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Misleading Climate Advertising Causes EU Legal Liabilities, Ferrero Wins Nutella Lawsuit Over Ahold Delhaize

By Gabriel Thoumi, CFA, FRM. Originally published at ValueWalk.

As published by Chain Reaction Research, in June, Ferrero won an EU lawsuit in the Belgian National Court against Delhaize. Delhaize had run an advertising campaign stating that Nutella and other Ferrero products contained palm oil, regardless of Ferrero’s sustainable palm oil and Roundtable on Sustainable Palm Oil (RSPO) commitments. Since 2014, Ferrero has purchased only ‘segregated’ RSPO-certified palm oil. The term ‘segregated’ means that Ferrero’s palm oil supply chain is kept separate throughout the supply chain from any other palm oil. The court ruled that Delhaize’s campaign ran afoul EU law against misleading advertising.

sipa / Pixabay

Background – Palm Oil is Big Business

Palm oil is a staple of many consumer goods, biofuels, and plastic substitutes. It is found in about half of all packaged products purchased by Western consumers. Demand for palm oil has tripled over the past fifteen years. In 2016, global palm oil production was 58.3 million metric tons. Malaysia and Indonesia produced 85 percent of global supply. In 2016, palm oil production was a USD 65 billion market.

Oil palm trees yield about 4 to 5 metric tons of crude palm oil (CPO) and 0.5 metric tons of crude palm kernel oil (PKO) per hectare (ha) per year. Because oil palm production achieves a higher yield than other oilseeds, it is attractive for cultivation. This has made it the most actively traded vegetable oil globally.

At the same time, palm oil production is a key driver of both deforestation and peatlands clearance in Indonesia and Malaysia. These activities have major negative impacts including greenhouse gas emissions, public health risks, human rights violations, land grabbing, and result in irreversible biodiversity loss. Chain Reaction Research estimates suggest that at least ten percent of Indonesia’s land is under concession to palm oil estates which has resulted in about 3 percent of Indonesia’s oil palm estate to be potentially a stranded asset due supply and demand constraints associated with deforestation regulations by governments and voluntary commitments by corporations.

Voluntary Corporate Commitments

Companies have responded by working towards sustainable palm oil supply chains. Currently, according to Forest Trends, 277 companies globally have some type of public zero-deforestation commitment. In fact, the member companies of the The Consumer Goods Forum has made a voluntary commitment to achieve zero net deforestation by 2020.

Another example is the 2014 New York Declaration on Forests. In this declaration,  53 companies committed to “at least halve the rate of loss of natural forests globally by 2020 and strive to end natural forest loss by 2030” and “eliminat[e] deforestation from the production of agricultural commodities such as palm oil, soy, paper and beef products by no later than 2020”.

Standardizing Sustainability Terms Within Supply Chain Contracts

The Roundtable on Sustainable Palm Oil (RSPO) was established in 2004 with the objective of promoting the growth and use of sustainable oil palm products through credible global standards and engagement of stakeholders. 21 percent of global production of palm oil is RSPO-certified.

In 2017, RSPO-certified palm oil accounted for about 2.4 million ha (11.8 million metric tons), or 21 percent, of global palm oil production. RSPO has four certification systems. These are Identity Preserved, Segregated, Mass Balance, and Book & Claim.

There are also other palm oil sustainability certification mechanisms such as the International Sustainability & Carbon Certification (ISCC) system.

The key is RSPO-certified palm oil trades over-the-counter (OTC) with the term sheet used for the contract between corporate buyer and seller referencing the specific sustainability criteria of the underlying transacted palm oil asset.

The commitments that are written into conditions for term sheets place corporations at risk for not achieving their sustainability goals. For example, in June, Unilever suspended purchasing crude palm oil from Sawit Sumbermas Sarana (SSMS) because this supplier violated Unilever’s supply chain commitments. In Q1 2017, trade receivables to Unilever Oleochemicals Indonesia amounted to IDR 57.6 billion (USD 4.3 million) – a 41x increase over Q4 2016 trade receivables. With the suspension of this contract, SSMS lost a buyer that was equivalent to 8.4 percent of their 2016 revenue.

In summary, SSMS actions could have put Unilever at legal risk of their products subject claims of violating misleading advertising laws in the EU. This is because SSMS sold palm oil to Unilever whose origin may have violated Unilever’s Sustainable Palm Oil Sourcing Policy – 2016.

EU Legal Risks: Misleading Advertising Directive and UCPD

The EU has laws in place to prevent misleading advertisement by businesses. Companies making claims about their products’ main characteristics while supplying these products to consumers or traders in the EU should be aware that there is a legal risk if they do not comply with these claims. This could include environmental and sustainability claims.

ClientEarth’s April 2017 legal policy brief explains that, depending on the specific circumstances of the case, such companies could be held accountable under EU laws on misleading commercial practices.

In the EU, the Unfair Commercial Practices Directive (Directive 2005/29/EC) (UCPD) and the Misleading Advertising Directive (Directive 2006/114/EC) aim to protect consumers and traders against misleading advertising.

The UCPD prohibits misleading commercial practices that deceive or are likely to deceive the average consumer in relation to, among other things, the geographical origin of a product and are likely to influence consumers’ purchasing decisions. According to the UCPD, a company could violate the directive if its provides false information, presents information about a product that is deceptive, omits material information about a product, and/or fails to comply with a code of conduct by which the company has undertaken to be bound.

For example, in 2011, the Market Court of Helsinki upheld a claim by a Consumer Ombudsman that a trader took advantage of the retail public when it “advertised the sale of bags of sweets by stating that for each bag sold, it would plant one tree. However, the trader had already agreed to plant a certain number of trees, independently from the number of candy bags sold.”

According to a brief by ClientEarth:

“(UCPD) guidance provided by the European Commission specifies that clarity and accuracy of an environmental claim is key:

  1. Traders must present their environmental claims in a “specific, accurate and unambiguous manner”; and
  2. Traders must be able to substantiate their factual claims with scientific evidence and provide it in an understandable way if challenged.”

This means that if a trader that has described their product as being compliant with a self-regulatory code, it is important that the product actually is compliant with the self-regulatory code – such as the RSPO. Non-compliance with a code of conduct could constitute a breach of the UCPD where the related claims are not merely aspirational, but are firm and capable of being verified.

Finally, the UCPD states that certain practices are prohibited. These prohibited practices are relevant to voluntary commitments:

  1. Falsely claiming to be a signatory of a code of conduct (e.g. displaying that the company has signed up to a code of conduct relating to the product’s environmental credentials).
  2. Displaying a trust or quality mark without the necessary authorisation (e.g. the RSPO certification logo).
  3. Falsely claiming that a code of conduct has the endorsement of a public or other body.
  4. Claiming that the

    The post Misleading Climate Advertising Causes EU Legal Liabilities, Ferrero Wins Nutella Lawsuit Over Ahold Delhaize appeared first on ValueWalk.

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