Tentative title: Unmasking greenwashing: How the EU is combating deceptive eco-claims for a greener future

Tentative title: Unmasking greenwashing: How the EU is combating deceptive eco-claims for a greener future

What is Greenwashing?

With the rise of environmental pollution, companies all around the world have been paying more attention to how their business plans negatively impact the environment. Public awareness and concern for environmental protection led stakeholders (such as investors, consumers and even governments) to increasingly pressure companies to become transparent about their environmental performance and demand products with a reduced impact on the environment. Not only do businesses have to be environmentally conscious, but they must also be socially responsible. Thus, businesses have to meet three bottom lines: economic, environmental and social, which we describe as ‘sustainable’ business practice. 

Recent studies show that more and more consumers are willing to pay more for sustainable products and services. The proportion of consumers in the Netherlands who were willing to pay extra for sustainable products in 2014 rose from 28% to 43% in 2020.

In view of increasing customer demand, government pressure in terms of transparency and environmental regulations and the green market slowly coming to the fore, the question arises as to what options are available to companies that have not previously had to deal with these requirements.

Well, some companies decided to change their practices, while others opted for greenwashing. There are many different definitions of greenwashing, and there is no consensus on a universally accepted definition. Nevertheless, the term greenwashing was first coined by environmentalist Jay Westerveld in 1986. He used it to describe the hotel industry's practice of falsely advertising towel reuse as a tactical measure as part of a larger environmental plan, when it was actually a cost-saving measure.

Overall, greenwashing can therefore be understood as companies and business practices designed to mislead stakeholders into believing that their sustainability performance is better than it actually is.

Is greenwashing bad?

As you might have guessed, greenwashing has positive consequences for companies - they retain or even increase their customer base and generate revenue by attracting investors and customers, as well as preventing revenue loss from actual change. 

However, the benefits do not extend to the wider public. Firstly, greenwashing does nothing to address the problem of pollution - in fact, it exacerbates it. Secondly, greenwashing leads to green skepticism. Misleading claims take away credibility from companies and firms that are actually working to reduce their environmental and social impact.

(Depending on whether the 'Why invest in sustainability' blogpost gets published first, it could be linked here for more negative consequences of providing misleading data)

What can the customer do?

In the European Union (EU), the legal framework regarding consumer rights can be somewhat complicated. However, in December 2011, the European Union implemented Directive 2011/83/EU on consumer rights, which harmonized consumer protection law in the member states. As such, consumers from across the EU were now entitled to claim a range of rights relating to clear information about products and services, withdrawal, returns, payment, shipping, price transparency and additional charges, as well as non-discrimination and compensation.

Although the Directive granted the right to clear and accurate information, it did not specifically mention or address the issue of greenwashing. In 2022, 206 cases of greenwashing were brought in the banking sector. Within the EU alone, the financial sector accounted for 23% of all alleged greenwashing cases involving an EU company.

Therefore, in March 2022, the European Commission proposed an update to EU consumer rules that would help consumers in the green transition process. The new rules aim to ensure that consumers are provided with the correct environmental information on product durability and reparability (did you know that consumers also have a right to repair?). These measures should ensure that consumers are protected from false environmental claims and thus put an end to greenwashing.

Does the same apply to the financial sector?

The European Supervisory Authorities (ESAs ) are working to tackle greenwashing in the financial sector. Their reports provide comprehensive information on the risks of greenwashing, the impacts as well as the challenges of proposed mitigation tactics for various industries, including the investment market. The ESAs began their work in May 2022 and plan to publish their final reports on greenwashing in May 2024, when final recommendations will be presented, including possible regulatory changes to the EU framework in the financial sector.

If you want to know how Moniflo selects the most sustainable funds and ensures that the data is factual, read our blog post "How is impact measured?".