of the environmental impacts, aspects or performance. It is therefore increasingly important not to publish environmental claims without considering the balance, weight and precision of those claims.

Moreover, the GCD defines mandatory governance criteria for environmental labels. These include requirements that the governance model be transparent, stakeholders be considered and an on-going process be established for evaluating complaints, disputes and handling of noncompliance with the requirements of the labeling scheme.

Third-party verification

Environmental claims and labels will also be subject to third-party verification. EU Member States will be expected to set up procedures for verifying the substantiation and communication of explicit environmental claims against the requirements of the GCD. The verifier will provide companies with a certification of conformity, confirming that the claim or label complies with the regulation.

Although the aim of the verification process is to assess compliance, it is not a guarantee against civil liability or scrutiny by authorities. Nonetheless, public authorities are expected to conduct regular checks of companies' compliance with the regulation and publish public reports on the results.

Noncompliance risks

The GCD also aims to provide an appropriate procedure for appeals and complaints for persons, organizations and others who are negatively affected by misleading marketing.

In terms of public sanctions, companies found to be noncompliant may face the following:

• Fines: Imposition of fines should be at a level that effectively eliminates any economic advantage gained from the infringements, with the maximum amount of such fines being 4% of annual turnover. Fines amounts will increase for repeated violations.
  
  
• Confiscation of revenues: If a trader gains revenue from a transaction involving products associated with noncompliant environmental claims, the authorities have the power to confiscate those earnings.
  
  
• Temporary exclusion from public procurement: Traders in violation may face exclusion, for a maximum period of 12 months, from public procurement processes and from access to public funding. This includes exclusion from tendering procedures, grants and concessions.

Amendments by the European Parliament

The European Parliament took the position to establish a verification and preapproval system for environmental claims aiming to protect consumers from misleading marketing.

Key amendments by the European Parliament include:

• If found noncompliant, companies will have 30 days to take corrective action and only in exceptional cases may apply for an extension.
  
  
• All claims and supporting evidence must be evaluated by verifiers within 30 days. However, simpler claims and products could be eligible for a faster and less complex verification process.
  
  
• Micro-enterprises remain excluded from the scope of the proposed rules, and the European Parliament emphasizes the need to support small to medium enterprises (SMEs) with implementation of the rules (e.g., by suggesting one extra year for SMEs to prepare for compliance).
  
  
• The possibility to base green claims on carbon offsetting remains limited, and green claims relating to products containing hazardous substances will still be possible.

Business implications

The GCD marks an important milestone in the European Green Deal and reinforces the Commission's ambition to combat greenwashing and empower consumers. Avoiding greenwashing allegations can help companies maintain corporate reputation, boost customer trust, and promote ethical and sustainable business practices.

Activities to consider include:

• Reviewing ESG communication and communication strategy
  
  
• Assessing the potential impact on operations and communications
  
  from proposed new GCD rules and related regulations
  
  
• Identifying existing gaps and actions to take
  
  
• Preparing for implementation

EY teams advise on sustainability communication and strategy helping to create a robust governance framework. By combining technical capabilities and legal expertise, EY teams can help in assessing content to identify greenwashing risks, while aligning it with applicable ESG-related stipulations.

Businesses should closely monitor any further developments and assess the potential impact. It is also important to note country regulatory developments may be expected and should also be monitored.

Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young AS, Norway

• Linn Anker-Sørensen
  
  
• Susanne Eriksen
  
  
• Benjamin P. Green

Ernst & Young LLP, London

• Michelle T Davies
  
  
• Vanessa M Fullerton

Ernst & Young Law GmbH Rechtsanwaltsgesellschaft, Mannheim

• Sebastian Wurzberger

Ernst & Young Law AB, Stockholm

• Paula Hogéus

EY Godkendt Revisionspartnerselskab, Copenhagen

• Ossian Nilsson

HVG Law LLP, Rotterdam

• Bart Wolters

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.