December 19, 2024

By Colleen Kaiser & Caelan Welch

Canadians should be able to buy products and services such as cleaning products, trips or dining out and trust that their claims of sustainability are true. Greenwashing — the practice of making false claims about the environmental benefits of a product, service or organization — has become a widespread issue as consumers and investors prioritize sustainability.

In response to growing concerns about greenwashing, the Canadian Competition Bureau made key changes to the Competition Act in June to curb deceptive environmental claims. Greenwashing has no official definition, so to avoid being accused of greenwashing, some companies, including many of Canada’s largest oil and gas companies, took down their public statements about climate change. The practice, which has come to be known as “greenhushing”, is an unintended effect of vague greenwashing regulations. It underscores the need to better define greenwashing.

Just months later, in October, the Federal Finance Minister unveiled plans to develop a Canadian sustainable finance taxonomy. This is a framework to classify and define economic activities that help mitigate climate change, like installing electric vehicle charging infrastructure, retrofitting existing buildings or restoring wetlands to their original state.

At first, these two developments might seem separate, but they have important connections. This blog explores these links and explains how a Canadian sustainable finance taxonomy could make anti-greenwashing enforcement more transparent, efficient and impactful.

The rise of greenwashing

Businesses are under pressure to show their sustainability credentials. Unfortunately, not all claims are genuine. Vague labels like “eco-friendly” or “green” often lack evidence that supports them, leaving consumers vulnerable to deceptive marketing practices. This not only undermines consumer trust but also disadvantages companies that are genuinely pursuing more sustainable practices and often face higher costs for doing so.^[i]

Greenwashing is not merely an ethical issue — it’s a legal one. Misleading claims can violate Canada’s Competition Act, which prohibits deceptive marketing practices. However, enforcement has been challenging due to the lack of clear standards defining sustainable practices. This gap has allowed some companies to operate in a regulatory gray zone.

The role of a sustainable finance taxonomy

The introduction of a sustainable finance taxonomy by the Canadian government would mark a turning point. Canada’s pending taxonomy would provide a standardized framework that describes when an economic activity is contributing to reducing GHG emissions. For example, the taxonomy is expected to define ‘green’ and ‘transition’ activities that contribute to climate change mitigation. Under this approach, an activity could qualify as contributing to climate change mitigation because (a) it is  a low- or zero-emission activity such as wind power generation, or (b) is a measure that leads to emissions reductions of another activity such as electrifying a steel plant. By defining the activities that will help us achieve our climate-related sustainability goals, the taxonomy would reduce uncertainty, enabling businesses to make verifiable claims and regulators to hold them accountable.

Integrating the taxonomy into the Competition Act would reduce the cost of compliance for companies and make it easier for them to access capital from sustainability minded investors around the world.  The Canadian Competition Bureau would benefit from easier enforcement of anti-greenwashing practices.

Clarity reduces the cost of compliance for corporations and combats greenhushing:

A taxonomy provides performance criteria against which companies can validate their climate-related sustainability claims. For example, a company producing aluminum could assess how well its manufacturing process meets taxonomy criteria for emissions performance. Meeting these criteria would allow the company to prove its sustainability claims with clarity and credibility, encouraging companies to disclose their climate-related performance without fear of being accused of overstating claims.

Increased transparency and building consumer trust:

A taxonomy improves transparency and better protects consumers from misleading marketing because companies must substantiate their climate-related claims according to well-defined and publicly available criteria. When consumers see that products or services meet taxonomy-based criteria, it fosters trust in the claims being made. Trustworthy information reduces skepticism and empowers consumers to support genuinely climate-friendly options, driving real impact.

Enhancing financial product transparency and easing access to capital:

Financial institutions developing climate-friendly labelled products could use a taxonomy to guide the selection of eligible investments. They could then show investors the proportion of their investments that are aligned with the taxonomy criteria, increasing investor confidence in the product’s environmental integrity. This clarity attracts more green capital by ensuring that investments genuinely support climate-related objectives, reducing uncertainty for investors and fund managers, while accelerating the transition to a low-carbon economy.

Reducing enforcement costs and streamlining adjudication:

The recent changes to the Competition Act are expected to increase the number of claims that the Bureau will need to judge.^[ii] Aligning greenwashing enforcement with a Canadian sustainable finance taxonomy would help the Competition Bureau enforce its rules more efficiently. By offering a standardized reference point, a taxonomy simplifies the adjudication of greenwashing cases.^[iii] This efficiency reduces regulatory burden and enhances the Competition Bureau’s ability to enforce the law effectively. ^[iv] 

Next steps

To capitalize on these benefits, SPI recommends the Competition Bureau incorporate and align its greenwashing enforcement strategy with the Canadian sustainable investment taxonomy, once it becomes available. By adopting a standardized framework, the Bureau can more efficiently validate claims, impose penalties and deter future violations. This approach not only ensures fairness but also fosters innovation by rewarding companies that genuinely invest in sustainable practices. While the taxonomy is a vital tool, its success will depend on effective implementation and collaboration between the government, businesses and civil society. Clear guidelines, regular updates and stakeholder engagement will be critical to its credibility and influence. For maximum impact, Canada’s taxonomy must align with global standards, focus on measurable sustainability outcomes and be publicly accessible. A well-designed framework will not only support enforcement but also enhance market credibility, ensuring that sustainability claims are meaningful and verifiable.

These measures represent a significant step in advancing an efficient and transparent sustainable finance market. They leave Canada in a better position to achieve its environmental and economic goals, and help Canadians shop with confidence.