The Digital Markets, Competition and Consumers Bill: the greenwashing risks increase

Richard Reichman discusses the lack of clarity around the substantiation of green claims

Consumer protection may be the third issue in the title of the new Digital Markets, Competition and Consumers Bill, but its position belies its significance. The bill would give the Competition and Markets Authority (CMA) game-changing powers to decide itself whether consumer protection law has been breached and impose monetary penalties of up to 10 per cent of global turnover.

Appetite is increasing for regulators to be able to directly impose significant financial penalties without the need to prosecute and take cases to court, with similar plans to extend the Environment Agency’s powers currently under consultation. The CMA’s new powers are expected to make consumer protection enforcement action quicker, simpler and more cost-effective. The ability to save time, including increasingly backlogged court time and costs (particularly important in the current economic climate) is understandably appealing, but allowing a regulator to be judge, jury and executioner puts impartiality and fairness into question. The bill proposes an important route of appeal to the High Court in circumstances such as where the decision is based on an error of fact, wrong in law, or the penalty is unreasonable.

Greenwashing

The CMA would almost certainly seek to use its new enforcement powers in the fight against greenwashing, i.e., misleading environmental claims made to increase sales. This is a consumer protection issue, which is currently firmly on the radar of regulators. The Advertising Standards Authority (ASA), Financial Conduct Authority (FCA) and CMA are all at various stages of the enforcement action lifecycle. The FCA has recently undertaken a consultation on proposed new anti-greenwashing rules and the ASA has already taken enforcement action on numerous occasions, with recent examples including against HSBC, Lufthansa and Etihad. Greenwashing is one of the CMA’s consumer protection priorities and, as well as issuing guidance (see the Green Claims Code), it is currently investigating high value and significant environmental impact sectors, such as fashion and fast-moving consumer goods (i.e., household essentials such as food, drink and toiletries).

In addition to the power to impose monetary penalties, the 388-page bill contains significant requirements regarding the substantiation of certain commercial claims, including green claims. If the proposals in the bill go through, the CMA could demand evidence when a company defends against direct enforcement action, putting the burden of proof on companies to prove the accuracy of their green claims. There is no equivalent obligation for traders to provide supporting evidence to consumers.

It is clear in the detail of the bill that the substantiation provision firmly has environmental claims in mind, but there is no detail on the content or scope of the evidence that the CMA would deem adequate. The substantiation requirement is broad and vague and likely to cause difficulties for companies in understanding what is needed to substantiate their green claims, particularly when contrasted with the detailed substantiation requirements in the EU’s recent proposal for a Green Claims Directive. Will further detail be left to rules and guidance prepared by the CMA?

Whilst the bill would make enforcement action against greenwashing easier for the CMA, there are hurdles remaining, including the need for a link between misleading claims and their influence on average consumer behaviour. Despite the opportunity to address this hurdle – the bill revokes the relevant existing regulations (the Consumer Protection from Unfair Trading Regulations 2008) and incorporates similar provisions – the need for such a link is currently retained. This is despite the CMA’s call for such action in its advice to government dated March 2022. The EU is expected to take action to address this hurdle and, without such action in the UK, there may be challenges in using the new powers against greenwashing.

Conclusion

The relatively soft approach to greenwashing enforcement action to date is hardening. The risk of enforcement action is increasing as a reasonable opportunity to react to the guidance and warning stage passes. We will almost certainly see large fines against corporates that ignore the warnings. Companies will want to carefully review their green claims, and any other potentially misleading consumer claims, against the available guidance and take all reasonable precautions and exercise all due guidance to avoid a breach. Evidence to substantiate any claims will be crucial to avoid the risk of multimillion pound fines and severe reputational damage.

Richard Reichman is a partner at BCL Solicitors
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