Key Takeaways
- EU Member States must transpose Directive 2024/825 by 27 March 2026 and apply its anti-greenwashing prohibitions from 27 September 2026.
- Claims of "carbon neutral" or "climate neutral" based solely on carbon offsets are banned under the new rules.
- ESMA's June 2024 final report found that 14% of UCITS funds used ESG-related terms in their names, up from 3% in 2013, raising consistency and greenwashing concerns.
- Incomplete or selective CSRD disclosures create greenwashing exposure even when the omitted information was not deliberately misleading.
What is Greenwashing?
Greenwashing takes two forms in audit and assurance practice. The first is consumer-facing: a company makes environmental claims (on packaging, in advertising, in annual reports) that are false, vague, or unverifiable. Directive 2024/825 targets this form by amending the Unfair Commercial Practices Directive to prohibit generic environmental claims such as "eco-friendly" or "green" unless backed by recognised certification, and by banning carbon-neutrality claims based on offsetting alone. Member States must transpose these rules into national law by 27 March 2026, with enforcement beginning 27 September 2026.
The second form is disclosure-related. Under the CSRD, in-scope entities publish sustainability statements prepared under the ESRS. If an entity cherry-picks favourable datapoints while omitting material adverse information, the resulting statement is misleading regardless of intent. ESRS 1.37–58 requires a double materiality assessment that captures both positive and negative sustainability impacts. An assurance provider evaluating the statement under ISAE 3000 (Revised) or (from December 2026) ISSA 5000 must consider whether the scope of disclosures is complete and whether the presentation is balanced. ESMA's June 2024 final greenwashing report warned that Omnibus-related scope reductions could increase greenwashing risk from voluntary reporters who disclose selectively without the discipline of mandatory datapoints.
Worked example: Bergstrom Skog AB
Client: Swedish forestry and paper company, FY2025, revenue EUR 75M, IFRS reporter, first-time CSRD reporter. Bergstrom markets its packaging products as "100% sustainable" and claims carbon neutrality on its corporate website.
Step 1 — Assess consumer-facing claims against Directive 2024/825
The audit team identifies two environmental claims in Bergstrom's marketing materials. The "100% sustainable" claim is a generic environmental assertion with no recognised certification backing it. The "carbon neutral" claim relies on purchased voluntary carbon offsets covering 18,000 tonnes of CO₂e, with no disclosed reduction in Bergstrom's own Scope 1 and Scope 2 emissions of 22,400 tonnes.
Step 2 — Evaluate the CSRD sustainability statement for completeness
Bergstrom's sustainability statement reports its reforestation programme and water stewardship targets under ESRS E1 and E3. The statement omits disclosure of biodiversity impacts from clear-cutting operations, despite the IRO assessment identifying biodiversity loss (ESRS E4) as impact-material. The assurance team flags this omission.
Step 3 — Quantify the greenwashing risk for the assurance engagement
The omitted biodiversity disclosure and the unsupported carbon-neutrality claim together create a risk that the sustainability statement is materially misstated through incompleteness and that the entity's public communications contradict the factual position. The engagement partner escalates both findings. Bergstrom's management agrees to remove the carbon-neutrality claim, add ESRS E4 biodiversity disclosures, and restate the website language before the report is filed.
Conclusion: The assurance engagement is defensible because the team identified both the consumer-facing and disclosure-related greenwashing risks, traced them to specific regulatory requirements, and obtained management's commitment to correct the statement before issuance.
Why it matters in practice
ESMA's June 2024 final report on greenwashing found that national competent authorities detected only a limited number of greenwashing occurrences, attributing this to low signal volume, resource constraints, and difficulty accessing quality data. The implication for audit firms is that regulatory detection is still maturing; firms that treat the absence of enforcement action as evidence of low risk misjudge the trajectory.
Assurance providers sometimes limit their procedures to the sustainability statement itself without considering whether the entity's public communications (website, marketing materials, investor presentations) contradict the reported position. ISAE 3000 (Revised) paragraph 46 requires the practitioner to consider other information that may be relevant to the engagement. A sustainability statement that reports high emissions alongside a marketing campaign claiming carbon neutrality is internally inconsistent, and the assurance provider who ignores the marketing materials leaves that inconsistency unaddressed.
Greenwashing vs. selective disclosure
| Dimension | Greenwashing (affirmative misrepresentation) | Selective disclosure (omission) |
|---|---|---|
| Nature | The entity makes a claim that is false, vague, or unsubstantiated | The entity omits material adverse information while reporting favourable data |
| Regulatory hook | Directive 2024/825 (consumer protection); national transposition laws | ESRS 1 paragraphs 37–58 (completeness of double materiality assessment); ESRS 2 IRO-2 |
| Intent | May be deliberate or negligent | Often unintentional but still results in a misleading sustainability statement |
| Assurance response | Evaluate external communications against disclosed data; flag contradictions | Compare the IRO assessment to the final statement; identify unreported material topics |
| Consequence | Consumer protection enforcement, reputational damage, potential modification of the assurance opinion | Scope limitation or qualified conclusion in the assurance engagement |
Both forms create the same outcome for stakeholders: a misleading picture of the entity's sustainability performance. The assurance provider must test for both, because an entity that avoids affirmative misrepresentation but omits half its material impacts is no more transparent than one that makes false claims.
Related terms
Frequently asked questions
When does the EU ban on carbon-neutral claims take effect?
Directive 2024/825 requires Member States to transpose the ban into national law by 27 March 2026. The prohibitions apply from 27 September 2026. After that date, claims of carbon neutrality, climate neutrality, or equivalent terms based on greenhouse gas emission offsets rather than actual reductions in the value chain are prohibited commercial practices under the amended Unfair Commercial Practices Directive.
Does greenwashing affect the auditor's report on the financial statements?
Not directly, but ISA 720.14 requires the financial statement auditor to read other information (including the management report) and consider whether a material inconsistency exists between that information and the financial statements. If the sustainability statement contains misleading claims that contradict the financial position (for example, overstating the value of carbon credits recognised as assets), the auditor must respond under ISA 720.
How does greenwashing relate to the EU Taxonomy?
An entity that reports a taxonomy-aligned activity without completing the DNSH assessment or the minimum safeguards check overstates its environmental credentials. Regulation 2020/852 Article 3 requires all three conditions (substantial contribution, DNSH, minimum safeguards) to be met before an activity qualifies as aligned. Reporting partial compliance as full alignment is a form of disclosure greenwashing.