Greenwashing

What is greenwashing, and why is it a problem?

In recent years, the green transition has become a central theme in Denmark's and the EU's pursuit of sustainable development and climate neutrality by 2050. The green transition holds a significant part of the key to mitigating and adapting to the challenges posed by climate changes. With the green transition comes new business opportunities and often also the question whether a product actually has a positive impact on the environment or climate (in other words, whether it is "green"), and whether and how the company can market the environmental benefit of the product.

This creates a risk of products being presented as greener than they actually are – also known as "greenwashing".

The number of greenwashing complaints is increasing in Denmark

Each year, the Danish Consumer Ombudsman receives a significant number of complaints about businesses engaging in potentially misleading marketing practices in the form of greenwashing. During recent years, the Consumer Ombudsman has had to remind several businesses to comply with the rules and has even had to report instances of non-compliance to the police.

The term "greenwashing" is not defined in law, so in cases concerning environmental marketing it is the Danish Consumer Ombudsman that protests against any violation of the prohibition of misleading information as set out in the Danish Marketing Practices Act. However, the prohibition of misleading information is a general prohibition of misleading trading practices and therefore does not specifically regulate environmental marketing. Violation of the prohibition of misleading information is punishable by a fine, and one of the latest amendments to the Danish Marketing Practices Act introduced a new, turnover-based fine model as of 1 January 2022 to ensure, among other things, appropriate penalties for violations of the prohibition of misleading information.

At the EU level, the legislative initiative "EU Green Deal" has as one of its objectives to provide consumers with reliable, comparable and verifiable information to enable them to make better and more informed choices that will ultimately contribute to a more sustainable society and put an end to greenwashing. The proposed directive on environmental claims (the "Green Claims Directive") will also be an important tool in the fight against greenwashing, as the directive imposes a number of specific requirements for information and evidence about environmental claims. It does so in the same way that e.g. the EU Taxonomy Regulation already provides a framework for defining an "environmentally sustainable economic activity" within the meaning of the Regulation.

Read more about the EU Taxonomy Regulation and other ESG legislation here.

Balanced and reliable marketing is essential

Precisely because the green transition is so important for achieving the ambitious climate targets set out in e.g. the Paris Agreement and in Danish and EU climate laws, accurate, reliable and verifiable information is quite essential.

If the information that companies use in their marketing or otherwise publish is not fully accurate, verifiable or balanced, this will weaken the trust in the companies as well as the green transition.

Some of the green solutions needed for a fossil-free and climate-neutral future are associated with significant investments and – at least in the short term – increased costs. There is a need for correct and complete information, as greenwashing involves a risk of reducing the incentive for companies to use the resources and costs necessary to contribute to the green transition.

Environmental claims can be misleading for a number of reasons – for example, factually correct information may be presented in a misleading manner, material information may be omitted, or the claim may simply be untrue. Below are a few examples of claims that may constitute misleading marketing (greenwashing):

Misleading marketing may result in fines, disputes and lawsuits

As mentioned, misleading environmental marketing is punishable by a fine. Usually in such cases, the Consumer Ombudsman will report the company to the police, criminal proceedings will be initiated against the company, and the amount of the fine will be decided by a competent court. There is also a certain increase in the number of civil law disputes and proceedings concerning companies' – possibly – incorrect or incomplete information about environmental and/or climate impacts.

The EU proposal for a directive on environmental claims also provides for:

In practice we see that in certain public and private procurement procedures, companies are already increasingly being asked for a significant volume of environmental and climate information. We also see that companies are excluded from tenders due to failure to provide satisfactory documentation.

Correlation between ESG and greenwashing

The question about the greenness of a product or even an entire company is also often a theme in a broader environmental, social and governance context, also known as ESG. 

It may have a significant impact on the valuation of a company, but it is rarely clear-cut. In recent years, we have seen an increase in investors including ESG criteria in their investment strategy and the specific business cases. 

We therefore often, as an integral part of our legal due diligence assistance, assist companies with identifying and qualifying ESG factors. In this context, we assist with looking out for any instances of greenwashing. 

Traditionally, until a few years ago, investors focusing on ESG were considered to belong in a niche, but investing in ESG has gradually moved further into the "mainstream" part of the spectrum. In our experience, this is partly because of the fact that the link between a company's long-term value and its ability to deliver on key ESG issues has become increasingly recognised, and more companies have matured in this area.

ESG work has been expanded and intensified

Working with environmental, social and governance issues is an integral and natural part of everyday life for many Danish companies. What is new in this context is the link to the company's future value creation and, thus, its competitiveness – and not least its role in reducing and averting the worst negative impacts on ESG factors.

The ESG developments in recent years have also had an impact on the development of methods and documentation. However, there is still some variation in the level of the documentation provided by companies.

If a company provides incomplete or incorrect information about ESG performance, or even withholds information about the true situation, the consequences may be immense. 

Below are some examples of ESG information that may be important to investors and therefore has consequences if it is incorrect or incomplete:

From a risk perspective, these types of practice may give rise to a number of inexpedient scenarios, including:

• a financial risk such as loss of future turnover;
• a legal risk such as disputes or lawsuits regarding breach of contractual obligations and claims for damages;
• a strategic risk such as a permanent decline in the company's value creation, competitiveness and ability to attract and retain customers, investors, employees and other business partners;
• a reputational risk such as breach of the trust that the company's stakeholders place in the company, as well as negative publicity;
• a sustainability risk that the company may have a significant negative impact on people and environment.

Thus, all of the above provide a good reason for any company to establish a robust and credible basis for their ESG strategy and the required documentation, which may vary depending on the purpose.

How does your company avoid falling into the greenwashing trap?

While concepts such as greenwashing and ESG may still seem abstract in some contexts, there are a number of recognised methods which, together with the increasingly EU-harmonised legislation, can help your company along the way.

In our counselling, we focus on helping your company identify and comply with the relevant legislation and other relevant frameworks and standards.

It may seem tempting or necessary to use popular expressions, terms or labels emphasising a green transition, but it may be costly to obtain documentation for this purpose. If it does not support your business model and values, it is not necessarily worth the resources.

However, it is evident from the current cases and legislation against greenwashing that documentation plays a key role. Therefore, when weighing up which claims and information you wish to communicate, you need to have studied the applicable documentation requirements set out, for example, in legislation and regulations on marketing practices, sustainable investments, reporting, etc.

Summary and recommendations 

In light of the developments already seen in Denmark and the EU, there is every reason to stay updated on how your organisation can avoid greenwashing. With the prospect of a possible fine of up to 4% of your company's turnover, we recommend:

• that you, internally in your company, create a common understanding of what the legislation means for you as a company
• that you allocate the key roles, including who is responsible for technical, legal, marketing approval, etc.
• that you continuously ensure proper documentation for e.g. marketing and reporting purposes.

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