Greenwashing Regulation Needs Government and Business in Sync

Attributes such as “green,” “sustainable,” and “climate neutral” are increasingly important for many consumers when purchasing products—they actively seek out items that reflect their commitment to sustainability and environmental responsibility. Changes in consumer behavior have encouraged companies to embrace the environmentally friendly messages and strategies known as green marketing.

Corporate climate claims should be substantiated and rely on standards and data, informing whether the claim is verified and by whom. But as the use of climate-related marketing terms increases, there is growing confusion and skepticism among consumers and investors about exactly what those terms mean.

Clear rules about what companies can claim as real climate or sustainable action are crucial to promote transparency and credibility. Corporate pledges on climate change shouldn’t be issued just for appearances or as a marketing tool.

Deceptive Practices

Greenwashing is considered a deceptive practice that has raised concerns among regulators and authorities, leading to increased scrutiny and potential legal consequences for companies engaged in such activities. Regulators are increasing their efforts to combat this phenomenon, acknowledging the reputational, legal, and liability risks it poses.

The damaging impact of greenwashing goes beyond ethical concerns. It undermines sustainability efforts by giving unfair advantages to companies that engage in misleading practices and erodes consumers’ confidence in eco-friendly products—ultimately jeopardizing the transition to a more sustainable economy.

According to the UN Secretary General, greenwashing is a major impediment to climate action.

The UN Climate Change Conference, COP28, held in Dubai from Nov. 30 to Dec. 12, 2023, was a good opportunity for country-level regulators to share best practices and move toward rules on green claims. One clear goal for country-level regulators at COP28 was to advance strong guidelines on what companies can and can’t claim as climate action.

The growing number of greenwashing scandals in various industries has also brought the issue of environmental deception to the forefront. A total of 150 environmental claims were examined in a 2020 European Commission study used in developing the proposal for the Green Claims Directive. The results showed that 53.3% of these claims contained misleading information about the environmental attributes of the products.

This increase in misleading practices has been attributed to the lack of regulation of sustainability claims, which has created loopholes that allow companies to make unverified claims without facing any consequences.

Regulatory Initiatives

Regulatory bodies around the world are intensifying their scrutiny of green marketing claims. For instance, the Federal Trade Commission in the US has established guidelines for environmental advertising that prohibit deceptive claims and demand companies substantiate their environmental assertions.

Similar regulatory frameworks are emerging in other regions, reflecting a growing global consensus on the need to combat greenwashing.

In its efforts to implement the European Green Deal, the European Commission put forward the Green Claims Directive with the aim of introducing a standardized set of rules for environmental claims made by companies in the EU, thereby promoting transparency and credibility.

The proposed directive requires companies to substantiate their environmental claims with verifiable methods, scientific evidence, and independent verification. By holding companies accountable for their environmental claims, the directive builds consumer confidence, drives innovation in sustainable practices, and supports the EU’s overall sustainability goals.

The regulatory landscape around greenwashing is therefore evolving rapidly. However, while a strong regulatory framework is needed, overly stringent regulation could discourage innovation and prevent progress.

Greenhushing

The absence of clear regulations addressing greenwashing can give rise to a phenomenon known as greenhushing, where companies choose to remain silent about their sustainable practices to avoid potential scrutiny and legal challenges.

This reluctance to disclose sustainability efforts comes from companies’ fear of being accused of greenwashing if their claims lack meticulous substantiation. This concern is significant in light of Australia’s proposed three-year freeze on corporate greenwashing litigation.

This freeze was suggested by the Australian Treasury for various reasons, including that the absence of clear guidelines and robust enforcement mechanisms might discourage companies from sharing their sustainable practices, even when supported by evidence.

This hesitance from companies could impede progress towards a more transparent and environmentally responsible corporate landscape.

A Balanced Approach

A balanced approach to regulating greenwashing involves a combination of government supervision, industry self-regulation, and consumer education.

Governments should set clear guidelines for green advertising and encourage companies to self-regulate.

Companies must prioritize transparency and stakeholder engagement so consumers can make informed and appropriate decisions that ultimately benefit truly sustainable businesses.

By working together, all parties can promote a more sustainable future based on honesty, responsibility, and informed consumer choice.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Pilar Galán Gavilá is partner with KPMG and global ESG legal lead. Matilde Whittaker Mancha is a paralegal with KPMG.

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