Green Claims Directive - The EU Commission turns off the tap to "greenwashers"

Sustainability and the ecological footprint of products and services can be advertised, but do not have to be. The same applies to the accuracy of the information communicated. These can be correct - but they are not always. A study conducted by the European Commission in 2020 found that 53.3 per cent of the environmental claims examined for products and services in the European Union (EU) were vague to misleading and as many as 40 per cent were simply insubstantial.

On 23 March 2023, the European Commission published a proposal for a directive to combat advertising that presents products, services and the company itself as more environmentally friendly than they actually are, thereby misleading consumers and hindering a genuine sustainable transformation of the economy.

The Green Claims Directive is intended to create transparency and give consumers the certainty that something that is advertised as environmentally friendly actually is. Consumers should be able to make informed purchasing decisions based on comprehensible information. In addition, the competitiveness of those market participants who endeavour to make their products and services more environmentally friendly should be strengthened. The directive thus contributes to the reorganisation of the economy and society in line with the requirements of the EU Green Deal. It also contributes to the endeavour to update European consumer law and supplements existing EU regulations, both in the area of consumer protection and in relation to environmental standards.

The proposed directive places an obligation on all companies that make voluntary claims about the environmental impact, aspects or performance of their products, services or the company itself that are not already regulated by other EU legislation, using terms that are not defined by the EU, such as "ocean-friendly" or "climate-neutral".

Companies must first carry out an assessment, which should form the basis for any environmental claims. It must be made clear whether the claim relates to the entire product, a part of the product, a section of the product's life cycle or specific aspects of the product. The claims must be supported by scientific evidence and may only be made if the environmental benefits of the product go beyond what is required by law. If positive environmental effects are advertised, these must not be cancelled out by any negative side effects. The aim: Consumers should be given a complete picture of the overall environmental balance.

The Green Claims Directive also sets out requirements for comparisons that are popular in advertising. If a claim is made that the advertised product is more environmentally friendly than other products, it must be ensured that equivalent information, data and methods are used for the comparison.

To ensure that ecolabels that promise consumers tested sustainability standards are actually reliable, they must comply with EU requirements regarding transparency and scientific assessment methodology in future.

Consumers should be empowered in the best possible way to recognise the environmental potential of the product. Therefore, if the environmental claim relates to the use of the end product, companies must inform consumers how to use or dispose of the product in order to achieve the environmental benefits. Furthermore, information on environmental claims should be made available to consumers in the form of a web link or printed QR code.

All information and evidence thereof must be submitted to an accredited verifier before publication. This independent body should ensure that the information provided by the company fulfils the requirements of the directive and issue a certificate of conformity. In addition, the environmental information must be updated by the companies on an ad hoc basis and checked for accuracy after five years at the latest.

Only micro-enterprises with fewer than ten employees and an annual turnover not exceeding two million euros are exempt from the regulations and obligations of this directive. For small and medium-sized enterprises, the member states are to offer financial resources as well as training and organisational and technical support so that they can implement the requirements of the directive.

The member states are required to set up competent authorities for monitoring. These authorities are to regularly check the accuracy of environmental claims and ecolabels. To this end, they are to be given extensive rights. These include the right to request the disclosure of and access to documents, data and information, the instruction of corrective measures, the imposition of penalties and the publication of violations. The principle of "naming and shaming" is therefore also included in this directive. Other penalties provided for in the event of violations are

• A maximum fine of at least 4% of the company's annual turnover in the Member State(s) concerned. The exact amount will be based, among other things, on the economic benefits derived from the offence and will be increased in the event of repeated offences,
• the absorption of profits made from the products concerned and
• exclusion from public tenders and support services for up to twelve months.

On 12 March 2024, the European Parliament adopted its position on the draft Green Claims Directive at first reading. In the next step, the Council of the European Union will decide whether to accept the Parliament's position and thus adopt the legislative proposal, or to submit its own position to the Parliament.

After approval by the European Council, the member states have 18 months to integrate the directive into their national law and a further twelve months until the provisions actually come into force.

It remains to be seen how test schemes and definitions of terms will be organised. However, companies should already prepare themselves for the fact that the reliability of their voluntary environmental claims will be critically scrutinised and take appropriate measures to ensure the accuracy and verifiability of their environmental claims.

A study conducted by the German Institute for Compliance on the topic of internal investigations in 2022 showed that over 74 per cent of participating companies expect ESG issues to become more important in internal investigations in the future. With its proposed directive, the EU Commission is therefore addressing a topic that will be relevant for German companies both in terms of prevention and with regard to the detection and clarification of violations.

KPMG's experts will be happy to answer any questions you may have on this topic.