Environmental, social and governance (ESG) initiatives are now critical drivers for companies – there is no getting around it. Companies often make significant ESG efforts. But when they wish to – or have to – communicate about these efforts, a growing web of regulations becomes relevant. This, coupled with increasingly active authorities who are on the look-out for greenwashing practices, means that it can be hard to establish what is, and what is not, allowed or required. Below, we will summarise the state of play and also look ahead.

Key takeaways

1. When making a sustainability claim, be aware that you must be able to prove that the claim is correct.

2. In voluntary disclosures (for example, advertising):

Do

• define the specific sustainability benefits to be communicated
• be as specific as possible when claiming sustainability benefits
• have solid evidence available for any sustainability benefit that is claimed or suggested
• have a concrete plan and targets in place when communicating sustainability ambitions, and be specific about them
• ensure the availability of relevant information for consumers about the sustainability claim, and make sure that it is easy to find and just a "click" (or QR code) away

Do not

• make absolute claims if you cannot support them with strong evidence
• use colours, images, symbols and labels that may suggest a sustainability benefit without a direct and verifiable relationship with such benefit

3. In mandatory disclosures, be aware that for listed and large companies, reporting requirements are becoming more onerous, some starting as early as this year (2024)

4. On enforcement:

• regulators are actively pursuing sustainability claims, and their role continues to expand, with substantial fines being a risk
• civil enforcement is expected to increase

Introduction

Sustainability claims are, in short, claims that communicate a message regarding the environmental impact, ethical standards or lifespan of a product or service. The fact that action may be taken against sustainability claims is not new. It was, after all, already possible to take action against misleading claims based on, among other things, the Unfair Commercial Practices Directive and the Misleading and Comparative Advertising Directives, as implemented into national law.

But recently, sustainability claims are being scrutinised by regulators and courts much more critically than other types of marketing claims. Requirements for substantiating sustainability claims are becoming very strict, and new directives are raising the bar even further, blacklisting certain claims and requiring prior verification for other sustainability claims. Claims that were acceptable in the past can become problematic in the future.

On the other hand, companies cannot abstain from communicating on their ESG efforts altogether. Mandatory disclosures (reporting) are increasingly required. Below, we summarise the relevant legal frameworks.

Legal framework - voluntary disclosures

Current rules

As mentioned, the Unfair Commercial Practices Directive (UCPD) and the Misleading and Comparative Advertising Directive already provide the option to take action against claims that are misleading, with the burden of proof generally being placed on the party making the claim. This includes sustainability claims, as also demonstrated by judicial actions based on these directives as implemented into national laws. A recent example of this concerns communications made by the Dutch airline KLM (such as "Join us in creating a more sustainable future"), several of which were held by the Amsterdam District Court to be misleading under the UCPD.

Notably, the Dutch regulator responsible for enforcing the UCPD (the "ACM") in 2023 issued the second version of its Guidelines on Sustainability Claims. These guidelines can be summarised into five general rules: (i) use correct, clear, specific and complete sustainability claims; (ii) substantiate sustainability claims with facts and keep them up to date; (iii) ensure that comparisons with other products, services or companies are fair; (iv) describe future sustainability claims concretely and measurably; and (v) make sure that visual claims and labels are useful to consumers, not confusing.

Furthermore, the Sustainability Code is a set of rules issued by a self-regulatory advertising organisation in the Netherlands (the Advertising Code Committee). It contains a number of provisions specifying that, in short, sustainability claims should not be incorrect or misleading. These rules are applied strictly, as can be seen in a recent decision where advertising by Primark was held to violate the Code because even though the communications provided a realistic view of sustainability efforts at the time of the complaint, it was not sufficiently clear that they concerned an ambition (rather than achieved results). Including text in smaller typeface such as "By 2027 all the cotton in our clothing is biological, recycled or come from our cotton sustainability programme" was not deemed sufficient, and could easily escape consumer attention. In another decision, substantial evidence submitted by Tata Steel on its "Polycyclic Aromatic Hydrocarbons, 50% less PAH emissions since 2019claim was not deemed sufficient since it "cannot be excluded" that the reduction in PAH emissions was in fact less than claimed.

Additionally, the AFM Guidelines on Sustainability Claims provide guidance for financial institutions and pension providers on how to make correct, clear and non-misleading claims.

Another relevant factor to note is that pursuant to the EU Trade Mark Directive (and EU Trade Mark Regulation), registered trade marks conveying green claims can be held invalid: not only if they are misleading, but also, for example, if they are descriptive or are contrary to public policy or to accepted principles of morality.

Looking ahead

The Directive Empowering Consumers for the Green Transition, which amends various pieces of legislation, including the UPCD, entered into force on 26 March 2024. EU member states will have two years to implement it (with the rules applying as of 27 September 2026). It introduces specific rules to tackle unfair commercial practices that mislead consumers and prevent them from making sustainable consumption choices (for example, practices associated with the early obsolescence of goods; misleading environmental claims ("greenwashing"); misleading information about the social characteristics of products or traders’ businesses; or non-transparent and non-credible sustainability labels).

Some of the Directive's rules introduce:

• new blacklisted practices, such as:
  • making a generic environmental claim (for example, "environmentally friendly", "green", "ecological", "bio based") without recognised excellent environmental performance
  • making an environmental claim about the entire product or the trader’s entire business when it concerns only a certain aspect of the product or a specific activity of the trader’s business
  • claiming, based on the offsetting of greenhouse gas emissions, that a product has a neutral, reduced or positive impact on the environment in terms of greenhouse gas emissions
  • inducing a consumer to replace or replenish the consumables of a good earlier than necessary for technical reasons.
• a required, verifiable plan for ambitions: it is misleading to make an environmental claim related to future environmental performance without having clear, objective, publicly available and verifiable commitments. These commitments must be set out in a detailed and realistic implementation plan that includes measurable and time-bound targets and other relevant elements necessary to support its implementation. The plan must be verified regularly by an independent third-party expert whose findings are made available to consumers.
• a prohibition of misleading information regarding durability, reparability or recyclability: the overall presentation of a product must not mislead consumers as to its environmental or social characteristics or aspects linked to circularity, such as durability, reparability or recyclability.
• provisions to the effect that sustainability labels must be based on a certification scheme or established by public authorities.

Furthermore, the proposed Green Claims Directive (2023/0085) was adopted by the European Parliament in March 2024 (1st reading). The Council adopted its own position in June 2024. Next up are negotiations between the European Parliament and the Council. Important elements of the proposal as currently worded include:

• a mandatory assessment for explicit environmental claims: traders must carry out an assessment to substantiate explicit environmental claims. This assessment must be based on independent, peer-reviewed, widely recognised, robust and verifiable scientific evidence, use accurate information and take into account relevant EU or international standards, and consider a life-cycle perspective, among other things;
• a ban on environmental claims stating that a product has a neutral, reduced or positive environmental impact based on the offsetting of greenhouse gas emissions. Specific requirements will apply to compensation claims that are based on the use of carbon credits;
• provisions on environmental labels: explicit environmental claims on the cumulative environmental impacts of a product or trader based on an aggregated indicator of environmental impacts can be made only when they are based on environmental labels that comply with the requirements set out in the directive; for example, regarding verification by an accredited third party;
• a simplified verification process for certain claims: this may include a presumption of conformity.

Legal framework - mandatory disclosures

While sustainability claims are subject to increasingly strict legal standards, other relatively new European legislation requires companies to actively communicate about their ESG efforts.

Pursuant to the Corporate Sustainability Reporting Directive (CSRD), sustainability reporting requirements are increasing for companies in scope (listed and large companies). With the first companies having to apply the new rules for the 2024 financial year, companies soon will have to report on their material positive and negative impacts, as well as on the risks and opportunities related to sustainability issues. This includes information on the company’s business model and strategy; any time-bound targets; the role and expertise of the board of directors; the company’s policies; the existence of incentive schemes; due diligence processes; and material risks, to the extent related to material sustainability matters. The reporting will have to comply with the European Sustainability Reporting Standards (ESRS), which cover the entire range of environmental, social and governance issues, including climate change, biodiversity and human rights. For more information, we refer to our earlier articles on the CSRD here.

The Corporate Sustainability Due Diligence Directive (CSDDD) requires companies in scope (after implementation of the directive) to report on the matters covered by the directive in an annual statement. That is, on how they implement sustainability due diligence as provided for in the directive. Companies in scope must also adopt a best efforts climate change transition plan. For more information on the CSDDD (which recently got the green light from the Council, see our articles here.

Other noteworthy mandatory disclosures are:

• The Deforestation Regulation (2023/1115) requires large companies that put relevant products on the EU market or export relevant products to publicly report on their due diligence systems aimed at ensuring that the products are deforestation-free (but note the one-year delay for application that has been proposed);
• The Conflict Minerals Regulation (2017/821) similarly requires EU importers of minerals or metals to publicly report on their supply chain due diligence policies and practices for responsible sourcing, aimed at curtailing opportunities for armed groups and security forces to trade in tin, tantalum and tungsten, their ores, and gold ("conflict minerals").
• The Prospectus Regulation (2017/1129) requires a prospectus to disclose all necessary information which is material to investors. This may require sustainability disclosures, as confirmed in recent ESMA (the European Securities and Markets Authority) guidance.
• The Taxonomy Regulation (2020/852) primarily seeks to classify which economic activities – and which investments – must be considered environmentally sustainable in the EU. However, it also requires certain entities to disclose information on how and to what extent the undertaking’s activities are associated with economic activities that qualify as environmentally sustainable under the EU Taxonomy.
• The Forced Labour Regulation will, once it becomes final, ban products made with forced labour from the EU market in due course, and it provides a framework to investigate the use of forced labour in supply chains.

Regulatory and civil enforcement

With these increasingly stringent requirements, increased enforcement against non-compliant sustainability claims is a natural consequence.

First, we see a regulatory trend where authorities, like the ACM, are becoming increasingly vigilant in respect of greenwashing. For example, the ACM can start a formal or informal investigation into a sustainability claim, require commitments or remedies, publish its findings (either in a press release following an informal investigation or in a formal decision) and impose fines. In a novel approach, the ACM has in some cases supported allowing a company to donate money to a good cause instead of paying a fine, and agreed to, for example, a company addressing greenwashing concerns or incomplete information by making certain changes to a product or website.

In addition, we see the first signs of an increase in civil enforcement against greenwashing. In the past few years, the number of greenwashing complaints filed with the Advertising Code Committee has increased significantly. Any person who believes that the Sustainability Code has been violated can file a brief complaint. If the complaint is successful, this will lead to a recommendation to discontinue the advertising (which is generally followed; if not, that failure will be published and as such brought to the attention of third parties, including government regulators), which can subsequently serve as a step towards civil litigation.

We have also seen the first court cases (as in the KLM case above), sometimes on the back of successful action before the Advertising Code Committee. This can result in an injunction as well as the award of ancillary claims (such as a rectification; damages may also be claimed but must be substantiated).

In due course, fines and other measures currently envisaged under the Green Claims Directive will also become available.

What next

Looking ahead, the risks associated with and the requirements for sustainability disclosures have significantly increased, and this trend is expected to continue. Not only has the regulatory framework tightened, but key authorities such as the ACM have seriously stepped up their activity too. Civil litigation claims are also on the rise. In view of this, designing internal processes is key to making sure that sustainability claims are subject to stringent legal review, and that reporting obligations are complied with. Even then, compliance will not be an easy task: it will be important to be specific and clear in communication, avoiding absolute and subjective claims where possible, and having solid evidence available to back up any claims made.