Systems in the Making: the Role of Companies in Implementing Sustainability Policy and Reporting

This paper focuses on the implementation of corporate sustainability, or Environment, Social and Governance, reporting. The introduction from 2023 of mandatory reporting is a key milestone in sustainability.

Adopting a comparative case method, we identify as related case studies Materiality (in reporting), Transition (in corporate strategy), and Stewardship (in fund management). We compare these by applying the theory-led themes of system openness, the agency or power of coalitions in producing and acting upon reports, contests in the qualification of key data, and through business exchanges related to or enabled by sustainability reports.

Drawing on a two-year applied project, we elaborate upon policy, regulation, business and industrial markets, and business relationships. We find that Materiality is the most stable and well-framed system. It produces key outcomes in depicting a reporting company’s sustainability risks and opportunities. Transition is the most open, influenced by global and jurisdiction task forces, for example tasked with achieving net zero policy obligations.

Stewardship in the UK articulates a set of principles, which guide fund managers in engaging with investee companies. We conclude that sustainability policy is at the same time setting in progress the forming of three systems, corresponding to this paper’s three case studies. Each has its own development, function and sets of facts, though each is beginning to achieve its function through interactions and exchanges with the other two.

Regulatory Innovations and Anti-Greenwashing: UK/EU Strategic Insights

Financial Regulation Innovation Lab – University of Strathclyde

Given the growing global concern for sustainability and environmental responsibility, the practice of greenwashing has emerged as a critical challenge. Greenwashing occurs when companies exaggerate or falsely represent their environmental efforts to stakeholders, creating a misleading image of sustainability that masks their true impact. The United Nations (UN) highlights the severity of this issue, defining greenwashing as the behaviour of “misleading the public to believe that a company or other entity is doing more to protect the environment than it is”[1]. This deceptive practice can present significant challenges in addressing climate change, undermine consumer trust, and disrupt the market.

In response to this issue, the UK and EU have implemented a series of rules and regulations guiding firms toward anti-greenwashing practices. The EU, for instance, formally endorsed the Greenwashing Directive on 17 Jan 2024, which requires companies to substantiate their environmental claims with clear, reliable evidence. The UK has also established guidelines to combat greenwashing, with oversight from the Competition and Markets Authority (CMA). Additionally, the Financial Conduct Authority (FCA) has introduced a new anti-greenwashing rule, effective since 31 May 2024, further strengthening the regulatory framework to ensure the integrity of environmental claims made by firms.

In this blog, we cover the latest anti-greenwashing regulations in the UK and EU, examining their strategic insights in respect of promoting transparency and authenticity in sustainable practices. We discuss the consistency of these regulations, while also highlighting key differences in their approaches. Finally, we suggest potential future developments in these regulatory frameworks.

UK Regulations Targeting Greenwashing Practices

Prior to 2021 in the UK, consumer protection and advertising regulations had been in place to address potentially misleading sustainability claims. However, these regulations lack a structured and enforceable framework specifically designed to address and mitigate such issues comprehensively. After 2021, the CMA launched a review over the potential misleading sustainability claims regarding the eco-friendliness of clothing lines in the fashion sector, including brands such as ASOS, Boohoo and George at Asda (Competition and Markets Authority, 2023[2]). Additionally, to help companies understand how to communicate their green credentials while reducing the risk of misleading shoppers, the CMA has published the Green Claims Code[3], focusing on six principles based on existing consumer laws. The Green Claims Code regulates companies that they “must not omit or hide important information” and “must consider the full life cycle of the product” when making green claims. For example, a loaf of bread labelled as “Organic Sourdough” would be misleading if it does not meet the sector-specific requirement that food products must contain at least 95% organic ingredients to be labelled as organic. The CMA is able to fine companies up to £300,000, or 10% of a company’ annual turnover (whichever is higher), for breaching consumer laws, and up to 5% of a company’s annual global turnover, with an additional daily penalty of 5% of daily turnover during non-compliance, for failing to comply with a direction (Department for Business, Energy & Industrial Strategy, 2022[4]).

However, recent incidents have revealed that greenwashing practices have increasingly surfaced in the banking sector. Therefore, the Financial Conduct Authority (FCA)’s Anti-greenwashing Rule (AGR/The Rule) came into force in May 31, 2024, with the aim of protecting investors against firms’ greenwashing intentions. The Rule is stated under Section ESG 4.3.1R of the FCA’s Environmental, Social and Governance (ESG) Sourcebook, published through their Policy Statement on Sustainability Disclosure Requirements (SDR) and investment labels (the Policy Statement). The Rule requires all FCA-authorised firms providing sustainability-related financial products/services and/or financial promotions to clients in the UK to deliver claims that are ‘fair, clear and not misleading’, and are consistent with their sustainability characteristics. Specifically, AGR Guidance underpins the following principles (referred to as the ‘4 Cs’):

• Correct and capable of being substantiated – claims should be factually correct and not provide conflicting or contradictory information; the firm’s products/services should live up to the claims made with robust and credible supporting evidence; the firm should regularly review and maintain their claims and evidence following AGR on an ongoing basis; the firm should make the evidence publicly available in an easily accessible way.
• Clear and presented in a way that can be understood – claims should be made transparent, straightforward, useful, and generally understood by all intended audiences; firms should maintain the overall impression and visual presentation to be consistent with their claims; firms subject to Consumer Duty should test their communications where appropriate and ensure they have the necessary information to understand and monitor customer outcomes.
• Complete – claims should not omit or hide important information and should consider the full lifecycle of the products/services that might influence decision-making. This extends to not highlighting only positive sustainability impacts where this disguises negative impacts.
• Comparisons should be fair and meaningful – comparisons mentioning other products/services should be made in a fair and meaningful manner, whether in relation to a previous version of the same product or service or to a competitor’s product or service. This should enable the audience to make informed decisions about the products/services.

EU Regulations Targeting Greenwashing Practices

In the EU, the battle against greenwashing is also intensive. In 2020, the European Commission found that 53% of examined environmental claims in the EU were vague, misleading or unfounded, and 40% were unsubstantiated (European Commission, 2023[5]). The Consumer Protection Cooperation (CPC), a network under authority of the Consumer Protection Cooperation Regulation and with the coordination of the European Commission, takes action to address cross-border violation of consumer protection at EU level. BEUC can post alerts about emerging market threats associated with greenwashing and their information is then directly accessible by enforcement authorities[6].

In January 2024, the European Parliament formally approved its Greenwashing Directive[7], requiring member states to introduce stricter rules surrounding the use of environmental claims by companies. The regulation complements and further operationalises the proposal for a Directive on empowering consumers in the green transition in 2022. In Parliament, the file has been allocated jointly to the Committees on Internal Market and Consumer Protection (IMCO) and on Environment, Public Health and Food Safety (ENVI).

The Greenwashing Directive covers all sustainability claims that relate to a product, a brand, a company, or a service made in a business-to-consumer (“B2C”) context. Under the Directive, sustainability claims cover both environmental or “green” claims and so-called “social characteristic” claims. Only sustainability labels based on official certification schemes or established by public authorities will be permitted in the EU. In addition to “greenwashing”, bluewashing[8]issues also fall within the scope of the Greenwashing Directive. The Greenwashing Directive also introduces a clear definition of “environmental and social characteristics with specific examples; specifically, matters relating to animal welfare or vegan are also considered as social characteristic claims”.

Currently, the EU has been taking stronger actions against greenwashing. The European Parliament and Council have reached a provisional agreement on new rules to ban misleading advertisements and provide consumers with better product information; for instance, generic environmental claims, e.g. “environmentally friendly”, “natural”, “biodegradable”, “climate neutral” or “eco”, without proof of recognised excellent environmental performance relevant to the claim. False or unfounded product durability claims that promote replacement or repairability earlier than necessary will also be banned. Once the Greenwashing Directive is published in the Official Journal of the EU and enters into force, Member States will have 24 months to transpose the Directive into their national legislation.  However, some Member States, such as France, Germany, and the Netherlands, are expected to implement these rules earlier, as their regulators, NGOs and consumer organisations and courts have already started to enforce against greenwashing.

A Comparative Perspective on UK/EU Anti-greenwashing Regulatory Frameworks

The overview of the UK’s and the EU’s anti-greenwashing regulatory frameworks reveals a consistent and unified effort to combat greenwashing, aiming to foster consumer trust and promote true sustainability in the market. These frameworks reflect a shared goal of combating greenwashing, with recent developments showing an increased focus on addressing specific challenges and complex cases associated with misleading environmental claims. Both regulatory frameworks emphasise the importance of accountability and verification, requiring companies to substantiate their environmental claims with credible evidence that can be verified by consumers. The regulations are frequently updated, underscoring the recognition by both the UK and the EU that greenwashing is a critical issue that must be tackled to ensure transparency and protect consumers.

It is also important to acknowledge some differences in the anti-greenwashing regulatory frameworks between the two regions. The UK advocates a principle-based regulatory approach that encourages companies to adhere to broad principles of fairness and honesty in their environmental claims. Over the period 2015 to 2022, the FCA has outlined various measures to address greenwashing, including requiring firms to withdraw or amend misleading advertisements, banning promotions, and issuing public alerts. This approach fosters flexibility, innovation, and dynamic solutions to sustainability challenges by allowing companies to tailor their environmental claims and practices following the rules. However, it has not publicly disclosed any specific sanctions against companies within the Advisors and Intermediaries portfolio for greenwashing (Financial Conduct Authority, 2022[9]). Compared to the UK, the EU employs a legislative-based framework characterised by stricter enforcement and detailed, uniform rules. Although it has not been officially implemented, the EU Parliament’s proposal clearly called out sanctions for businesses guilty of breaking the rules, including temporary exclusion from public tenders, loss of their revenues, and a fine of at least four per cent (4%) of their annual turnover. The most recent action by the EU after the introduction of new proposal was the case against greenwashing claims of the aviation industry. In May 2024, the EU Commission and EU consumer protection authorities contacted twenty (20) airlines regarding claims that “the CO2 emissions caused by a flight could be offset by climate projects or through the use of sustainable fuels, to which the consumers could contribute by paying additional fees”. The airlines were asked to respond within thirty (30) days with their proposed solutions to address the concerns. After that, authorities will discuss and monitor the implementation of agreed upon solutions, and if the required steps are not followed accordingly, further actions, including sanctions, could be taken[10]. This rigorous approach guarantees uniform standards and accountability throughout the EU, effectively managing the complexities of coordinating regulations across various legal systems and markets.

One other difference comes from the sectoral focus. The FCA, as an institution that serves to regulate financial services and markets in the UK, has recently directed its Anti-greenwashing Rule specifically towards greenwashing behaviors within financial services, financial institutions, and financial products. Besides this, the CMA’s Green Claims Code primarily targets the consumer goods sector, aiming to address misleading environmental claims across a wide range of consumer products. In contrast, the EU’s Greenwashing Directive takes a broader approach, applying to a wide range of sectors and industries across the European market.

Potential Future Developments in Anti-greenwashing Regulatory Frameworks

We acknowledge the critical advancements in recent anti-greenwashing regulatory frameworks within both the UK and the EU. We outline here several prospective developments that could be considered to enhance the effectiveness of combating greenwashing practices.

The regulatory framework should broaden its focus to encompass not only environmental practices but also social and governance aspects, as it evolves to address ESG-related greenwashing. For instance, the finalised Anti-greenwashing Rule from the FCA in the UK has received positive feedback overall from respondent companies, but some concerns have been pointed out regarding the clarity of sustainability’s taxonomy, which should go beyond environmental / climate-related claims to cover claims relating to “social issues”, and even corporate social responsibility initiatives. The terms “environmental/social characteristics” should be more clearly defined and elaborated from other terms used in the guidance, such as “complete”, “life cycle of the product”, “regular review” and “periodically monitor”. Moreover, there is less of a focus on claims regarding governance, despite the FCA stating clearly that: “We consider governance to be an enabler of environmental or social outcomes, rather than an end in itself, and we refer to ‘sustainability characteristics’ as ‘environmental or social characteristics” (Financial Conduct Authority, 2024[11]).

We also recommend that increased attention be directed towards small and medium-sized enterprises (SMEs). From perspective of stakeholders, SMEunited[12] is worried that, although the proposed Greenwashing Directive from the EU would exempt micro-enterprises from obligations ((Articles 3(3), 4(6), 5(7)), SMEs could be affected indirectly through market pressure or consumers who suspect they do not comply with the obligations. Improved support measures should be put in place therefore, in case micro-enterprises would like to apply the requirements of the directive voluntarily, through the introduction of a simplified EU-level tool and by facilitating lifecycle analysis for SMEs at EU level. IMA[13]-Europe suggests that the Commission should avoid ‘over-regulating’ and reduce unnecessary administrative burdens; for instance, procedures for firms to obtain more certificates of conformity for green-claim products should be simplified, and authorities should allocate sufficient time for firms to remedy for their violations before applying penalties.

Ngoc Anh Chu is a PhD candidate and a scholarship recipient from Department of Accounting & Finance, Strathclyde Business School (SBS). Her current work is related to artificial intelligence and machine learning, specifically in Natural Language Processing (NLP) and eXplainable AI (XAI) applications in the field of ESG and Sustainable Finance. She previously worked in Integrated International Tax Consulting Department at KPMG Vietnam and later obtained her MSc in Financial Technology from SBS in 2023 with distinction and academic award from the department. Her dedication in integrating advanced technologies to improve transparency and reliability of financial sector highlights her innovative approach and commitment to driving impactful research, contributing to sustainability, and developing solutions that foster a more accountable industry.

Email: ngoc.chu@strath.ac.uk

Daniel Dao is a Research Associate at the Financial Regulation Innovation Lab (FRIL), Department of Accounting and Finance, University of Strathclyde Business School; and a Research Economist (Consultant) at the International Bank for Reconstruction and Development (IBRD), The World Bank, Washington DC Headquarters. He is a CFA Charterholder and an active member of the CFA UK. He has earned PhD in Finance from Coventry University, UK; MBA in Finance from Bangor University, UK; and MSc in Financial Engineering from WorldQuant University, US. His expertise lies in the fields of Fintech; Sustainable Finance; Productivity, Innovation, & Growth; with proficiency extending to data science techniques and advanced analytics, with a specific focus on artificial intelligence, machine learning, and natural language processing (NLP). He has published in internationally leading journals, including British Journal of Management (ABS-4), Information and Management (ABS-3*), and various policy and industry research reports affiliated with The World Bank (Dominican Economic Memorandum, 2023; World Development Report, 2024; Labour and Policy Reform, 2024) and Fintech Scotland (White papers and Blog Posts in AI, Fintech, ESG, and Financial Regulation)

Email: daniel.dao@strath.ac.uk

[1] The UN: Greenwashing – The deceptive tactics behind environmental claims: https://www.un.org/en/climatechange/science/climate-issues/greenwashing#:~:text=By%20misleading%20the%20public%20to,delay%20concrete%20and%20credible%20action.

[2] Competition and Markets Authority – ASOS, Boohoo and Asda: greenwashing investigation: https://www.gov.uk/cma-cases/asos-boohoo-and-asda-greenwashing-investigation

[3] Green Claims Code: https://www.gov.uk/government/publications/green-claims-code-making-environmental-claims/green-claims-and-your-business

[4] Department for Business, Energy & Industrial Strategy – Reforming competition and consumer policy:

[5] European Commission – Consumer protection: enabling sustainable choices and ending greenwashing: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_1692

[6] Bureau Européen des Unions de Consommateurs, which is translated into “European Bureau of Consumers’ Unions”.

[7] Greenwashing Directive: https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2023)753958

[8] Bluewashing refers to companies who signed the United Nations Global Compact and its principles but did not make any actual policy reforms. Bluewashing differs from greenwashing as it focuses more on social and economic responsibility rather than the environment (Forbes – Bluewashing joins greenwashing as the new corporate whitewashing: https://www.forbes.com/sites/timothyjmcclimon/2022/10/03/bluewashing-joins-greenwashing-as-the-new-corporate-whitewashing/)

[9] Financial Conduct Authority – Information on firms sanctioned for greenwashing – April 2022: https://www.fca.org.uk/freedom-information/information-firms-sanctioned-greenwashing-april-2022

[10] European Commission – Commission and national consumer protection authorities starts action against 20 airlines for misleading greenwashing practices: https://ec.europa.eu/commission/presscorner/detail/en/ip_24_232256

[11] Financial Conduct Authority – Finalised Guidance: https://www.fca.org.uk/publication/finalised-guidance/fg24-3.pdf

[12] European Association of Craft, Small and Medium-Sized Enterprises

[13] Industrial Minerals Association