“100% organic,” “environmentally conscious,” and “eco-friendly” are some common labels stuck onto a wide range of products today, but just how accurate are these claims? A 2021 study by the International Consumer Protection Enforcement Network examined 500 company websites and reported that 40% presented misleading claims about product sustainability. In recent years, many companies have made false claims about the supposed environmental benefits of their products as a means of attracting consumer interest and increasing sales, a tactic also known as “greenwashing.” While greenwashing has been a marketing staple for years, consumers have begun calling out large companies for their deceptive marketing strategies. Volkswagen found itself at the center of a recent greenwashing scandal when it promoted its use of “clean diesel” but was later exposed for using a special device in its cars to cheat emission tests.
This month, the European Union passed new legislation called the Sustainable Finance Disclosure Regulation (SFDR) to combat some of the rampant greenwashing that had previously gone unchecked at the governmental level. The SFDR is one of the first greenwashing bills to ever be passed in the EU, revealing the region’s newfound commitment to addressing environmental concerns. The regulation will roll out in stages with an ultimate goal of driving $1.19 trillion into green investments in the next ten years. The SFDR will require companies and other participants in the financial market to disclose information and proof to support any and all sustainability claims. Through such requirements, the EU intends to make it more difficult for corporations “following a purely financial, profit-led strategy” to promote a deceptive “green agenda,” says Neil Robinson, a financial services partner at the law firm Katten Muchin Rosenman.
Beginning March 10, 2021, the first phase of the SFDR will require investment firms, management companies, and funds to begin labelling themselves as articles 9, 8, or 6. Article 9 indicates that a company is completely dedicated to sustainable objectives, while articles 8 and 6 mean some or no level of sustainable objectives, respectively. Those designating themselves as either article 8 or 9 must disclose specific plans for sustainability and publish information on their websites about how they calculate and incorporate sustainability risks into company decisions. While these disclosures are on a comply-or-explain basis, the SFDR expects that companies will cooperate to preserve their public image.
The requirement to disclose sustainability goals will become more specific and demanding in 2022. The second round of the SFDR will request companies to provide detailed methods to achieving their sustainability goals as well as share the negative environmental impacts of their investment products, including CO2 emission and water usage data. Although these demands appear manageable on paper, they may be challenging to implement as sustainability-related data does not exist for many companies. Companies that do not have this data readily available may have to begin gathering it in order to meet the SFDR standards. This additional work has raised much controversy and opposition. Such concerns will have to be addressed as the EU continues to adjust and finalize the next steps of the SFDR.
The implementation of the SFDR goes beyond European borders and will also affect companies in the United States if they hope to continue selling products within the European Union. J.P. Morgan estimates that about $7 trillion worth of US investments will have to comply with the SFDR requirements. Some American companies remain hesitant to publicly disclose their sustainability data, and it is unknown how well-enforced the SFDR will be outside the EU.
Despite posing considerable inconveniences for corporations, the SFDR ultimately serves a higher purpose of bettering the environment. The SFDR’s potential for environmental impact may initially be limited as it concentrates more heavily on improving the transparency of current corporate sustainability objectives rather than ordering any companies to actively begin environmental action. However, the SFDR hopes to enact a trickle-down effect that eventually increases the number of companies dedicated to sustainability. By requiring companies to provide accurate information about their sustainability plans, the SFDR allows investors to better take into account and judge the environmental factors of a company. Growing public interest in the environment can thus place companies without clear sustainability goals at a disadvantage, pressuring them to formulate their own environmentally-conscious goals in order to remain competitive in the financial market.
With a lack of current green-washing legislation worldwide, the SFDR will serve as a precedent in showing other countries if and how governments can effectively curb green-washing. One international party particularly interested in the SFDR is the United States, as the U.S. Securities and Exchange Commission has already started seeking environment-related information from American companies and will likely look toward the SFDR’s successes and failures to help inform its plans.
Erin is from Baltimore, Maryland studying Environmental Science and Policy.