Short Case Studies of Legislation and Regulation | 25, Issue 20
In these short case studies supporting SARAH CHARLES’ feature on supply chain sustainability in Issue 20, sustainable sourcing professional, MEL BANDLER, explores regulating sustainability market claims while sustainability governance researcher, JANINA GRABS, discusses European Union deforestation regulation.
Editor’s Note: Although these case studies discuss some of the terms of recent regulatory approaches, they should not be construed as legal advice.
Regulating Sustainability Marketing Claims
Mel Bandler
As sustainability claims presented themselves as a novel way for businesses to engage with their customers, it led to an era of “greenwashing,” the practice of communicating that something is more environmentally friendly than it truly is, therefore misleading the reader about the product, policy, or practice. To provide guidance to consumers and companies alike, governments took note of these unsubstantiated sustainability claims, inspiring (and continuing to inspire) legislative proposals about “green claims.”
Early examples of this in the United States are the Federal Trade Commission (FTC) Green Guides, originally published in 1992 and last updated in 2012. The guides outline FTC recommendations for qualifying claims with specific sustainability terms and are currently under revision, inclusive of open comment periods from the public. Today, they cover benefit claims such as: “free-of,” “eco-friendly,” “compostable,” or “recyclable,” to name a few. Although “carbon offsets” and “renewable energy” are currently covered, based on the expanded public comment periods it seems that the FTC is responding to the increased climate focus (sometimes referred to as “carbon tunnel vision”) to expand the Green Guides to include terms such as “net zero” and “carbon neutral.”
According to a study published by the European Commission in 2020, 40 percent of green claims made by companies were “completely unsubstantiated,” with 53.3 percent of companies making environmental claims that were “vague, misleading or unfounded.” [1] In Europe, the Green Claims Directive was introduced in March 2023 to reduce greenwashing and enable consumers to make informed purchasing decisions. The proposal would require that claims be substantiated with scientific evidence and comparisons based on “apples to apples” data (i.e., using the same units and approaches). Environmental product labels would have to be transparent, verified by a third party, and regularly (and independently) reviewed. Given the more than 200 environmental labels currently found across the EU when counting both sustainability and energy labels, the proposal would also decree that any new labelling schemes would either take place at the EU level (if public) or provide “higher environmental ambition” than existing schemes and receive pre-approval from the Commission (if private). To fight the proliferation of new labels and reinforce trust in existing ones, the Commission would tighten controls and enforcement based on certification with independent verifiers.
Businesses affected by the proposed EU directive are those that are based in the EU with more than 10 employees and turnover greater than €2 million/year as well as businesses that are based outside of the EU that make environmental claims directed at EU consumers. The Green Claims Directive rolls into the larger EU Green Deal and, while it will be adopted in Brussels, it will rely on the member states for enforcement and monitoring. It is an interesting comparison to the FTC approach in the United States, which is much more of a “best practices guidebook,” specifically designed for marketers covering common terms utilized in sustainability claims. The US approach is less about compliance and more focused on qualified versus unqualified claims.
While regulating bodies’ approaches are different, they each seek to minimize deceptive claims and enable informed consumer purchasing decisions by requiring the substantiation of green claims. One result of this increasingly regulated approach to sustainability claims in marketing is companies pivoting to “green-hushing,” or underreporting/hiding sustainability commitments or achievements, in order to “fly under the radar” to avoid investor, consumer, or legal scrutiny—potentially a huge pendulum swing in marketers’ approach to celebrating sustainability achievements in years to come.
European Union Deforestation Regulation
Janina Grabs
The European Union’s Deforestation Regulation (EUDR) aims to reduce commodity-driven deforestation by prohibiting deforestation-linked imports of seven key commodities (coffee, cattle, cocoa, palm oil, rubber, soy, and wood) from entering the EU market. It was passed in May 2023 and will be enforced after an 18-month grace period (i.e., from January 2025; micro and small enterprises receive an additional 6 months to move into compliance). Companies that place goods on the market and companies that subsequently handle the product are both subject to due diligence. The rules also apply to several derived products (e.g., roasted coffee); notably, soluble coffee is not included.
These due diligence obligations include the provision of GPS points of all plots of land that the product contained in a specific shipment was produced on; polygon data is required for plots larger than four hectares. Additionally, companies need to provide adequately conclusive and verifiable information that the relevant products are deforestation-free and in legal compliance with local laws, and demonstrate efforts that they assessed and mitigated deforestation-related risks.
The legislation uses the FAO definition of forest (land spanning more than 0.5 hectares with trees higher than 5 meters and a canopy cover of more than 10 percent) and defines deforestation as “the conversion of forest to agricultural use, whether human-induced or not.” It also specifies that products produced on land deforested after December 31, 2020 are prohibited from entering the market. Here, agroforestry systems are defined as agricultural use: managing shade trees in agroforestry systems would not be considered deforestation, but converting natural forests into agroforestry systems would.
Companies will be expected to upload due diligence statements into a centralized information system. Subsequent buyers will be able to refer to their suppliers’ respective due diligence statement of a particular shipment, but will remain responsible for data quality assurance.
Each EU Member State's customs authorities and regulators will enforce the legislation using spot checks on a certain proportion of companies and product volumes. Such checks may include, for example, overlaying submitted GPS points/polygons with geospatial imagery to verify that the land was not subject to deforestation past the cut-off date.
During the grace period, the European Commission will categorize producing countries and/or regions into low-, standard-, and high-risk origins. Products from low-risk origins will not have to demonstrate risk assessment and mitigation efforts, though the traceability requirements are the same. Products coming from high-risk origins will be checked more frequently. Until this classification is released, all origins are considered standard risk.
Penalties, set by individual Member States, shall include fines (with maximum fines to be at least 4 percent of a company’s annual EU-wide turnover); confiscation of the relevant product and/or associated revenues; temporary exclusion from public procurement processes; temporary market exclusion; and prohibition from exercising the simplified due diligence process.
Implementation is anticipated to require extensive efforts on behalf of both private actors and producing countries in mapping farmers and establishing reliable traceability systems. Market participants anticipate high administrative costs and the potential disruption of established sourcing and trading systems, with systems that require aggregation (e.g., via centralized exchanges) and origins with a highly fragmented producer base particularly affected. There is considerable uncertainty over the details of compliance, including which monitoring systems are aligned with the EU’s approach. Further guidance is expected in the coming months.
At the same time, the legislation may benefit actors with experience in traceable and transparent supply chains, as well as those who have built long-term partnerships with producer communities. It may also strengthen a move toward longer-term relationship building and reward sustainable farmers. However, this will require strong collaboration and adequate cost-sharing to ensure that smallholder farmers are not shouldering the costs or excluded from EU markets.
Sustainability governance researcher JANINA GRABS is an Assistant Professor of Business and Society at the Department of Society, Politics, and Sustainability at ESADE Business School in Barcelona.
Although these case studies discuss some of the terms of recent regulatory approaches, they should not be construed as legal advice.
MEL BANDLER is a sustainable sourcing professional who empowers brands to communicate sustainability achievements and engage purposefully with consumers.
Sustainability governance researcher JANINA GRABS is an Assistant Professor of Business and Society at the Department of Society, Politics, and Sustainability at ESADE Business School in Barcelona.
References
[1] Milieu Consulting SLR and IPSOS NV on behalf of the European Commission, Environmental Claims in the EU: Inventory and Reliability Assessment Final Report, Publications Office of the European Union (2020), https://www.qualenergia.it/wpcontent/uploads/2023/01/Envclaims_inventory_2020_final_publi.pdf.
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