Regulators join forces to fight greenwashing in 2022
Net zero commitments and greenwashing
Many companies around the world have voluntarily committed themselves to reaching net zero emissions by a certain target date. Companies are making these commitments publicly, for example, in their annual reports and sustainability policies, in speeches by company CEOs and CFOs at conferences like COP26, and as part of their marketing strategies. These claims are matters on which some companies are choosing to differentiate themselves.
Pressure to act quickly and ambitiously and, in some cases, to be seen to have done so to obtain a competitive advantage, have triggered issues of "greenwashing". There is also concern over a potential increase in inaccurate climate-related statements and disclosures, including flawed climate scenario analysis and "net zero" commitments that could be misleading or made without a reasonable basis.
What's a greenwash?
When a company creates a misleading impression about its net zero ambitions, carbon neutrality or other green credentials, it is engaging in "greenwashing": the act of applying a "green" gloss to capitalise on the growing demand for environmentally friendly corporate conduct.
Importantly, making a "green" commitment or claim without a proper basis can breach the Australian Consumer Law (ACL), specifically the prohibitions against:
- engaging in misleading or deceptive conduct in trade or commerce; and / or
- making false or misleading representations about specific aspects of goods and services.
In relation to misleading or deceptive conduct, it is not necessary to prove that the conduct (which includes an act, omission, statement or silence) actually led any person into error. The breach is established if the conduct is only likely to mislead or deceive, ie. is capable of inducing error. Claims or statements about future matters will be misleading if there are no reasonable grounds for making a claim at the time it was made; statements about future matters need to be grounded in fact.
In relation to the prohibition against false or misleading representations, businesses must not falsely represent that their goods or services are of a particular standard, quality, value, grade, composition, style or model or having a particular history or previous use. This has particular relevance to advertising or labelling about recycled or recyclable products or the environmental impact of products. Businesses are also prohibited from representing that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits that they do not have.
It is now widely accepted that directors who fail to consider whether or not climate change poses a material risk to their company and its operations are not discharging their duties and exercising their powers with the degree of care and diligence required pursuant to the Corporations Act. This focuses on the effect of climate change on the company.
It is also possible that directors who fail to consider the impact their company's operations have on accelerating climate change and fail to take steps to minimise those impacts may expose the company to risks, including reputational and future funding risks, and therefore not discharge their duties.
What the Regulators are doing about greenwashing
In March this year, Australian Securities & Investments Commission (ASIC) and the ACCC indicated that they will be taking action against all forms of greenwashing as a priority in the upcoming years, and working closely together with the Clean Energy Regulator because many of the companies they are looking to target operate across a range of regulatory regimes.
ASIC is also working closely with the International Sustainability Standards Board (ISSB), an internal standard-setting board unveiled at COP26, to develop a new framework to guide green financing in 2022.
Outgoing ACCC chairman Rod Sims put the manufacturing and energy sectors on notice that they would be a particular focus for the ACCC:
"‘Greenwashing’ is a concern for both consumers and businesses. Consumers are often unable to determine the veracity of a product’s green credentials, reducing their confidence in the market. And businesses incurring the costs of genuine environmentally friendly manufacturing processes face unfair competition from those businesses making misleading green claims without incurring the same costs.
The ACCC’s focus on environmental claims and sustainability won’t be limited to consumer goods."
Importantly, the incoming Chair of the ACCC, Gina Cass-Gottlieb, has indicated that she is also committed to pursuing the conduct. She has said that "greenwashing and fabrications about carbon neutrality create unfair advantages" for companies that engage in such conduct.
ASIC is currently undertaking a review of greenwashing in the funds management space to establish whether the practices of funds are as green or ESG-focused as they claim. Its recent review of climate risk disclosures by large listed companies revealed improved standards of disclosure, and more companies adopting the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. Furthermore, businesses are increasingly opting for sustainability-linked loans or green bonds with key performance indicators requiring reduction of greenhouse gas emissions in order to progress their sustainability goals and respond to the concerns of conscientious consumers and investors.
There are very real risks for those that get it wrong. Serious litigation risk attaches to greenwashing or carbon neutrality and other ESG-related claims, particularly with the rising trend of stakeholder activism. For example, in late August 2021, the Australasian Centre for Corporate Responsibility commenced legal action against Santos Limited in the Federal Court of Australia alleging it is engaging in misleading or deceptive conduct by claiming in its 2020 annual report that natural gas provides “clean energy” and that it has a “clear and credible” road map to reach net zero emissions by 2040 for its Scope 1 and 2 greenhouse gas emissions due to reliance on carbon capture storage technology.
What you need to do
There is growing global pressure for mandatory disclosure regimes. On 21 March 2022, the US corporate regulator released the draft rule by the US Securities and Exchange Commission mandating the disclosure of climate risk and scope 1 to 3 emissions by listed companies in their financial statements. There is the potential for such scrutiny to reach Australian shores if it is perceived that companies are not doing the right thing.
To avoid the scrutiny of regulators, shareholders, and interested parties affected by claims made, companies need to ensure that:
- any statements concerning environmental commitments have reasonable grounds, including credible and up-to-date scientific data and technologies;
- targets or green credentials are not over-embellished and are realistic and substantiated; and
- commitments and representations are subject to ongoing evaluation to ensure they are achievable and consistent with the latest scientific data and stakeholder (including regulator) expectations.
A General Safety Provision for Australia?
In its 2018 and 2019 product safety priorities, the ACCC expressed its intention to progress the development of a General Safety Provision under the Australian Consumer Law (ACL), after consideration of potential reform proposed by a Consumer Affairs Australia and New Zealand report. Though the notion of a General Safety Provision has ostensibly taken a backseat in more recent times, former Chairman Rod Sims used his final speech as Chairman of the ACCC to renew calls for the inclusion of protections in the ACL against "unfair practices" including the supply of "unsafe goods".
What is a General Safety Provision?
While Mr Sims did not provide specifics, we understand that a "General Safety Provision" would be inserted into the ACL and would require manufacturers to ensure the safety of a product before it enters the market. This may include an approach to compliance by reference to relevant product standards to test the safety of the products. Any breach would likely attract a penalty.
In its current form, the ACL does not impose an obligation on manufacturers to ensure that goods are safe or to ensure that they comply with consumer guarantees (such as the guarantee that consumer goods be of acceptable quality). Instead, the ACL enables the ACCC to take reactive steps in relation to product safety, for example:
- providing the ACCC with oversight over product recalls that are initiated voluntarily by businesses under section 128, and in rare cases mandating that a recall be initiated or done in a particular way;
- issuing a notice prohibiting the further supply of particular goods pursuant to Part 3-3, Division 2;
- reviewing injury reports relating to consumer goods which submitted to the ACCC as required by section 131; and
- prohibiting false, misleading or deceptive conduct in relation to representations made about the safety of consumer goods.
If a general safety provision were introduced into the ACL, it would mean that a supplier who sold an "unsafe" product could be subject to enforcement action by the ACCC, rather than the ACCC having to first take steps to prevent or prohibit the continued sale of the product.
It is not clear that a general safety would drastically change the existing regulatory landscape in Australia. The ACL already gives the government power to declare safety standards for risky goods and the ACL prohibits the supply of goods otherwise than in accordance with those safety standards. Furthermore, the ACCC has previously used the prohibition on false or misleading conduct to obtain civil penalties against retailers who sold unsafe products, arguing that each time a retailer offers a product for sale they make an implied representation that it is safe. The ACL also provides private rights to sue for damages if the normative standards in the ACL, for example the consumer guarantees or the prohibition on misleading or deceptive conduct, are breached.
Many of the remedies available do not require proof of fault. For example, whether the consumer guarantee of acceptable quality is breached depends on the characteristics of the product in question, not on the conduct or intention of its supplier.
What a General Safety Provision would look like
It remains unclear what a General Safety Provision under the ACL would look like in practice, and much of the detail will be decided by the drafting of the provision and its subsequent interpretation. The EU experience has shown that a number of factors will need to be considered by the Federal Government as part of any legislative reform, whether the obligation should be a positive or negative one (ie. to supply safe products or not supply unsafe products), who is bound by the obligation (eg. only manufacturers and importers), the definition of "safe"/"unsafe", whether compliance with international standards would be involved, whether any monitoring obligations post-supply would be imposed and what defences might be available for a breach of such a provision.
Currently, the ACL does not contain a specific obligation that prohibits the supply of non-conforming or unsafe goods, but rather provides the ACCC with reactive steps for when a product safety issue arises in a product already in the market. Mr Sims' renewed calls for a General Safety Provision is unsurprising and consistent with the ACCC's intentions to expand its regulatory activities and oversight in respect of product safety matters. However, the uncertainty of how this provision would work in practice currently poses more questions than it answers.
Automotive class actions: where to from here?
Thirty years ago, the federal class actions regime was introduced to enhance access to justice, resolve disputes more efficiently, and avoid respondents facing multiple individual proceedings with the potential for inconsistent findings across those proceedings. It was also intended to reduce the costs for both the parties and the courts. Similar objectives were cited on the subsequent introductions of the regimes in Victoria, New South Wales, Queensland and Tasmania. Western Australia is poised to follow.
Fast forward 30 years and most people with experience of class actions agree that the regimes have largely met these objectives. Class actions have undeniably provided practical access to justice for a large number of claimants with a wide range of claims, many of whom would not have been able to bring individual claims before the courts.
However, the regimes are not perfect. In our recent article we explored aspects of the class action regimes that we think should be reformed to increase efficiencies and improve certainty for defendants in product liability claims in particular.
In our next edition, we will explore recent issues in automotive class actions. Please let us know if there are any particular trends or events that you would like us to consider.
Transitional period under the RVSA extended to 30 June 2023
On 1 July 2021, the Road Vehicle Standards Act 2018 (Cth) (RVSA) and the Road Vehicle Standards Rules 2019 replaced the Motor Vehicle Standards Act 1989 (Cth) (MVSA), bringing with them a range of new homologation, vehicle safety recall and other processes for OEMs and vehicle distributors to familiarise themselves (and comply!) with. As an acknowledgment of the significance of these changes and the new integrated online Road Vehicle Regulator system ("ROVER"), a 12 month "transitional period" was built into the legislation. In some good news for OEMs and vehicle distributors, the transitional period has now been extended a further 12 months, so that the existing transitional arrangements that allow some approval holders to continue operating under existing approvals will remain in place until 30 June 2023. More details about the transitional period are available here.
Automotive sector still within ACCC's crosshairs
The automotive sector remains high on the ACCC’s priority list following the announcement of the ACCC's compliance and enforcement priorities for 2022-23.
What does a priority mean?
As we have previously explained, each year the ACCC identifies industries and categories of conduct which it proposes to monitor particularly closely and where it will likely take enforcement actions over the coming 12 months. The ACCC will generally take enforcement action over specific conduct if:
- it is of significant public interest or concern;
- it results in substantial consumer or small business detriment;
- it is engaged in by large / national traders with an increased likelihood of greater consumer detriment and influence over other market participants;
- it involves a significant new or emerging market issue or where ACCC action is likely to have an educative or deterrent effect; and/or
- taking enforcement action will assist to clarify the law.
2022 compliance and enforcement issues of particular relevance to the automotive sector
Environmental and sustainability claims
Reflecting consumers' increasing consciousness of the environmental impact of the products and services they buy, the ACCC is hearing growing concerns that some businesses are falsely promoting environmental credentials to capitalise on changing consumer preferences, in a practice known as "greenwashing". The ACCC has indicated that this practice may be misleading to consumers and unfair to businesses whose claims are legitimate.
In response to this growing issue, the ACCC will monitor environmental claims across a range of markets including consumer goods, and the manufacturing and energy sectors, particularly noting misleading claims about the carbon neutrality of production processes. It has flagged it will work closely with other related regulators and take action where businesses have engaged in false, misleading or deceptive conduct.
What you should do: Importers and national sales companies should evaluate any claims being made in their promotional material, including on their websites and other advertising to ensure that any claims about your brands' environmental sustainability can be sustained.
Consumer guarantees for high-value goods
The ACCC has previously indicated its concerns over the application of the consumer guarantees in the supply of motor vehicles and caravans.
Its review of the automotive sector revealed non-compliance with consumer guarantees under the Australian Consumer Law (ACL) as the most reported issue, and it's unsurprisingly still a key priority for the ACCC. The ACCC has noted that dealers often cite a reluctance to provide consumer guarantee remedies due to the difficulties in being indemnified by manufacturers. In what appears to be a running theme across the priorities, the ACCC noted the imbalance in the relationship between motor vehicle dealers and manufacturers, which in turn negatively affects consumers.
The ACCC has noted a high volume of complaints about the automotive sector, despite its having taken enforcement action against various car manufacturers. It will continue to advocate for law reform to criminalise non-compliance with consumer guarantee obligations and manufacturers' failures to indemnify a supplier that does give a consumer a remedy.
What you should do: It is important that dealers are aware of their rights and obligations under the Australian Consumer Law with respect to the consumer guarantees and they do not misrepresent the rights available to customers with a valid claim. Importers and NSCs should review the material provided to dealers, including bulletins and warranty information to ensure compliance with these obligations. Given recent class action decisions in the Federal Court, the risks for importers and NSCs are also not limited to ACCC action and the damages exposure in relation to product defects and consumer guarantee issues is potentially significant.
Global and domestic supply chains
The ACCC has acknowledged the effects of the COVID-19 pandemic-related staff shortages and transport interruptions in contributing to higher prices for consumers. Nonetheless, it will seek to identify and take enforcement action against businesses that use these conditions to undertake illegal conduct, such as price-fixing, market-sharing or collusion in global supply chains.
On 18 February, the ACCC announced that it would participate in a global working group to prevent anti-competitive conduct by sharing intelligence and working together to detect any attempts by businesses to use the pandemic conditions as a veil for illegal conduct. The working group includes authorities from the United States, New Zealand, Canada and the United Kingdom.
What you should do: Now is the time to review your compliance practices and ensure that any changes arising from or related to the COVID-19 pandemic have not changed these practices that may result in anti-competitive conduct, such as those identified by the ACCC.
Small business protections and franchising
The ACCC still sees franchisees being harmed by conduct that potentially breaches both the Franchising Code of Conduct and the ACL. Providing a clear warning to offending businesses, Mr Sims noted that litigation is an important part of its response, citing recent examples of enforcement action against franchisors.
The ACCC (and class action litigants) has demonstrated a willingness to continue to commence enforcement action where it sees unlawful conduct by larger businesses that causes significant harm to small businesses. In addition, it will continue to provide education and support to small businesses and franchisees, particularly with the dispute resolution mechanisms available to them.
The importance of "getting it right" when it comes to the Franchising Code has been further emphasised by an additional raft of changes which came into effect on 15 April 2022. While most of the changes involve tweaks to existing provisions to clarify the obligations imposed on franchisors, the changes also introduce or significantly increase the penalties for non-compliance – in some cases by introducing penalties of up to $10 million, 3 x any benefit gained from non-compliance or 10% of annual turnover for the 12 month period during which the non-compliance occurred.
What you should do: The Franchising Code of Conduct has undergone various changes in recent years and the ACCC has previously given increased attention to the obligation to act in good faith. With increased penalties for non-compliance now in place, you should remain up-to-date with these changes, and ensure the provisions of your agreements with suppliers and their implementation comply with the Code.
Product safety – button batteries
Product safety continues to be an important item for the ACCC which is advocating for a general safety standard. However in the meantime a new button batteries standard will commence in June of this year and will affect around 30 million products supplied each year.
The button batteries standard aims to improve safety in the design of products containing button batteries through requirements for their packaging and warnings. While there are some exceptions to products that are caught by the new standard (such as goods already supplied before the standard comes into force), various automotive-related products, such as electronic keys supplied with new vehicles may fall within the standard.
What you should do: Consider whether any electronic accessories require the use of a button battery. If you do supply such products, review the standard and get to know what is required to comply with it before June this year.