A green litigation wave in waiting: Net zero claims under scrutiny in the EU

At the end of March, the EU Commission presented its proposal for a Green Claims Directive, which will transform the regulatory landscape for how companies substantiate, verify, and communicate environmental claims. 

Whilst we wait for the European Parliament and the Council of the EU to consider the proposal, and ultimately reach an agreement on the terms of the final legislation, Net Zero Investor caught up with Nicolas Lockhart, an ESG litigation partner based in the Geneva office of international law firm Sidley Austin, on the impact the proposed directive could have on the investment appeal of corporates.

“The GCD comes against a backdrop of a rising tide of ESG litigation across the EU,” Lockhart told this publication, pointing to a study by the Commission, mentioned in the proposal, that found that more than half of all corporate net zero and environmental claims in the EU were based on vague, misleading, or unfounded information. 

“To that end, the Green Claims Directive aims to tighten up significantly the regulatory environment for environmental claims – statements of all kinds about the impacts that a company, its products, or its services have on the environment.” 

Lockhart added that the GCD will provide a specialized regime that complements the more general EU Unfair Consumer Practices Directive, which itself is being revised to address explicitly both environmental and social claims.

“The EU’s proposed GCD is part of a broad wave of new EU legislation addressing ESG communications, performance and disclosures." 

He added that "this wave is striking in terms of the demands it is already placing on EU and even non-EU companies, 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."

Lockhart pointed out that "this is very much a time" when companies are reviewing their ESG communications, performance and disclosures, by reformulating their ESG compliance and governance policies, to adapt to a fast-changing regulatory environment.

Green Claims Directive reach

The Directive covers a broad range of environmental claims, and will apply to environmental claims made by traders about their products or business in B2C communications, including messages, labels, representations, and symbols.

Communications are covered if they claim that a product or trader has a positive or no impact on the environment, is less damaging to the environment than other products or traders respectively, or has improved its impact over time.

However, Lockhart noted that “the Directive will not cover green claims governed elsewhere under EU law, such as the rules on sustainability claims that apply to financial services.” 

He also specified that it will not apply to microenterprises; companies with fewer than 10 employees and less than €2 million turnover.

Under the GCD, companies will have to undertake a rigorous process to substantiate environmental claims. 

Before making claims companies will have to conduct, an assessment that 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 full lifecycle, taking account of all relevant environmental considerations. 

Companies must also identify whether environmental improvements subject to a claim lead to significant harm in other environmental dimensions. Firms will have to update the assessment every five years or whenever circumstances change meaningfully.

Many companies use carbon offsets as part of a net zero strategy. Until now, this area has not been the subject of much public regulation. 

Under the GCD, businesses will have to consider carefully their use of carbon offsets in relation to a claim, including whether offsets involve emissions reductions or removals and are of “high integrity”.

Comparative environmental claims – which compare environmental performance of one product or trader to others – will also be subject to additional rigour, in particular, comparisons will have to use equivalent bases, such as data, methods and effects.

Lockhart emphasized that, under the new rules: “Companies can only make claims on environmental effects that are properly substantiated and found to be significant. When communicating a claim about future environmental performance, companies must also include a time-bound commitment for improvements throughout the value chain.”

The rules also look to ensure a high degree of transparency. 

An environmental claim must be accompanied by substantiating information, for example a weblink or QR code, including on 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.

Under the GCD, a company’s own assessment of an environmental claim will not be enough. Lockhart noted that companies will have to secure third party verification.

“An authorised third party must verify the substantiation and communication of a claim before it is used publicly. Once verified, a claim will receive an EU certificate of conformity.”

Existing EU schemes

Third party environmental labels, which many companies use to support their environmental credentials, will also have to comply with the new GCD rules. 

Schemes that certify the use of labels will have to 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.

Existing public schemes established by EU Member States and third countries can continue to be used, provided they satisfy the Green Claims Directive.

“In the EU, under the new GCD framework, new schemes can be established only by the EU itself, not by its Member States. But new third-country schemes can also be used in the EU if they are approved by the Commission as a ‘value add’, in comparison to existing EU schemes and as meeting the GCD’s requirements”, Lockhart noted.

The same goes for private environmental labelling schemes, both at EU and third-country level. New schemes must be approved as adding value in comparison to existing EU schemes and as meeting the Directive’s requirements.

Falling foul of the new rules

Environmental claims will be heavily scrutinised and non-compliance penalised. National authorities will be required to check environmental claims. 

To do so, they will enjoy broad investigative powers, acting on their own initiative or following a complaint.

Lockhart notes non-compliance is likely to be sanctioned through “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, and potentially a new wave of litigation to follow.