How should companies prepare for the EU’s Green Claims Directive?

Let’s rewind to 2020 for a moment – an eventful year for so many reasons, including the agreement of the European Green Deal. As part of this, the EU Commission committed, amongst other things, to ensuring that consumers are empowered to make better-informed choices and to tackling environmental claims. So, developing the right legislation to tackle greenwashing in the EU has been in the works for several years.

The Commission proposal for the draft Green Claims Directive (“the GCD”) was published on 22 March 2023. It sets the minimum criteria that companies need to meet when making claims to consumers about the environmental benefits and performance of their products or services. The GCD focuses on three areas: clear communication of claims, adequate substantiation of claims made and appropriate use of environmental labels. Many of the provisions governing such claims relate to the trader itself. The proposal is stated to ensure consumers are provided with environmental information that is reliable, comparable and verifiable.

The GCD broadly defines “green claims”, as any voluntary message or representation in the context of a commercial communication made within the EU, and which states or implies that a product or trader has either:

• A positive impact on the environment
• No negative impact on the environment
• A lower negative impact on the environment than other similar products or traders
• A lower negative impact on the environment than previous versions of the product or service

Even if a business is not based in the EU, the GCD would cover that businesses’ communications if directed at EU consumers.

On 12 March 2024, the European Parliament adopted its negotiating position on the proposed GCD adding some markedly different positions to the Commission’s proposal. Here are the key differences:

Approach to carbon credits

Parliament agreed with the Commission’s proposal to require traders to separately disclose details on carbon credits when they form the basis of a climate-related claim. However, Parliament has gone further by proposing that “compensation claims” (i.e. where carbon credits are used by a company towards a climate target) may only be made in respect of its ‘residual emissions’.

The Commission will be required to adopt a method defining ‘residual emissions’ within 12 months of the adoption of the GCD.  Given the link in Parliament’s proposal to the recently adopted European Sustainability Reporting Standards (ESRS), as discussed below, it seems likely that the definition will mirror the definition of residual emissions in the ESRS (i.e. “those left after approximately 90-95% of GHG emission reduction with the possibility for justified sectoral variations in line with a recognized sectoral pathway”). The impact of this latter carve out will be the one to watch – particularly for hard-to-abate sectors.

MEPs also proposed that carbon credits used by companies for their residual claims must be certified units issued in accordance with the recently agreed EU Carbon Removal Certification Framework Regulation (CRCF), which seeks to establish an EU certification framework for carbon removals, carbon farming and carbon storage products. Plus, where the use of the carbon credits is for compensation of residual fossil fuel emissions, only permanent removals, as defined under the CRCF, will be considered as adequate substantiation.

In addition, Parliament is seeking to expressly link claims on ‘future environmental performance’ to the framework established by the ESRS. The ESRS contains very detailed rules for disclosure around climate targets and the use of carbon credit, so this presents a high bar for traders wishing to make claims involving offsets. We expect the argument from Parliament and other stakeholders including certain NGOs would be that this bar acts as one of the necessary guardrails to ensure that carbon credits are not used by companies as a smokescreen to mask weak progress on decarbonising their operations and/or value chains.

Parliament’s proposals go a lot further than simply trying to set standards around company communications that aim to prevent misleading consumers. Taken together, they effectively prohibit companies from using carbon credits in their decarbonisation efforts until the very end of their pathway, and even then for a very limited scope.

Given the original policy drivers for the GCD, it is unclear why such prescriptive limitations are being imposed on the use of carbon credits in this context. Are consumers really being misled by the kinds of claims that the Parliament is trying to ban? If adopted in the final text, there is a risk that this ends up having a chilling effect on companies’ efforts to decarbonise, particularly in hard-to-abate sectors – they are effectively disincentivised to minimise their climate impact in the interim through the use of carbon credits.

Environmental claims and labelling schemes

Parliament has doubled down on requirements for environmental claims based on future environmental performance. In addition to being “time-bound”, these need to contain science-based and measurable commitments as well as an implementation plan containing measurable and verifiable interim targets. Given the broad definition of “green claims”, some have already commented that this could potentially apply to a company’s net-zero or other emissions reduction targets (if being used in a marketing communication with consumers). Again, this seems to be a significant strategic and operational obligation imposed under the umbrella of consumer protection law.

Information used to substantiate environmental claims needs to be based on independent, peer-reviewed, robust and verifiable scientific evidence (in addition to being widely recognised), taking into account “Union or international standards”. This obligation, particularly the latter part, will become significant over time as the EU continues to bolster its sustainability legislative regime, especially with the recent adoption of the ESRS in connection with corporate reporting.

With all these new restrictions, it is no surprise that some critics are concerned that this will just lead to more “greenhushing” by companies who are worried about attracting liability for their claims (even if they have been robustly assessed internally). Litigation against companies based on allegations of greenwashing is showing no signs of slowing down and claimants continue to use a wide range of legal bases and regimes to argue their case, making this an increasingly difficult legal risk for companies to navigate and mitigate.

Online platforms

MEPs would like the GCD to make it very clear that the rules apply to claims made about products placed on the market or services deployed through online platforms.

We expect that this is intended to be a simple clarification, but it does have the effect of significantly expanding the scope of products caught by the GCD. Companies which solely sell products or provide services online to EU consumers will need to pay attention to how the GCD progresses and should start thinking now about the existing processes and procedures they have in place to develop and monitor environmental claims.

Application periods

MEPs have recommended delaying the application of the GCD until 30 months after it comes into force, extended to 42 months for small enterprises. The longer application period is intended to give these companies more time to get their house in order. The MEPs specifically acknowledged in a new recital the challenges faced by micro, small and medium-sized enterprises in terms of resources and capabilities.

What next?

While the EU Parliament vote is a key hurdle to pass, there is still a way to go before the GCD becomes law. The next round of negotiations will start after the new EU Parliament is formed following the elections in June 2024. The EU Council will also need to adopt its negotiating position before the so-called trilogue negotiations could start. Given the wide-reaching consequences described above, companies should continue to watch this space and track the development of the GCD.

Iyesogie Igiehon is a managing associate in Linklaters’ ESG practice