Businesses urged to be on guard for greenwashing as government cracks down
Investors, consumers, stakeholders and regulators are increasingly interested in how businesses are addressing climate-related risk. Consequently, many businesses are adopting more pro-climate policies as part of their environmental, social and governance (ESG) efforts. With the push to be seen to be doing more in the ‘green’ space, comes the risk of gilding the lily – or ‘greenwashing’.
Greenwashing is the practice of misrepresenting the extent to which a product or service is environmentally friendly, sustainable or ethical.
Businesses need to be aware of potential greenwashing, especially when it comes to net zero commitments, climate policies and ESG targets, law firms have warned. Making statements in relation to these without having a proper understanding of the scope of the statement or without being able to substantiate those statements with documentation and action that reflects what is being communicated, opens the business up to allegations of greenwashing – and to legal action.
Litigation on the rise
Greenwashing is a growing concern among stakeholders, and climate-related ligation by shareholders is on the rise, both globally and locally. One of the most prominent ligation cases involves an energy company. The Australasian Centre for Corporate Responsibility (ACCR) launched the case in the Federal Court in August 2021 saying the company’s claims that natural gas provides “clean energy” and that it has a “credible and clear plan” to achieve net zero emissions by 2040 constitute misleading or deceptive conduct under the Corporations Act 2001 and the Australian Consumer Law.
The ACCR expanded its allegations in 2022 to include comments made by the energy company during an investor day briefing and in its 2021 Climate Change Report. The ACCR says the case (which is ongoing) is the first of its kind in the world to challenge the veracity of a company’s net zero emissions target. ACCR executive director Brynn O’Brien is reported to have said: “Investors have an expectation of accurate information going into the market, investors are making billion-dollar investments in companies on the basis of the information they put out. So optimism is one thing, but misleading the market is another.”
In the Climate Change Litigation paper, the Law Society of New South Wales wrote that the lawsuit against the energy giant was a test of the litigation risk arising from net zero commitments: “There are signs that greenwashing claims will continue in coming years in Australia, and focus on individual directors as well as corporate entities.”
Government takes action
The government has also increased regulatory scrutiny and prosecutions. The Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have said they are getting tough on greenwashing.
The Australian Financial Review reported (June 2023) that companies “overreaching” on their sustainability claims are the biggest cause of greenwashing in corporate Australia according to the regulators, as they warned of a crackdown on this misconduct.
ACCC deputy chair Catriona Lowe said the most common cause of concern was “overreach”, with companies and brands effectively “doing 5% but claiming 95%” on environmental claims.
ASIC chairman Joe Longo told the paper there were four key areas in which companies fell foul of greenwashing laws: the “overstatement or inconsistent application of sustainability-related investment screens”; making “net zero statements and targets without a reasonable basis or that are factually incorrect”; using “terms like ‘carbon-neutral’, ‘clean’ or ‘green’, that aren’t founded on reasonable grounds”; and using “inaccurate labelling or vague terms in sustainability-related funds”.
Both watchdogs have investigations into greenwashing actions as enforcement on the issue builds.
ASIC has made it clear it is keeping a close eye on the climate change commitments being made by corporate Australia. In a speech to the Committee for Economic Development of Australia (August 2022), Mr Longo said: “There has been a proliferation of investment products and companies appealing to consumers with sustainable or ‘green’ investments and ‘net zero’ emission promises. If you make net zero claims, you must have substance behind those claims. Aspiration on its own is not enough – the bar is set much higher. We want to ensure that firms moving towards net zero do so with integrity – fostering trust and practising transparency.”
ASIC said it has issued more than $150,000 worth of infringement notices for instances of greenwashing since October 2022. In the nine months to March 2023, ASIC had investigated 122 companies for greenwashing and issued 11 infringement notices and agreed on 23 corrective actions. In one case, a superannuation fund was fined more than $13,000 after ASIC alleged a Facebook post the fund made overstated its positive environmental impact. ASIC deputy chair Sarah Court said the action should send a message that ASIC is continuing to “focus on greenwashing broadly, in statements to the market, disclosure documents, marketing material and on social media. We expect the industry to be able to stand by their sustainability statements and back these up with evidence”.
The corporate regulator also lodged its first court action in respect to greenwashing in February 2023 when it launched civil penalty proceedings against a superannuation fund for allegedly making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.
In October/November 2022, the ACCC conducted an internet sweep which found 57% of the businesses reviewed made concerning claims about their environmental or sustainability practices. The consumer watchdog said it would be investigating a number of businesses for potential greenwashing. Ms Lowe said the sweep indicated a significant proportion of businesses were making vague or unclear environmental claims, which “warrants further scrutiny”. Several active investigations were underway across the packaging, consumer goods, food manufacturing and medical devices sectors for alleged misleading environmental claims and the number may grow as the ACCC continued to conduct more targeted assessments into businesses and claims identified through the sweep. “We will take enforcement action where it is appropriate to do so as it is critical that consumer trust in green claims is not undermined,” said Ms Lowe.
The Australian Government has also stated its intention to introduce mandatory sustainability and ESG reporting requirements for large Australian entities. This will further increase scrutiny on climate claims and may lead to further prosecutions for greenwashing.
What it means for D&Os and businesses
With the increasing focus on ESG, businesses may be at risk of greenwashing. As a result, directors and officers (D&Os), and management too, need to be mindful of pledges and representations made in respect to climate change policies, solutions and products.
One of the common greenwashing pitfalls businesses make is when they set ambitious and publicly-stated ESG goals without a credible or robust plan to achieve them. To avoid this pitfall, businesses must back up their commitments with a clear action plan supported by reliable data to track their ESG performance.
In a speech to the Australian Institute of Company Directors (March 2023), Mr Longo spoke about directors’ duties and specifically mentioned greenwashing or sustainability-related disclosures. He emphasised the significance of implementing reliable disclosure practices to maintain a well-functioning market. “Consumers and investors should be able to make informed decisions with trust and confidence”, he said. “We are now taking enforcement action where we see disclosures fall short and where misleading sustainability claims are made by the entities we regulate.”
With a spotlight shining on ESG claims, it is paramount for companies to be truthful about their climate change goals and progress, and not be misleading the public or shareholders.
Increasingly, D&Os, together with their businesses, risk legal and/or disciplinary action if they engage in, or allow, greenwashing.
Impact on insurance
It is a risk by which insurers are also increasingly concerned. With the rise of litigation and regulatory activity relating to ESG issues, companies face increased potential ESG-related legal exposures. Many businesses will seek insurance cover against these risks in the form of liability policies such as D&O, management liability or statutory liability.
As a result, insurers are applying greater scrutiny on a company’s green credentials and ESG activities. When it comes to underwriting, a client’s ESG maturity and their plans for achieving disclosure targets will factor into the decision whether to take on the risk.
Incorporating ESG into insurance proposals
As the relevance of ESG heightens, businesses will need to provide good quality, detailed and up-to-date information to insurers (at initiation and on renewal). Work with your EBM Account Manager to build a compelling ESG narrative – one that provides insurers with information about your business’ ESG policies and frameworks, but also illustrates how the business is meeting its obligations to consumers, shareholders, regulators and other stakeholders by communicating factual information about its goals and progress.
