By the end of this week, one of the world’s most ambitious anti-greenwashing regimes will be fully applicable across Europe.
The Empowering Consumers for the Green Transition (ECGT) Directive, nicknamed EmpCo, will update the EU’s existing Unfair Commercial Practices Directive (UCPD) with more explicit rules around sustainability claims.
“It will go a lot further than almost any other regulation or legislation in the world,” says Renske Mackor, director of regulatory and sustainability risk at PwC Netherlands. “Any statement that a business makes in the context of a commercial activity towards consumers falls within the scope.”
EmpCo places major restrictions on how firms can communicate about their goods, services and brands, including by banning generic, vague or exaggerated claims. “Saying your company is sustainable, for example, is prohibited unless you can prove it with a recognised external certification or label,” says Mackor.
More specific claims have to be substantiated with clear evidence, and forward-looking claims must be expressed as serious, timebound targets.
“You won’t be able to just say you’ll be net zero by 2050 anymore – you’ll have to have an implementation plan that’s reviewed and verified by a third party on an ongoing basis,” says Mackor. “And carbon offsetting claims will only be permitted if they relate to offsets undertaken within the value chain of that particular product. Anything else is prohibited.”
Investor implications
While the ECGT Directive is usually talked about in the context of physical goods and services, it also covers financial ones – including all investment funds and pension products made directly available to European retail investors, even if the primary audience is professional investors.
“Vague green claims mislead people, whether they’re buying a washing machine or a fund,” says Anyve Arakelijan, a senior regulatory policy adviser at the European Fund and Asset Management Association (EFAMA).
However, she says, some of EmpCo’s tests were designed with physical items in mind, and are not well-suited to investment products – such as the requirement for words like “green” or “sustainable” to be used only when accompanied by proof of excellent environmental performance.
“For a physical product, that makes sense – you can measure its footprint, and you can certify it,” says Arakelijan. “A fund is different. What makes a fund sustainable is how it invests – what it holds, what it excludes, what methodology it uses, and what it discloses to investors.”
As she notes, Europe’s investment industry already has two sets of greenwashing rules – the Sustainable Finance Disclosure Regulation (SFDR) and guidance from the European Securities and Markets Authority (ESMA) on using terms like ESG or sustainable in fund names.
Regulation overlap
A key question for investors will be how EmpCo fits with the EU’s other greenwashing rules. Every part of the Unfair Commercial Practices Directive can be overridden if another, more appropriate consumer protection regime already exists.
“The discussion now is whether SFDR fulfills that definition,” says Heike Schmitz, a senior lawyer specialising in sustainable finance at Herbert Smith Freehills.
And, according to the European Commission, it does.
“For sustainability-related disclosures that it specifically regulates, [SFDR] takes precedence over more general consumer-law rules,” said a spokesperson. “The UCPD does not impose parallel or conflicting requirements on elements that are specifically regulated by the SFDR.”
The Commission has proposed a clarification in the next iteration of SFDR to make it explicit that the legislation functions as a consumer protection regime, and therefore supersedes EmpCo’s rules.
“Absurdly, this is taken as an argument by some in the market to say that, if the Commission takes the step to clarify it, it is fair to assume the current SFDR is not explicitly seen as a specialised consumer protection law,” says Schmitz. “And that’s the version that’s in place for the time being.”
That’s the position taken by EFAMA, in lieu of official guidance.
“Under the Commission’s SFDR 2.0 proposal, the idea is that if you follow SFDR properly, you also meet the consumer protection requirements. But that is still being negotiated and isn’t expected to apply before 2028,” says Arakelijan.
“So for about two years, the same fund communication may be checked twice, by financial supervisors and by consumer authorities or civil courts, using different criteria.”
ESMA’s guidelines will create another complication, she adds.
For instance, they permit a fund to be called “sustainable” if at least 80 percent of its investments are used to meet its environmental or social characteristics or sustainability objectives, and it applies strict exclusions.
“The risk is that a court could still treat the term ‘sustainable’ as a generic environmental claim under EmpCo, and ban it unless the fund can show ‘recognised excellent environmental performance’ – a test built for physical products,” says Arakelijan. “So a fund that follows its financial rules could still be challenged in court.”
The Commission says EmpCo will “operate as a horizontal and complementary safety net for aspects that are not specifically governed by sector-specific legislation, including the overall presentation of environmental claims to consumers”.
This means entity-level descriptions like “responsible investor”, or common assurances such as “sustainability is in our DNA”, must be clearly evidenced.
Climate targets or net-zero pledges made available to consumers to help sell products or services will now have to be communicated as quantitative targets with deadlines, backed by a verified transition plan and updated at regular intervals.
“You can’t claim your whole organisation is going green unless it really is the whole organisation,” says Marcus Navin-Jones, senior counsel and environmental specialist at law firm Crowell & Moring.
But there is confusion about whether, under the Commission’s definition, EmpCo still might be applied to certain product-level claims as well.
“It’s unclear what would happen if you use information you’ve disclosed in compliance with SFDR within your marketing materials, too,” says Schmitz.
“Is a statement that’s acceptable in the context of SFDR now subject to a different set of rules once it becomes marketing? If you say your emissions have reduced by X percent over a period as part of your SFDR reporting, do you have to get it verified externally if you also want to say that in your brochures?”
When it comes to ESMA’s Guidelines, part of the concern is legal status, notes Arakelijan. “EmpCo is legislation, while ESMA’s naming rules are guidelines, so it isn’t clear whether a court would give them priority,” she says.
Enforcement questions
A number of regulatory experts within investor bodies have told Responsible Investor that they see little chance of these issues being tested in court. EmpCo was built for physical products, and that would likely be reflected in how it was enforced, they say.
Each EU member state will transpose the directive into national law differently, with some countries handing enforcement powers over to consumer protection agencies and others to competition authorities. Others may leave it to NGOs to go through the courts.
“You need to be located in a country where there’s actually enforcement risk,” says Schmitz, who is based in Germany – arguably the most likely source of EmpCo-based investor litigation because of its big retail market and consumer agencies known to target financial institutions.
But Navin-Jones says investors elsewhere should also be on their guard, because supervisors across the bloc have stated their intention to look into greenwashing in the sector.
In 2023, for example, the Dutch Authority for the Financial Markets (AFM) published its Guidelines on Sustainability Claims, which are broadly in line with EmpCo. It has since done a deep-dive into how pension funds are complying.
A spokesperson told RI the topic “will remain a focus of the AFM in coming years”, adding that any company covered by the UCPD will also soon be covered by EmpCo.
“We expect financial institutions to be aware of this and comply with the rules accordingly,” he said. “We expect market participants to assess their sustainability claims against the applicable legal requirements and the principles set out in our guidelines, and to make further improvements where necessary.”
French supervisor AMF, on the other hand, told RI that EmpCo’s entry into force “is not expected to result in any significant changes for the financial sector” because investors are already subject to the SFDR.
The Danish Financial Supervisory Authority, the Belgian Financial Services and Markets Authority, and Germany’s BaFin have all stepped up their efforts around greenwashing in the investment industry since 2021.
“One of the big questions is whether the consumer protection coordination authorities will act together, with the backing of the Commission, to stop greenwashing in the financial sector through enforcement of the ECGT rules,” says Navin-Jones.
The Commission oversees a group called the CPC Network, which seeks to encourage a harmonised approach to consumer protection by enabling national bodies to cooperate on priority areas, with fines of up to 4 percent of business turnover.
“If the CPC Network targets the finance sector, it will likely drive significant changes across the board,” says Navin-Jones. “If you’ve got all these countries talking about prioritising this issue, it’s logical we might see coordinated action.”