Regulators join forces to fight greenwashing in 2022

By Claire Smith, Elizabeth Richmond, Stephanie Daveson, Olivia Back and Gabrielle Lawrence
31 Mar 2022
The adoption of net zero commitments by companies in Australia has become the new norm and 2022-2023 will see the regulators testing whether the environmental promises made by companies to their stakeholders actually stand up to scrutiny.

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 publically, 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.

Due to the pressure to not only act quickly and ambitiously and in some cases, to be seen to have done so to obtain a competitive advantage, issues of "greenwashing" have emerged. There is an increase in "inaccurate climate-related statements and disclosures, including flawed climate scenario analysis and “net zero” commitments that are misleading or made without a reasonable basis" being proffered (Noel Hutley SC and Sebastian Hartford Davis, Further Supplementary Memorandum of Opinion, 23 April 2021).

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 capitalize 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.

Corporate responsibility

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 focusses 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 may not therefore be discharging their duties.

What are the Regulators doing about greenwashing?

In March this year, Australian Securities & Investments Commission (ASIC) and the Australian Competition & Consumer Commission (ACCC) indicated that they will be taking action against all forms of greenwashing as a priority in the upcoming years.

Both ASIC and the ACCC have flagged they will be working closely together as well as 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 in a speech to the Committee for Economic Development of Australia in March 2022 put the manufacturing and energy sectors on notice that they would be a particular focus for the ACCC.

In his speech, Sims said:

"‘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. ASIC's recent review of climate risk disclosures by large listed companies revealed improved standards of disclosure and an increase in 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 conscientious consumers' and investors' concerns.

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 (ACCR) 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 do 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.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.