An ESG Wave: Environmental Claims Under Scrutiny in the EU

On March 22, 2023, the EU Commission (Commission) presented its proposal for a Green Claims Directive (GCD), which will introduce demanding obligations on how companies substantiate, verify, and communicate environmental claims. The European Parliament and the Council of the EU will now consider the proposal and ultimately reach an agreement on the terms of the final legislation.

The GCD comes against a backdrop of a rising tide of ESG litigation across the EU. A Commission study, mentioned in the proposal, finds that more than half of all environmental claims in the EU were based on vague, misleading, or unfounded information. To that end, the GCD will create a specialized regime to govern environmental claims, which will complement the EU Unfair Consumer Practices Directive (itself being revised to address explicitly both environmental and social claims).

The GCD is part of a broad wave of new EU legislation addressing ESG communications and performance by both EU and non-EU companies (and, in some cases, extending up and down a company’s value chain), notably the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive.

This is very much a time when companies are reviewing their ESG communications and performance, as well as their ESG governance policies, to adapt to a fast-changing regulatory environment.

Key elements of the proposed GCD:

• The GCD covers a broad range of environmental claims: The GCD will apply to environmental claims made by traders about their products or business in B-2-C communications, which include messages, labels, representations, and symbols.
  
  Communications are covered if they claim that a product or trader (1) has a positive or no impact on the environment (absolute claim), (2) is less damaging to the environment than other products or traders respectively (comparative claim), or (3) has improved its impact over time.
  
  The GCD will not cover green claims governed elsewhere under EU law, such as the rules on sustainability claims that apply to financial services. It will also not apply to  microenterprises (fewer than 10 employees and less than €2 million turnover).

• Environmental claims must be substantiated: Before making claims, companies will have to conduct (and update) an assessment that, among others,
  
  • identifies the specific scope of a claim
  • demonstrates using scientific evidence and, preferably, the company’s own data that claimed effects are significant across the lifecycle, taking account of all relevant environmental considerations
  • identifies whether environmental improvements subject to a claim lead to significant harm in other environmental dimensions
  • addresses the use of carbon offsets in relation to a claim, including whether offsets involve emissions reductions or removals and are of “high integrity”
  • uses equivalent bases (data, methods, effects) to make comparisons
• Environmental claims must be properly communicated:
  • Claims may cover only environmental effects that are properly substantiated and assessed to be significant.
  • When communicating a claim about future environmental performance, companies must include a time-bound commitment for improvements throughout the value chain.
  • A claim must be accompanied by the substantiating information (e.g., weblink or QR code), including the claimed environmental effects and how they are achieved; underlying studies or calculations; the extent of any use of carbon offsets; and the nature of those offsets.
• Environmental claims must be verified: An authorized third party must verify the substantiation and communication of a claim before it is used publicly. When verified, a claim will receive an EU certificate of conformity.
• Environmental labels must comply with the new rules: Environmental labels must also comply with the new rules on substantiation, communication, and verification.
• Environmental labelling schemes must meet new requirements:
  • Environmental labelling schemes that certify labels must provide transparent, freely accessible, and comprehensible information on a scheme’s owners and decision-makers and its objectives, requirements, and procedures, and a scheme must use certification criteria that are scientifically robust and subject to external review, including for societal relevance.
  • For public environmental labelling schemes:
    • Existing public schemes established by EU Member States and third countries can continue to be used, provided they satisfy the GCD.
    • In the EU, new schemes can be established only by the EU, not Member States.
    • New third-country schemes can be used in the EU if they are approved by the Commission as adding value in comparison to existing EU schemes and as meeting the GCD requirements.
  • For private environmental labelling schemes (EU and third-country): New schemes must also be approved as adding value in comparison to existing EU schemes and as meeting the GCD requirements.
• Environmental claims will be scrutinized and noncompliance penalized: National authorities will be required to check environmental claims. To do so, they will be granted broad investigative powers, acting on their own initiative or following a complaint. Noncompliance will be sanctioned by fines, confiscation of revenues earned in sales of noncompliant products, and exclusion from public procurement and public funding.

After the GCD enters into force, Member States will have 18 months to adopt national implementing measures; the obligations will apply 24 months after entry into force. In the meantime, companies should start preparing for increased scrutiny over their environmental claims in the EU.

Thank you to Sidley Associate Nina Spieler for her significant contributions to this Sidley Update.