The ruling was made in a case brought against German confectionery manufacturer Katjes by an association that aims to tackle unfair business practices.
It centred on an advert that appeared in a trade publication for the food industry, which stated that "since 2021, Katjes has been producing all products in a climate-neutral fashion".
It included a picture of a packet of fruit gums with a "climate neutral" logo and the website address of a partner firm that helps companies in reducing their greenhouse gas emissions.
The ruling found the production of the sweets was not carbon-neutral however -- rather, the confectionery manufacturer supported environmental protection projects to offset emissions through its partner.
Two lower courts had dismissed the case but the Federal Court of Justice (BGH) ruled in favour of the association, the Centre for Combatting Unfair Competition.
"In the case of advertising that uses an ambiguous environmental term such as 'climate neutral', the specific meaning must be explained in the advertising itself in order to avoid misleading the public," the court said in its decision.
The risks of misleading were "particularly high" in environment-related advertising, it said, adding that labels such as "climate neutral" were important for consumers when making purchasing decisions.
When it came to the Katjes advert, it was vital to explain the claim as directly reducing emissions is considered more important for climate protection than offsetting them, the court found.
Katjes must stop using the misleading advert and reimburse legal costs, the court ruled.
The European Union is already taking steps to crack down on greenwashing when it comes to labelling of products sold in the bloc.
Earlier this month, member states agreed on a draft of new rules laying out that environmental claims will have to be verified using strict criteria. The legislation will now have to be finalised in the European Parliament.
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