In May, the European Parliament (the “Parliament”) overwhelmingly approved the proposal for a new directive (see the Parliament’s adopted amendments) requiring organisations to substantiate and verify their environmental claims and labels, aimed at protecting consumers from greenwashing.
The directive addresses a need for reliable and verifiable information for consumers, as well as concerns that companies are not making meaningful progress towards reducing emissions by relying solely on carbon offsets. Carbon offsets are generated from reductions in greenhouse gas emissions, which may then be utilised by companies to compensate for greenhouse gas-emitting activities.
The proposed directive is part of the first circular economy package, along with the ecodesign regulation, construction products regulation and an own-initiative report on the EU strategy for sustainable and circular textiles. It paves the way for a new Green Claims Directive that will further specify the conditions for making environmental claims in the future.
The Carbon Offsetting proposal
Carbon pricing can play a role in guiding economies towards low-emission pathways, and has attracted greater attention recently, largely driven by developments at international level around carbon market frameworks, and by corporate net zero commitments. Around one third of the world’s largest publicly listed companies now have net zero targets.
Offsetting will likely play a part in many companies’ net zero journeys. This has brought into focus concerns around the integrity of offsets, many of which have been found to be outdated, of poor quality or hard to verify. Without strong methods of assurance, offsets could hamper efforts to decarbonise, and create reputational and other risks for businesses looking to rely on them.
As a result, along with proposals prohibiting planned obsolescence, the right to repair and false claims on product durability, the directive aims to ban environmental claims based solely on carbon offsetting schemes. “Carbon or climate neutrality” claims, as well as other targets and commitments, will be prohibited following a case-by-case assessment when they are based solely on carbon offsetting schemes or are not supported by clear, objective, quantified, science-based and verifiable commitments and targets given.
This proposal creates an obligation on companies to produce a detailed and realistic implementation plan to achieve any future environmental performance, backed by concrete targets, a “sufficient” budget, and resource allocation. Further, any claims should be supported by an independent monitoring system to monitor the progress of the implementation plan, the trader’s commitments and targets.
That being said, the directive does not aim to vilify carbon crediting or offsets. As part of a wider framework for companies to follow, the directive seeks to ensure they are not a product used to enable the avoidance of ‘meaningful’ climate action.
Offsetting opportunities (and risks)
With increased scrutiny and supervision of carbon neutrality claims and carbon offsetting, there is no need to wait to be prompted by the directive. It is worth spending some time now thinking about whether the directive captures claims made by your company. If so, meaningful measures could be considered now, to assess and monitor implementation plans. Resources such as the SBTi Corporate Net-Zero Standard may prove useful in prompting discussions relating to offsets.
Any plan that relies on offsetting solely will be prohibited by the directive as currently drafted – even if accompanied by a clear, objective and verifiable commitment. Offsets should therefore be considered to be an option for neutralising residual emissions, or to finance additional climate mitigation beyond an organisation’s science-based targets, but not a complete answer. For most companies, the SBTi expects residual emissions not to exceed 10%.
Guidance can also be found from projects like the Voluntary Carbon Markets Integrity (VCMI) Initiative’s Claims Code of Practice (to be published on 28 June 2023), the Integrity Council for the Voluntary Carbon Market’s (ICVCM) core carbon principles, and the report from the United Nations’ High‑Level Expert Group on the net zero emissions commitments of non-state entities. These suggestions can help companies make robust voluntary use of carbon credits as part of its near-term emissions reduction objectives and long-term net zero commitments.
Risks remain. In particular, the reputational and greenwashing risks stemming from some credits being perceived as lacking credibility or quality. Companies that buy and use low-integrity credits will need to take additional steps to manage them. Offsetting might also be portrayed as greenwashing by some when it’s prioritised over in-house emissions reductions. And given the growth of the carbon credits market, there is a delivery risk. That is, projects may generate fewer credits than expected, or supply of good credits becomes short. This could in turn undermine progress towards corporate targets. Carbon credit portfolios should be diversified and thoughtfully tailored to a company’s needs to take account of these risks.
The vote in Parliament follows the adoption by the EU Council. Negotiations on the new rules will now begin.