The European Union and the future of greenwashing regulations

The Accountant reporter Santiago Bedoya-Pardo takes a look at the European Union’s efforts to curb greenwashing.

In the evolving landscape of sustainability and environmental consciousness, the European Union (EU) is taking a significant stride to combat greenwashing, a pervasive issue that has plagued the market. Greenwashing refers to the deceptive marketing tactics employed by companies to exaggerate or fabricate environmental claims about their products. The EU's recent regulatory changes and unwavering commitment to eradicate greenwashing have far-reaching implications for various industries, particularly the financial services sector and the accounting profession. In this in-depth exploration, we delve into the impact of these regulations and how they are set to redefine the financial world and the role of accountants in ensuring transparency and accountability. 

Margaret Craig-Bourdin

CPA Canada’s senior editor of digital content

Empowering Consumers and Tackling Greenwashing

The EU's mission to combat greenwashing goes beyond reacting to market deception; it represents a proactive approach to safeguard consumers and promote genuine sustainability. Misleading claims, such as "climate-neutral," "eco," or "biodegradable," have inundated the market, making it increasingly challenging for consumers to distinguish authentic environmentally responsible products from impostors. The EU's response to this challenge is to introduce stringent regulations aimed at substantiating environmental claims and enhancing consumer protection.

One of the pivotal changes introduced by these regulations is the ban on generic environmental claims. Phrases like "environmentally friendly" or "natural" will only be permissible if companies can provide compelling evidence of their products' exceptional environmental performance relevant to the claim. This shift toward transparency and authenticity represents a significant leap forward in enabling consumers to make informed choices.

Moreover, commercial communications about goods with features that limit their durability will come under scrutiny. Companies will be required to provide comprehensive information about these features and their effects on the product's longevity. Claims based on emissions offsetting, often employed to assert carbon neutrality or reduced environmental impact, will also be prohibited unless they are backed by verified offsetting programs. Sustainability labels not based on approved certification schemes or those established by public authorities will face regulatory restrictions. 

These regulations also aim to increase transparency and monitoring of claims related to future environmental performance. The EU is introducing a harmonised label to highlight products with extended guarantees, making it easier for consumers to identify more durable and sustainable products. Furthermore, the EU is making guarantee information more visible, ensuring that consumers are aware of the legal guarantee accompanying all products within the EU. 

Greenwashing and financial services

While the primary objective of these regulations is to protect consumers and promote transparent practices, the financial services sector will experience significant repercussions. Financial institutions and professionals play a pivotal role in evaluating the environmental impact of companies and their products. These regulations necessitate a recalibration of due diligence processes to ensure compliance with stringent standards.

One of the primary areas where financial services will be significantly impacted is sustainable investments. The EU's ban on misleading environmental claims creates a more reliable landscape for sustainable investments. Financial professionals and analysts must conduct meticulous assessments of companies' claims and the evidence supporting them. This in-depth analysis is critical for making accurate assessments of the environmental impact of investments and guiding clients toward responsible financial decisions.

These regulations will encourage a more responsible approach to sustainability in the financial sector. They underscore the importance of accurate reporting and accountability. Financial professionals will play a pivotal role in ensuring compliance and promoting ethical investments that genuinely contribute to environmental goals. These changes are in alignment with the global shift toward ESG (Environmental, Social, and Governance) investments, where companies' environmental claims and practices are assessed rigorously.

In addition to transparency, these regulations may influence the availability of financial products related to sustainability. Financial institutions will need to reassess their product offerings to align with the new regulations and ensure they are not indirectly supporting greenwashing. This transition toward more responsible and authentic sustainability practices in the financial sector will ultimately benefit both consumers and the environment.

The role to be played by accountants

The accounting profession is poised to undergo significant changes as a result of the EU's regulations against greenwashing. Accountants are responsible for auditing financial statements, including sustainability reports, to ensure their accuracy and compliance with relevant standards. These regulations will necessitate enhanced scrutiny and a more rigorous approach to sustainability reporting. 

Under the new rules, companies will face increased accountability regarding the environmental claims they make. Accounting professionals will need to collaborate closely with their clients to validate the evidence behind these claims and ensure that financial statements accurately reflect a company's environmental performance. 

Following the respective sessions held by both the EU Council and Parliament on the matter, Spain’s acting minister for consumer affairs, Alberto Garzón Espinosa, said: “Citizens are suffering the consequences of climate change and want to be part of the solution. With the compromise reached today consumers will have the necessary information to make the right green choices and will be better protected against green washing, social washing and other unfair commercial practices.

This is essential to allow them to play an active role in the common struggle for a greener and fairer Europe.

The accounting profession will need to adapt to the changing landscape of sustainability reporting. Sustainability reports will require more thorough examination, and the accounting profession may develop specialised expertise in assessing environmental claims and offsetting programs. Accountants will need a deeper understanding of environmental standards and regulations to meet the demands of these new regulations.

Furthermore, accounting professionals may need to work closely with sustainability experts to conduct comprehensive assessments of a company's environmental practices. This interdisciplinary approach will help ensure the accuracy of sustainability reports and prevent greenwashing.

The accounting profession plays a pivotal role in upholding the integrity of financial information. As these new regulations come into effect, accountants will play a vital role in maintaining trust in the market by holding companies accountable for their environmental claims.

Global Implications and Beyond

The EU's determination to combat greenwashing sets a global standard for responsible advertising and sustainability reporting. Companies operating internationally will need to adhere to these regulations to conduct business within the EU. As a result, similar regulations and standards may be adopted in other regions, creating a more consistent global approach to environmental claims.

The financial services sector will experience a paradigm shift towards more responsible and ethical investment practices. Financial professionals and analysts will become the gatekeepers of sustainability, ensuring that investments genuinely align with environmental goals and that greenwashing is eliminated from the equation. This shift will enhance investor confidence and drive more substantial investments in sustainable initiatives.

In conclusion, the EU's efforts to empower consumers and combat greenwashing will have far-reaching implications for various industries, including the financial services sector and the accounting profession. These regulations promote transparency, accountability, and authenticity in sustainability reporting. Financial professionals and accountants will need to adapt to these changes and ensure that their practices align with the new standards, ultimately contributing to a more responsible and sustainable future.

In an official statement, member of the European Parliament Biljana Borzan, said: “We have achieved an excellent deal for consumers. 60% of European consumers are not even aware a legal guarantee comes with all products. That changes today, with a reminder to be present in every shop in the EU and also in some cases on packaging.

Also, a new extended guarantee label will show clearly which products last longer, so it will be easier to buy more durable products. We have also negotiated a strong stance on early obsolescence. We shouldn’t advertise products that fail too early. In addition to that, we are clearing the chaos of environmental claims, which will now have to be substantiated, and claims based on emissions offsetting will be banned.

As the financial and accounting sectors adapt to these regulatory changes, they become instrumental in shaping a more sustainable and honest market. The fight against greenwashing is not merely a legal obligation; it is a call for integrity and a commitment to a greener future.

The EU's actions send a powerful message: the era of greenwashing is over, and transparency and accountability are the way forward. As these changes take effect, consumers, businesses, and investors can have greater confidence in the environmental claims made by companies, and the financial and accounting sectors will play a pivotal role in this transformative journey towards a more sustainable and responsible world.

As the financial and accounting sectors adapt to these regulatory changes, they become instrumental in shaping a more sustainable and honest market. The fight against greenwashing is not merely a legal obligation; it is a call for integrity and a commitment to a greener future.