'The repercussions of breaking the Green Claims Code are significant'
With stakeholders now increasingly conscious of their personal environmental impact, the demand for goods and services that are 'green' and 'sustainable' has grown significantly.
Inevitably, businesses have had to respond to this demand, putting pressure on them to provide goods and services with environmental attributes at the fore.
However, with an increase in costs and other priorities at stake, businesses have intentionally and unintentionally been greenwashing – that is the making of false or misleading environmental claims, usually through unsubstantial marketing statements.
To eradicate greenwashing activity, the Competition and Markets Authority introduced the Green Claims Code in 2021, which is designed for businesses with consumer-facing products and services to ensure that their environmental claims align with UK consumer law.
The regulation applies to anywhere a green claim is made by a firm towards a consumer, including financial services. The CMA has certain priority areas, such as fashion and travel, and financial services is not currently one of these areas, but the code nonetheless applies in this sector.
The significance of the code
Businesses using green claims to market consumer products will face much greater scrutiny under proposed new laws under the digital markets, competition and consumer bill, mandated at the end of April 2023, which will confer powers on the CMA to regulate competition in digital markets.
Firms will face fines of up to tens of millions of pounds for unsubstantiated or misleading claims.
The impact of these laws means that large companies now face the threat of civil penalties of up to 10 per cent of global turnover for breaches of consumer law, including incidents of greenwashing. Individuals who breach these laws will face fines of up to £300,000.
It’s indisputable that the potential repercussions of such activity are significant for corporates, not least reputationally, yet instances of greenwashing continue to persist.
Following the launch of the Green Claims Code, the CMA opened a review of environmental claims in the fast fashion sector, followed by a more formal investigation into two fast fashion brands, and one supermarket clothing brand.
A similar deep dive was also conducted across fast-moving consumer goods brands selling products in the UK, with the CMA finding claims on more than 90 per cent of dishwashing products and virtually all toilet products.
Said companies are put on notice while environmental claims are substantiated, and failing to meet requirements will result in financial penalties.
Impact on the financial sector
Greenwashing doesn’t just exist within the consumer product industries; the asset management sector is proactively marketing ESG funds as environmentally sound, opening the industry up to scrutiny.
However, such funds may misrepresent their ESG criteria, and regulators worldwide are tackling incidents of greenwashing – especially in light of figures showing the number of exchange-traded funds carrying an ESG label has more than doubled in the past two years, prompting regulatory concerns about the methodologies used by fund managers.
As a result of the Green Claims Code for the consumer goods and services sector, the Financial Conduct Authority has consulted on its own set of measures aimed at "clamping down on greenwashing".
Mirroring the more stringent action being taken for consumer-facing businesses, there has been a notable increase in investigations and enforcement relating to ESG issues over the past few years amongst investors, in which the FCA has proposed restrictions on the use of certain terms such as 'green' or 'sustainable' in investment product names.
As the demand for private sector products with sustainable credentials increases – with $35tn (£28tn) of assets currently under management in ESG-labelled funds – clamping down on greenwashing in financial markets has become a priority issue in most jurisdictions.
The strong appetite amongst consumers and investors for 'sustainable’, ‘green’, and ‘planet friendly’ commodities lends its hand to a spike in greenwashing activity, and this is being challenged via regulatory complaints and lawsuits.
It is also becoming increasingly important for companies to take stock of their positions and consider how they may engage with regulators if they find themselves facing an enquiry or investigation.
Illustrating this is action from The Pensions Regulator earlier this year, which said it would check whether trustees of plans with more than 100 members have published a statement of investment principles – a document detailing the policies that shape how their investments weigh ESG and climate change factors – and could fine corporate trustees up to £50,000 for compliance failures.
With an increasing number of businesses and financial services providers being accused of greenwashing, the Green Claims Code marks an integral step for consumers.
Only by ensuring that businesses market products in a way that accurately reflects their sustainable credentials, and that investors accurately depict opportunities that drive ethical and pro-environmental production and consumption, can consumers make informed decisions without fear of being misled.
Nicola Stopps is founder and chief executive of Simply Sustainable
