Introduction

The sustainability market is booming as consumers buy more and more consciously. According to a research of ‘Sustainable brands’, 85% of consumers are more likely to buy from a company with a reputation for sustainability than from a neutral company.

Therefore Sustainability Marketing became a powerful tool to gain a competitive advantage. A lot of companies decide to actively communicate about their sustainability efforts to follow this trend and to meet consumers’ needs. However, this has also caused an increase in misleading or unsubstantiated claims, generally known as Greenwashing.

This article will help you understand what Greenwashing is, how to create reliable sustainability claims in different markets and how to avoid Greenwashing, especially by getting a better understand of your supply chain.

This article covers:

• What are Sustainability Claims?
• The Problem with Sustainability Claims
• What is Greenwashing?
• Examples of Greenwashing
• How to make reliable Sustainability Claims in the Netherlands
• How to make reliable Sustainability Claims in the U.S.
• How to make reliable Sustainability Claims in the U.K.
• How to avoid Greenwashing with Supply Chain Traceability
• How all actors of a supply chain can work together to avoid Greenwashing
• How to ensure data privacy

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The Growing Demand for Sustainable and Eco-Friendly Products

More than ever, consumers and companies want to reduce their environmental and social footprint. This is not only good for the environment, but it's also good for business. According to research conducted by The Nielsen Company¹ in 2015, two-thirds of global consumers say they are willing to pay more for products and services from companies that are committed to making a positive social and environmental impact. Indeed, the decision to adopt sustainable business practices is no longer driven by companies’ core values, but rather by the economic imperative to remain relevant to buyers and customers.

At the same time, the US, Europe and several countries in Asia are expanding their regulatory frameworks and targets to promote sustainable procedures and practices among suppliers, OEMs and brand owners. Executive orders recently signed by President Biden put the environment squarely at the heart of U.S. federal policy. The message is clear: to survive and thrive in the net-zero future, now is the time to scale up actions to fight climate change and accelerate innovation. The EU is also putting forward commitments to become climate neutral in 2050 via the presentation of the European Green Deal. Further, the EU Commission has proposed a European Climate Law to turn this political commitment into a legal obligation.²

In addition, the EU is discussing regulations in regards to eco-design principles and the mandating of digital product passports. These data systems should be able to share critical information about products, components, and materials in order to extend product lifetimes and increase their reuse potential. Many regions see the EU as a leader in their regulatory approach towards supply chain transparency – a discussion that extends beyond the EUs reach.

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Main Sustainability Trends in the market

1. Consumers demand insights into the sustainability of their products
2. Governments put forward regulations to advance sustainability and supply chain transparency
3. Brand owners request information of products, materials and provenance from their suppliers
4. Suppliers struggle to provide product and material information without sacrificing data confidentiality

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Sustainability Claims and Greenwashing

What are Sustainability Claims?

In today's world, brands and consumers want to know where their products come from, what they are made of, and how they might impact the environment. They rely on sustainability claims to make their purchasing decisions.

Definition³

For the purposes of this document a ‘sustainability claim’ is defined as an umbrella term for “environmental claims” and “ethical claims”.

Environmental claims: communicate how a product or activity of a company has a specific and quantifiable environmental or sustainability benefit; such as CO₂ emissions etc.

Ethical claims: communicate that the production of products or activities of a company has been done in accordance with certain ethical standards, for example with respect to general working conditions, animal welfare and/or corporate social responsibility (CSR).

Sustainability claims can appear on a product (i.e. good or service) label, its packaging, in advertising material, as well as in promotional material, and other forms of marketing. Claims can take the form of words, symbols, emblems, logos, graphics, colour coding systems, and product brand names.

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The Problem with Sustainability Claims

Consumers increasingly want to buy sustainably – they just don’t know how. More and more companies are voluntarily adding sustainability claims to products, promising everything from biodegradable plastic packaging to carbon-neutral shoes, and energy efficient washing machines.

According to the Ecolabel Index⁴ there are more than 80 widely used reporting initiatives and methods for carbon emissions alone, more than 200 environmental labels active in the EU, and more than 450 active worldwide. Given the array of promises, claims, and language found on products it can be difficult for any company, consumer and other market actor to make sense of all the different environmental labels, initiatives, and know which ones to trust.

Another potential problem is Greenwashing – companies misleading consumers about their environmental impact or benefits. This can be done on purpose to gain an unearned advantage but most of the time it happens inadvertently. Companies might lack the access to all the necessary information or simply have incorrect information. Greenwashing has a number of unwanted consequences. It undermines consumers’ trust in sustainability claims and therefore makes them less inclined to buy and use sustainable products.⁵ It also has an effect on the competition in the market, as it prevents companies that are actually sustainable from standing out. Lastly, Greenwashing can be very risky and expensive due to high legal, financial and reputational risks.⁶

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What is Greenwashing?

Definition

Greenwashing is the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound. Greenwashing is considered an unsubstantiated claim to deceive consumers into believing that a company's products are environmentally friendly.

Greenwashing capitalises on the high demand of environmentally-friendly products and services, which are supposedly more natural, healthier, free of chemicals, recyclable, or less wasteful of natural resources.

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Different forms of Greenwashing:
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• Making a claim without the proof.
  The use of sustainability claims that are not supported by facts or proof.
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• Making an “incorrect and untrue” claim.
  ‍The claim suggests a benefit that is simply false or distorts  the benefit that the product or service offers in reality.
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• Making a “vague” claim.
  ‍The use of subjective terms such as the ‘greenest’, the ‘cleanest’, etc., can give a misleading impression of the companies’ products or services.
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• Confusing logos and labels.
  Using logos or labels that look like recognised sustainability labels. Or using sustainability labels that have low requirements, are not assessed independently, or do not go beyond current statutory requirements.
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• Making a misleading “comparative” claim.
  ‍Comparing products or services with other offerings that do not satisfy similar needs or that are meant for different purposes.
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• Confusing the sustainability aspects of a product, service, with those of a company .
  The use of sustainability claims about the company to make a product or service seem sustainable or the other way around.

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Engaging in one or more of these types of Greenwashing can have serious consequences. These could end in lawsuits and have serious financial implications, from high fines to loss of investments or removal of products from the market. In addition, the brand and reputational damage can be severe, which might lead to the loss of trust from the public in their products or future communications. Once a company is charged or suspected of Greenwashing, regulators and industry watchdogs might increasingly check and inspect claims for fraud.

‍Greenwashing examples⁸:

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Burger-King (April 2022, class-action complaint)

Claiming the Whopper as sustainable when product packaging contains substances that are harmful to the environment

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Oatly (January 2022, ASA inquiry)

Overstating what one climate expert said about cutting dairy and meat from your diet to reduce your environmental impact.

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Recreational Equipment, Inc. (REI) (April 2022, class-action complaint)

Marketing waterproof apparel as sustainable when they contain substances that are harmful to the environment.

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Allbirds Running Shoes (June 2021, class-action complaint)

Claiming that shoes have a low carbon footprint using a tool that doesn’t assess all environmental impact.

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How to Avoid Greenwashing

To tackle greenwashing, regulators have recently accelerated efforts to boost consumer and brand owner confidence in sustainability claims.

• In the US, the Federal Trade Commission (FTC) leads the effort against companies who use deceptive claims in the labelling, marketing, or promotion of their products or services, potentially resulting in cease and desist orders and financial penalties.

• In the UK, the Competition and Markets Authority (CMA) set-up principles and guidelines for companies in order to comply with existing obligations under consumer protection when making sustainability claims.

• In the EU, the Unfair Commercial Practices Directive (UCPD) regulates unfair business practices in order to protect consumers from untruthful information or too aggressive marketing techniques. The UCPD does not provide specific rules on environmental claims but a legal basis to ensure that green claims are not unfair towards the consumer.⁹
  
  However, as part of the New Consumer Agenda and the Circular Economy Action Plan, which aim to support consumers in the green transition, the Commission recently proposed a new legislation for a ‘Directive on empowering consumers for the green transition and annex’ in March 2022. This Directive would then ban greenwashing and tackle the durability and reparability of products.¹⁰
  
  The current Directive is enforced by regulators in each EU member state. One of those national regulators is the Netherlands Authority for Consumers and Markets (ACM), which can enforce action on a national level.

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Making reliable Sustainability Claims in the Netherlands

The Netherlands Authority for Consumers and Markets (ACM) is an independent regulator that makes sure businesses compete fairly, and that protects consumer interests in the Netherlands. To help companies avoid making sustainability claims that mislead consumers, the ACM designed ‘guidelines regarding sustainability claims’.

‍Five rules for making sustainability claims in the Netherlands

With these guidelines, the ACM explains, using five rules, how businesses are able to prevent their sustainability claims from being unclear, incorrect, or misleading for consumers:

1. Make clear what sustainability benefit the product or service offers.
   Sustainability claims are only useful to consumers if they are clear, easy-to-understand, and do not contain any misleading information.
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2. Substantiate your sustainability claims with facts, and keep them up-to-date.
   Any sustainability claims should be sufficiently substantiated with data and have verifiable sources. You should be able to prove that your sustainability claims are true.
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3. Comparisons with other products, services, or companies must be fair.
   Any comparisons with other products or companies must be fair and shouldn’t lead to any misunderstandings among consumers. The claims must explicitly mention what the products or services are compared with.
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4. Make sure that visual claims and labels are useful to consumers, not confusing.
   Any symbols, pictograms, or labels should not give a false impression of the sustainability of your products and services. Only logos or symbols that indicate the sustainability standards for which a product has been officially certified can be used. It must be clear what a label stands for, and on the basis of what criteria the label has been awarded.
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5. Be honest and specific about your company’s efforts with regard to sustainability.
   You need to distinguish between general information about your company’s efforts with regard to sustainability, and the specific information about the benefits of an individual product or service. Any claim about your company’s sustainability ambitions must be in proportion to your actual sustainability efforts.
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The aim of the ACM is to encourage businesses to inform consumers correctly and completely about the sustainability attributes of their goods and services. At the same time, they want to boost consumers' confidence in sustainability claims and ensure that the sustainability market can properly mature.

Companies are themselves responsible for complying with the rules to provide consumers with correct and verifiable information about sustainability, thereby enabling consumers to compare goods and services properly, and businesses to compete fairly with one another.

How big are fines for misleading sustainability claims in the Netherlands?

Recently, the ACM has launched investigations into misleading sustainability claims made by 60 energy firms, 70 clothing firms, and 40 dairy product companies, ordering revisions and threatening hefty fines. Further follow-ups will be made and companies found to still mislead the public can be fined up to €900,000 per violation or a percentage of their turnover.

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Making reliable Sustainability Claims in the U.S.

The U.S. Federal Trade Commission’s (FTC) Green Guides outline general rules for environmental marketing claims in order to avoid Greenwashing. Those principles can be used by authorities to take action and to penalise companies that use misleading claims. Alternatively, the principles can be used by companies as defence in regulatory or civil actions if they did comply.¹¹

The FTC Green Guides outline the following principles to avoid Greenwashing¹²:

1. Qualifications and disclosure: All qualifications or disclosures should be clear, prominent, and understandable, using plain language and large type. To achieve this, disclosures should be placed in close physical proximity to the relevant claim and distracting visual elements should be avoided.

2. Distinction between benefits of product, package, and service: It should be very clear whether the sustainability claim refers to the product, the product packaging, a service, or just a part of those elements.

3. Overstatement of environmental attribute: Sustainability marketing claims should not be overstated, either directly or by implication. Environmental benefits that are insignificant should not be stated or implied.

4. Comparative claims: Any comparative claim should be very clear and supported by substantive information to avoid confusing consumers.
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In addition, the FTC Green Guides also contain general principles but also detailed rules to follow when making different environmental marketing claims. Those concern among others carbon offsets, free-of claims, compostable claims, or degradable claims, but also recyclable and recycled content claims, renewable energy and materials claims, and source reduction claims.

Carbon offsets claims for example need to have reliable scientific methods to quantify the claimed carbon emission reductions and make sure that each reduction is only counted once. These claims can only be used for Marketing purposes if they represent carbon emission reductions for more than two years. In addition, claims cannot be made for emission reductions that occurred if it was required by law.¹³‍

All in all, the Green Guides provide all necessary information for companies and Marketing professionals to make correct and valid sustainability claims. It offers the right guidance to effectively evaluate current claims and to ensure the claims are not misleading in any way for their consumers.

How big are fines for misleading sustainability claims in the United States?

‍The financial cost of Greenwashing can reach up to a few million dollars. In 2022, the FTC issued the global retailers Kohl’s and Walmart a $2.5 million and $3 million civil penalty respectively for violating the FTC Act and Textile Act. Both companies claimed their bamboo textiles were sustainable and eco-friendly, while in reality the production requires the use of toxic chemicals and results in hazardous pollutants.¹⁴ In another case, Truly Organic Inc. and its founder paid a settlement of $1.76 million following a FTC complaint alleging that their nationally marketed bath and beauty products were neither “100% organic” nor “certified organic” by the U.S. Department of Agriculture (USDA).¹⁵

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Making reliable Sustainability Claims in the UK

The Competition and Markets Authority (CMA) in the United Kingdom has outlined the Green Claims Code which aims to help companies comply with existing obligations under consumer protection when making sustainability claims.¹⁶ The CMA Green Claims Code defines six principles to ensure environmental claims are correct according to the law.¹⁷

1. Claims must be truthful and accurate: Consumers should be able to make informed buying decisions. Claims should not be misleading, contain incorrect information, or give a false impression about the company’s sustainability efforts. They need to meet the claims about their products, services, brands, and activities.
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2. Claims must be clear and unambiguous: Consumers should be able to easily understand the claims meaning the claims should not leave any room for misinterpretation or confusion. The meaning of the messaging and the credentials of the product should be aligned.
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3. Claims must not omit or hide important relevant information: Companies need to share all information on environmental impact which consumers need to make an informed decision, no relevant information should be withheld.
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4. Comparisons must be fair and meaningful: Comparisons with other products or brands should not be misleading; they need to be based on objective, recent and clear information. Comparisons should only be made between products that are intended to meet the same needs and purpose.
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5. Claims must consider the full life cycle of the product or service: The entire business’ activities must be taken into account when making sustainability claims including its supply chain. The overall impact of a product of service needs to be reflected instead of only one specific aspect of the business.
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6. Claims must be substantiated: Claims should be backed up with robust, credible and recent evidence that support them.

Companies should check all their environmental claims against these six principles to make sure their green claims are genuine, not misleading, and actually help consumers make informed buying decisions. This not only helps to comply with consumer protection laws but also protects a business’ reputation.¹⁸

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How big are fines for misleading sustainability claims in the United Kingdom?

Consumer protection laws are in place but sustainability has so far been a grey area which made it easy for companies to greenwash in the UK. The Green Claims Code has recently been implemented to reframe legal responsibilities. The CMA has been rolling out investigations into different industries since the start of 2022. The first industry that is targeted is the fashion industry, followed by textiles and fashion, travel and transport, and fast-moving consumer goods (food and beverages, beauty products and cleaning products).¹⁹

So far in some cases, companies had to pay redress to any consumers harmed by the breach of consumer protection law.²⁰ The Advertising Standards Authority (ASA) takes action against misleading advertisements. In February 2022, the drinks company Innocent had to face an ASA ban because of overstating their environmental impact even though they sell their drinks in plastic bottles.

Avoiding Greenwashing with Supply Chain Traceability

Why Supply Chain Traceability is crucial  

The most important step to avoid Greenwashing is having trustworthy, auditable, and transparent data to back up your sustainability claims. This data cannot only come from the company itself but needs to include information from the entire value chain. According to the UN Principles for Responsible Investment, the environmental impact for most industries is located in the supply chain.²¹

The challenge is that most modern supply chains are highly complex, interdependent, and involve many different stakeholders around the world. This means that there is a high chance for hidden and uncontrollable risks.²²

On the one hand, suppliers are afraid of sharing sensitive data on materials or product information. For suppliers material composition information can be a trade secret, thus transparency across materials, products, and operations presents risks. Yet, trusting suppliers’ self reporting also represents a risk to brand owners and OEMs and their ability to make sustainability claims. This tension can lead to unintentionally misleading or inaccurate claims regarding sustainability.

To tackle these risks and to be able to perform actual due diligence on all suppliers, supply chain traceability and transparency are key. Having a traceability system in place, which on the one hand allows actors in the supply chain to safely share data with each other, without risking sensitive information, and on the other hand allows OEM’s and brand owners to gain visibility into their sustainability metrics is needed.

Circularise’s software is one of the solutions which can help all value chain actors with digital material traceability and secure data sharing powered by blockchain technology.

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How all actors in a supply chain can work together to avoid Greenwashing

Suppliers

1. Digitise materials using blockchain technology

2. Upload certificates and audit reports

3. Transfer data across supply chains
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Brands and oems

Brands & OEMs

4. Digitise materials using blockchain technology

5. Digitise materials using blockchain technology

6. Provide information and make it usable for consumers and regulators

Blockchain technology offers decentralised immutable and trustless storage of data, including all types of data such as: the mass balance, ownership, and any references to material, component or product information, or processing conditions across the lifecycle.

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How to ensure data privacy

Circularise has developed a patent-pending technology called ‘Smart Questioning’, which uses Zero-Knowledge Proofs (ZKP) as a way to ensure data privacy on public blockchain.

This technology allows safeguarding of the identity, business relations, production processes, and confidential information across all parties within the value chain. Only the essential and useful insights will be shared between parties, and, if necessary, regulators. In this way, the data cannot be tempered with and can be confidently trusted by all parties, which in turn enables supply chain traceability and transparency. Therefore brands are able to make stronger sustainability claims backed up by this trustworthy data.

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Summary and conclusion

The awareness around the need for sustainability is growing and so is the demand for sustainable and eco-friendly products. Companies are putting a lot of effort and money in meeting this demand and following the sustainability trend. They are adding sustainability claims to their products or services to prove that they are more environmentally friendly than similar competitors on the market. However, making trustworthy sustainability claims is complex and leaves companies vulnerable to charges of greenwashing.

Regulators are setting-up rules on how to make reliable environmental marketing claims. As these rules vary per country, this document focuses on the United States, United Kingdom, and the Netherlands.

Greenwashing can take different forms and can happen deliberately or inadvertently due to a lack of information. Especially within global complex supply chains the chance for hidden risks is high. Companies can tackle these risks by introducing a supply chain traceability and transparency system to enable stronger sustainability claims supported by trustworthy data.

Contact us to discuss the implementation of such a supply chain traceability and transparency system and how to securely share data with members of your value chain.

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