Fifty shades of green

Companies and directors are on notice that regulators will come after them if they over-inflate the ESG credentials of their businesses or products.

The Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have both identified investigating greenwashing and taking enforcement action as key priorities for 2023.

The ACCC warned that it and other regulators “are concerned that some businesses are falsely promoting their environmental, green or sustainability credentials in response to consumer demands”.

ASIC warned last year that it was switching from educating executives and directors about greenwashing to enforcement. The regulator has issued one or more infringement notices to four different entities.

In December, it issued infringement notices to investment manager Vanguard Investments Australia because it was concerned that product disclosure statements for the Vanguard International Shares Select Exclusions Index Fund may have been liable to mislead the public by overstating an exclusion claimed to prevent investment in companies involved in significant tobacco sales. This is known as an “investment screen”.

The Vanguard Funds were structured to exclude certain investments in tobacco. However, while this screen applied to exclude manufacturers of cigarettes and other tobacco products, it did not exclude companies involved in the sale of tobacco products, ASIC alleged.

Vanguard paid a fine of $39,960, although this does not constitute an admission of liability.

Increasing penalties

ASIC deputy chair Sarah Court says the next step in enforcement could be to start instituting civil court proceedings and seek penalties “significantly in excess” of those in infringement notices.

Where a company makes an ESG claim they have to have evidence to substantiate that claim to the market, investors and consumers, says Court. “If you’re on a board that is using green credentials to do your marketing or promotion, my message would be that it’s very important for directors to ask what is sitting underneath that. What enables us to be making that representation?”

This is what led to the issuing of four infringement notices to listed energy company Tlou Energy last October. ASIC was concerned about alleged false or misleading sustainability-related statements made to the Australian Securities Exchange, including that it would be carbon-neutral and also had environmental approval and the capability to generate certain quantities of electricity from solar power.

“ASIC was concerned that Tlou either did not have a reasonable basis to make the representations, or that the representations were factually incorrect,” the regulator said in a statement regarding the infringement notices issued to the company. Tlou Energy paid $53,280 to comply with the notices, although these payments do not constitute an admission of liability.

ASIC takes a broad approach to greenwashing and will consider any ESG-related claims made by a company to entice people to buy their products or invest in their offerings, says Court. “We’re certainly not having any trouble having that referred to us. One of the interesting things about greenwashing claims is that a big source of the matters that are coming our way are from individual investors and consumers who are seeing things out in the market and are actively referring those kind of complaints through to us.”

With businesses competing with each other based on their environmental credentials, ASIC is also receiving referrals from companies concerned about what their competitors are doing.

Court says the regulator has seen a spectrum of greenwashing incidents — ranging from the deliberately misleading to the inadvertent issuing of inaccurate ESG claims — but these will still require a regulatory response. “If there was an issue of any inadvertent publication that’s made, somebody’s picked it up and it’s quickly been remedied and reissued appropriately, that’s not something we would take enormous issue with. If there is some kind of marketing-related careless disclosure, but it has significant prominence and has been aired in the marketplace for quite some time, and we’re getting reports that people have been relying on it, then we’ll take a stronger response.”

Personal liability

Directors can also face personal liability, which Court says is no different from the general directors’ duties — the extent to which they are doing what a reasonable director would do when faced with those circumstances.

“Is the board aware that these kinds of potentially misleading claims are being made? What’s being done about it? What questions are being asked? What reports are being asked to ensure that the representations and statements and claims that are being made publicly can be appropriately backed up and substantiated? It’s not a particularly complex calculation. Directors can deal with those things relatively succinctly.”

Terms that companies use to promote their ESG credentials can be vague — such as “green”, “sustainable”, “cruelty-free” — but Court says the definition of the word isn’t the central issue in greenwashing claims. Instead ASIC looks at the overall context in which a statement is made. How prominent is it? Is it appropriately qualified? Is the qualification done with an asterisk and in fine print on page 53 of the prospectus, for example?

Work is being carried out in Australia to prepare a sustainability taxonomy to define greenwashing terms. The EU introduced its sustainability taxonomy in July 2020.

Andrew Lumsden MAICD, an M&A and corporate governance partner at Corrs Chambers Westgarth, says a key factor in regulators’ determinations on greenwashing will be the “intensity of the promise”. Directors need to bear this in mind in their analysis of greenwashing risk.

“At one end of the spectrum, you’ve got people who are demonstrably selling an investment in the broader category of an ESG-compliant fund,” he says. “So that promise is very intense. Then you’ve got, at the other end, somebody who’s offering a financial service from a bank, where the promise is still there, but it’s probably not as strong as it is in terms of people's reliance on it for their investment decision.”

Lumsden says that for directors, doing what they can to ensure their organisation isn’t greenwashing draws on basic core director skills — bringing an inquiring mind to a topic, being observant and making sure executives are acting appropriately.

For instance, if a company claimed it was going to convert its entire fleet into electric cars in the next three years, the board would ask the executives how they plan to meet that ambition.

Lumsden says directors with good business sense would ask: “How are we going to moderate that statement if there’s a supply chain issue and we cannot get the number of cars that we need in time? Are we comfortable that the material we’re putting out has sufficient clarity that we can say, well, all other things being equal, and based on what we think about supply chain issues, can we get to that level?”

ASIC has published an information sheet for companies, How to avoid greenwashing when offering or promoting sustainability-related products.

While this information sheet relates to the finance sector, the guidance is of broader relevance to all corporates.

Communication processes

Emily Tranter, litigation and dispute resolution partner at Clayton Utz, says directors should be mindful that company communications are made across a range of channels, not just as formal disclosures or regulatory filings. This can include social media statements, which can involve abbreviating well-crafted company statements, and statements the directors themselves make in the public sphere. Boards need to ensure they have visibility over their organisation’s ESG claims and statements — and ensure there are processes in place to capture any statements that could potentially be misleading to investors or a wider audience.

“It’s about putting the processes in place to ensure that future communications are run through the appropriate channels, whether that’s through your compliance or legal department in conjunction with your technical experts who are making those particular net zero commitments, for example,” she says.

When considering ESG-related statements, directors need to consider whether they should issue a statement in the first place — or potentially not make the statement. “There may be a time and a place to hold back because there might not be reasonable grounds for making the statement,” says Tranter. “But within all of that, there is also always a continuing obligation to consider disclosing the company’s climate-related risks.”

It’s a point taken up by Court. “You don’t have to make green claims or ESG claims,” she says. “They’re made for a purpose and the purpose is to entice people to choose your product over other products.”

ACCC in action

The ACCC warns against vague or broad terms such as “green” or “sustainable”. “These words on their own have limited value for consumers,” the regulator said in a statement after declining an interview. “Whether a claim is misleading will depend on what an ordinary consumer will understand.”

Any business making environmental or sustainability claims must have valid and reliable evidence to back up the claim and the ACCC said it will ask to see their evidence if it has any concerns about greenwashing. “Where businesses announce aspirational goals in relation to meeting future environmental or sustainability targets, they need to have genuine measures in train going towards meeting these goals,” the regulator said.

Treasury is currently consulting on bringing in mandatory climate disclosure into Australia based on the ISSB sustainability and climate standards.

The ACCC flagged a number of active investigations in the packaging, consumer goods, food manufacturing and medical device sectors for alleged misleading environmental claims. Additionally, it is proactively reviewing environmental and sustainability claims in the retail clothing, electrical and whitegoods, energy, motor vehicle, packaging and household cleaning product sectors.

Access the free AICD greenwashing webinar here