On 10 May 2023, ASIC released a report summarising its greenwashing enforcement activity from 1 July 2022 to 31 March 2023. With 35 actions taken, including the commencement of its first legal proceedings, the takeway is clear: ASIC is ramping up its enforcement action and unsubstantiated ESG claims will be targeted.
The report serves as a reminder that organisations need to ensure that key messages regarding sustainability commitments and product or service offerings are evidence-based and subject to a robust due diligence process. With regulator and stakeholder scrutiny never higher, boards should be requiring management to undertake a stocktake of ESG claims in the market to ensure they are accurate and do not mislead.
This article highlights recent enforcement action and suggests some steps for directors. For those interested in hearing directly from the corporate regulator on its approach to greenwashing, ASIC Deputy Chair, Sarah Court will be speaking at the Climate Governance Forum, 11 August, Sydney and online (registration available here).
What is greenwashing?
Greenwashing refers to the practice of making misleading or deceptive environmental or sustainability claims. Whilst the ACCC regulates misleading conduct aimed at consumers, ASIC focuses on market conduct, primarily through investor communications and disclosures.
The making of misleading claims is prohibited under the Australian Consumer Law, Corporations Act and ASIC Act.
Claims will be misleading or deceptive if they induce or are capable of inducing the target audience into ‘error’, even where there is no intention to mislead or deceive. The test is objective and considers whether an ordinary and reasonable member of the relevant target audience would be led into error, having regard to the context in which the claims were made.
In the climate context, any future statements such as targets or net zero commitments, will be deemed misleading unless they are made on “reasonable grounds”. What that requires in the climate context is not yet settled, with differing views existing in the market and no direct legal precedent (see Herbert Smith Freehills legal advice commissioned by AICD here).
What is clear though is that climate commitments - such as net zero plans that are publicly communicated without a credible pathway to achievement - are likely to be deemed misleading and attract the ire of regulators.
Greenwashing - some questions for directors
Below is a non-exhaustive list of questions directors may wish to ask management:
- Has our organisation done a stocktake of our public climate and broader ESG claims? If so, how will we communicate any necessary revisions?
- For any net zero commitments made, do we have a credible pathway to get there and have we articulated key assumptions and uncertainties?
- How dependent is our transition plan on offsets or emerging technologies? Have we clearly set this out in our communications?
- How prepared is our organisation for mandatory climate reporting? What is the gap between our current reporting and anticipated requirements?
- To what extent can external assurance be obtained to support accurate climate reporting?
What conduct is ASIC focusing on?
ASIC’s report focused on the following forms of greenwashing:
- Net zero statements and targets which lacked a reasonable basis or were factually incorrect;
- Using broad terms such as ‘carbon neutral,’ ‘clean’ and ‘green’ in circumstances where there was a lack of reasonable grounds to support these claims;
- Using inaccurate or vague terms in the labelling of sustainability-related investment funds; and
- Overstating or inconsistently applying sustainability-related investment exclusions and screens.
The results highlight how the lack of an agreed sustainable finance taxonomy, including definitions of terms such as “net zero”, can contribute to greenwashing, with the Government announcing funding in the recent Budget to develop such a framework.
ASIC’s greenwashing enforcement record
ASIC’s surveillance activities in the period 1 July 2022 and 31 March 2023 included reviews of disclosure documents, product Disclosure Statement (PDSs), advertisements, websites and other market disclosures. Specific sectors targeted include managed funds and companies raising capital from retail investors.
According to ASIC analysis, over 400 companies referenced the terms “Carbon neutral” or “net zero” in price sensitive ASX announcements in 2022, whilst in 2019 this number was below 50.1
ASIC’s enforcement activities in the relevant period included:
- Issuing 11 infringement notices against 5 different entities (Tlou Energy Limited, Vanguard Investments Australia, Diversa Trustees Limited, Black Mountain Energy and Future Super)
- Requiring 14 responsible entities to amend their disclosure in 21 PDS documents;
- Requiring nine entities to amend their disclosure documents, company websites or market announcements; and
- Commencing ASIC’s first greenwashing civil penalty proceedings against Mercer Superannuation (Australia) Limited.
ASIC has indicated it will continue to focus surveillance and enforcement on the managed fund, corporate and superannuation sector. The Federal Budget also saw the regulator provided with dedicated funding to address greenwashing in FY24.
In parallel, the ACCC is also focused on greenwashing enforcement following a recent internet sweep examining the sustainability claims of 247 business across eight sectors which found that 57 per cent of all businesses surveyed made potentially greenwashing claims (see report).
What about private litigation?
Australian regulators more active enforcement posture has been coupled with an upswing in activist action on greenwashing. Outside of the US, Australia has the highest number of climate cases brought anywhere in the world.
Whilst traditionally climate litigation focused on opposing development approvals for fossil fuel projects, there has been recent shift towards greenwashing-related climate cases. The University of Melbourne’s Centre for Resources, Energy and Environmental Law’s Climate litigation (Corporate Accountability) database cites 36 cases or complaints in Australia on the topics of climate disclosure and consumer protection, with legal practitioners expecting that trend to increase.
How have companies responded to increased greenwashing litigation?
In response to increased activist and regulator action, there has been an emerging trend of companies not providing climate disclosures – a phenomenon sometimes referred to as ‘greenhushing.’ According to research by climate consultancy firm South Pole, up to 25% of the 1,200 companies it surveyed globally stated that they were not planning on publishing their science-based targets.
In Australia, there have been recent media reports that several large super funds have removed climate commitments and representations from their website, while we are aware of a number of companies doing a stocktake of their public ESG related statements and making revisions or removing them entirely.
So what’s next?
It is clear that greenwashing will remain a key priority area for regulators, and there is strong political interest in the topic. A Senate inquiry has recently commenced, with submissions due next month, and a final report by early December. The AICD is intending to make a submission.
Looking further ahead, greenwashing and legal risks will continue to be a key topic in the development of a mandatory climate reporting framework. With that regime likely to commence from July 2024 and be based on the International Sustainability Standards Board Standards expected to be finalised next month, entities will be expected to disclose far greater climate information than is current practice. These more granular disclosures include setting out transition plans and targets over the short, medium and long term, and detailing the impact (including quantitative impact) of climate risk and opportunities on entities’ cash flows, assets and liabilities, access to finance, cost of capital and resource allocation.
While the AICD accepts the need to lift current reporting and supports local adoption of global standards, we are concerned that if current liability settings remain unaltered, organisations will be exposed to significant litigation risk, thereby encouraging bare bones disclosure (see summary of AICD’s submission here, with the full submission here).
In our view, policy settings should prioritise regulator enforcement and incentivise high quality, comprehensive reporting, while recognising the inherent uncertainties of climate disclosure. The AICD supports strong regulator action to tackle clear greenwashing as key to driving higher standards. A positive policy outcome is one in which good market participants which disclose on a best endeavours basis are not subject to undue litigation risk, while those that fail to take their obligations seriously face major legal and reputational costs.
We are continuing to engage with the government to support the rollout of the climate reporting regime and will update members on key developments.
1 Statistics referred to by ASIC Deputy Chair Karen Chester in her speech at the RI Australia 2023 Annual Conference on 10 May 2023.
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