Greenwashing — making sustainability claims that are misleading, unsubstantiated, or impossible to verify — has moved from reputational risk to legal risk. Regulators across the EU, UK, Australia, and the United States have dramatically increased enforcement activity, and the legal frameworks underpinning that activity are getting stronger. Companies that have been making expansive sustainability claims without the data to back them up face a meaningful and growing exposure.
The EU Green Claims Directive
The EU Green Claims Directive, provisionally agreed in early 2024 and expected to enter national law across member states by 2026, represents the most comprehensive greenwashing regulation globally. Its core requirements are demanding:
- Environmental claims must be substantiated by scientific evidence and assessed against the full lifecycle of the product or service
- Generic claims such as "eco-friendly," "green," "climate neutral," or "sustainable" are prohibited unless backed by an approved EU ecolabel or equivalent third-party certification
- Carbon offset-based claims ("carbon neutral," "net zero via offsetting") face strict conditions — companies must demonstrate credible internal emissions reductions alongside offset use
- Claims must be verified by an accredited independent third party before being made public
Non-compliance can result in fines of up to 4% of annual turnover in the member state concerned. The Directive applies to all B2C claims and covers product, service, and corporate-level sustainability statements.
"The era of aspirational sustainability language without substantiation is ending. Regulators are not asking companies to be perfect — they are asking them to be accurate."
UK FCA: Sustainability Disclosure Requirements and Investment Labels
The UK Financial Conduct Authority's Sustainability Disclosure Requirements (SDR) regime came into force in 2024, introducing a labelling system for sustainable investment products and an anti-greenwashing rule that applies to all FCA-authorised firms. The anti-greenwashing rule requires that any sustainability-related claim made by an authorised firm must be:
- Consistent with the sustainability profile of the product or service
- Clear, fair, and not misleading
- Accurate and capable of being substantiated
The FCA has made clear it will take enforcement action against firms using sustainability claims in marketing that cannot be supported by the underlying investment strategy or product characteristics. This applies not only to fund labelling but to firm-level sustainability statements on websites, annual reports, and investor presentations.
ASIC Enforcement in Australia
The Australian Securities and Investments Commission has pursued several high-profile greenwashing enforcement actions, resulting in infringement notices, court proceedings, and significant penalties. ASIC's focus has been on superannuation funds and asset managers making claims about ESG integration or sustainable investment practices that are not reflected in actual portfolio construction and decision-making processes.
The key lesson from ASIC actions is that the gap between marketing language and operational practice is the primary risk area. Funds that describe rigorous ESG screening in their disclosure documents but apply minimal screens in practice face the greatest exposure.
What Defensible ESG Disclosure Looks Like
Across jurisdictions, the common thread in regulatory guidance is that defensible ESG disclosure is: specific, quantified where possible, methodology-transparent, and limited to what the organisation can substantiate. In practice this means:
- Replace vague language ("committed to sustainability") with specific, measurable statements ("reduced Scope 1 and 2 emissions by X% against a 20XX baseline")
- Disclose the methodology behind every quantitative claim — emissions inventory boundaries, calculation standards, data sources
- Where offsetting is used, disclose the type, vintage, standard, and registry of credits separately from operational reductions
- Align public claims with internal strategy documents, board-approved targets, and capital allocation decisions — regulators look for consistency across all corporate communications
- Obtain third-party assurance on key metrics before they are used in public-facing claims
The Internal Controls Implication
Greenwashing risk is ultimately a controls problem. Companies that have robust internal processes for verifying sustainability data, reviewing marketing claims against substantiation, and maintaining a clear audit trail between claims and evidence are in a fundamentally stronger position than those relying on good intentions and informal review. Finance teams — with their experience in controlled reporting processes — have an important role to play in bringing that rigour to ESG claims.