European regulators are taking greater steps to clamp down on companies’ misleading environmental, social, and governance (ESG) claims, but experience shows different countries have differing priorities about tackling dishonest marketing.
While the focus of many countries is to target the biggest offenders capable of harm, there appears to be a split about which industries are most at fault and which regulators should take the lead.
Several European Union countries—including Denmark, France, Germany, and the Netherlands—and the United Kingdom have identified the financial services sector as being one of the biggest culprits, particularly regarding trying to entice pension funds to invest in supposedly green funds. As a result, financial regulators in these countries have been vocal in their desire to see the bloc pass EU-wide legislation to prevent greenwashing.
Some financial regulators have already taken direct action. In May, German authorities, including BaFin, raided the offices of both Deutsche Bank and its asset management subsidiary DWS as part of an investigation into financial institutions committing fraud by marketing investment products as more environmentally friendly than they really are. Both firms are cooperating with the probe.
In other countries, greenwashing is seen more as an unfair competition issue, with antitrust regulators taking the lead—especially against fashion retailers.
The Netherlands Authority for Consumers and Markets began investigating six clothing retailers over their green claims in November 2021. In July, the U.K.’s Competition and Markets Authority (CMA) opened investigations into ASOS, Boohoo, and Asda.
In June, the Norwegian Consumer Authority (Forbrukertilsynet) ruled the basis used by clothing retailer Norrøna to back its environmental claims was “not sufficient” and asked it to either amend or remove the misleading statements. The regulator warned H&M of similar deficiencies.
Competitors keeping tabs
Legal experts believe focus on antitrust issues might make it easier—and cheaper—for companies to pursue legal action against competitors who use spurious green credentials to win customers.
Last year, in a landmark case, an Italian court upheld a company’s request for an interim injunction to stop a rival manufacturer of microfiber materials from continuing to make “vague, false, and non-verifiable green claims” that gave it an unfair competitive advantage.
The case is of interest, said Carolina Piovano, a senior associate at law firm Clifford Chance, because it provides corporates a simple (and relatively cheap) tool to use against competitors making environmental claims about themselves, their products, or their services, should the green image they portray not correspond to reality.
Sanctions for misleading claims can also be substantial. Most regulators favor simply calling companies out and forcing them to retract or correct statements, but there are signs some want to take a tougher stance.
Last year, France introduced a legal sanction under its consumer code that states organizations accused of greenwashing can be fined up to 80 percent of the cost of any false promotional campaign. Companies can also be forced to pay for a correction on billboards or in the media, as well as carry a 30-day clarification on their websites.
The U.K. government, meanwhile, is consulting on proposals to give the CMA the power to impose a penalty of up to 10 percent of turnover for consumer law breaches and 1 percent of turnover for noncompliance.
Emerging regulatory landscape
In terms of enforcement, European countries appear to be taking individual approaches based on their own priorities, but plans are afoot at the EU level to put pan-European rules in place.
“It’s … important to ensure everyone involved in making green claims—including advertising agencies—understands the law and has had the necessary training. Brands should check their agency contracts, ensure the compliance clauses are fit for purpose, and strengthen them if needed.”
Duncan Reed, Partner, TLT
In March, the European Commission agreed to introduce legislation to amend the Consumer Rights Directive and the Unfair Commercial Practices Directive as part of its Circular Economy Action Plan so that greenwashing is automatically classed as “unfair.” No timeline has been set as to when it could be implemented and come into force.
Experts say Europe is taking the lead in trying to combat greenwashing. However, they note initiatives remain new and untested, with very little case law to warn companies about what constitutes a breach.
Simon Taylor, partner at consultancy Forensic Risk Alliance, said, “A clear and well-established framework of laws is essential if criminal prosecutions are to be brought fairly and successfully. At present, this is not the case. While these laws are in a state of flux, prosecutions will remain problematic.”
There are still actions companies can take to avoid regulatory sanction and limit risks.
Taylor suggested organizations carry out a “stock take” of all factual claims currently made in product advertising or marketing materials concerning ESG issues and test whether these can be forensically supported. He added companies should critically examine other broader aspirational claims on ESG and question whether these might expose the company to legal risk.
He also advised companies to map legal and regulatory standards applicable in relevant markets, involve legal and compliance teams to introduce approval controls ahead of any ESG claims, and monitor litigation and enforcement trends in key markets.
Duncan Reed, partner at U.K. law firm TLT, said, “It’s also important to ensure everyone involved in making green claims—including advertising agencies—understands the law and has had the necessary training. Brands should check their agency contracts, ensure the compliance clauses are fit for purpose, and strengthen them if needed.”
Elaina Bailes, partner in commercial litigation, fraud, and securities litigation at law firm Stewarts, said, “Climate-related law and regulation is a fast-moving area, and it is easy for companies to slip up. Companies need to take early legal advice on the potential implications of product descriptions, stay up to date with legal and regulatory developments, and provide training for marketing teams and boards to ensure their green claims stay up to speed with legal standards and public opinion.”