Top six greenwashing red flags to pay attention to in 2023

Emily Tranter, Claire Smith and Kirsten Webb
02 Mar 2023
Time to read: 3 minutes

Regulatory scrutiny, investment considerations and directors' exposure – companies need to be proactive in establishing processes to manage growing greenwashing risks.

The filing of ASIC's historic first greenwashing civil penalty proceeding against a Superfund is a timely reminder to boards, executives and legal advisors across industries that "green" product specifications and decarbonisation plans and greenhouse gas emissions targets will continue to be subject to intense regulatory and shareholder scrutiny in 2023.

This is an issue not just for those making sustainability claims to drive consumer interest, but it is also a real concern for all companies seeking to secure investments and sustainable finance.

We know from our clients that greenwashing is top of mind so we have put together Six Top Things we see emerging during 2023 in this space:

1. Regulator knocking: Greenwashing remains a key enforcement priority for both ASIC and the ACCC in 2023:

  • ASIC: ASIC has led the way with 11 infringement notices for potential greenwashing against four companies and now court proceedings. This will only continue. Deputy Chair Sarah Court stated this week that ASIC is "ramping up" on greenwashing enforcement and there was "no end" to greenwashing referrals being made to the regulator, particularly from individual investors, consumers and competitors who are taking an active stance against perceived misstatements in the market. Activist shareholder groups will continue to be prominent in testing the scope of greenwashing claims and funding actions to test the legal parameters of the existing misleading and deceptive laws.
  • ACCC: The ACCC has a long history of enforcement action for misleading environmental or green claims, such as its action against GM Holden in 2008 for misleading carbon emissions neutral claims about its Saab vehicle range. This focus continues with the current sustainability trends. In October 2022 the ACCC conducted an internet sweep to identify misleading environmental and sustainability claims. In March 2023 the ACCC issued a media release reporting that more than half of the 247 businesses reviewed in the sweep have made concerning claims about environmental credentials.  The industries with the highest proportion of claims are cosmetic, clothing, footwear, food and drink sectors. The ACCC is asking those businesses to substantiate their claims and has announced it has several active investigations underway and expects those to grow in number, with enforcement action where appropriate. In November 2022, Comms Declare, represented by the Environmental Defenders Office, reportedly complained to the ACCC and Ad Standards that Shell Australia may have breached sections of the Federal Australian Consumer Law and Ad Standards’ Environmental Claims Code relating to statements Shell Australia makes in marketing materials that Comms Declare alleges give investors and consumers the false impression that the company has a plan to become a net-zero business by 2050.

2. Communication channels: Greenwashing allegations will not to be limited to formal company disclosures. ASIC has already taken action for alleged misleading and deceptive statements in ASX disclosures, investor presentations, product disclosure statements and website claims. A particular vulnerability is social media statements which abbreviate well-crafted statements by companies and oral statements from directors which are likely to mislead and of course statements made in all forms of advertising.

3. Directors' exposure: The increasing regulatory and investor action along with the increasing state of collective scientific knowledge are inevitably elevating the standard of care expected from a director acting reasonably to comply with their Corporations Act obligations. There are increasing expectations on directors to be "carbon literate" and actively consider, disclose and respond to climate-related financial risks. Directors must particularly ensure there are sound and reasonable bases for making climate-related statements and commitments – whether made by the company or by the director. Already there have been reports of shareholders making complaints to ASIC about statements by directors at an AGM which were alleged to be misleading. In addition, the option of "green hushing" and staying silent or pulling back on making specific disclosures needs to be treated with care given Corporations Act duties and the real physical and energy transition risks we are seeing at the moment in Australia. Officers and employees continue to face potential accessorial liability for breaches of the Australian Consumer Law if they are knowingly concerned in and a party to, a contravention.

4. Mandatory disclosures: The Federal Government has committed to a mandatory disclosure regime for large businesses (following New Zealand and the UK). Treasury's disclosure consultation paper (which included a question on the "reasonable grounds" requirement for climate-related disclosures and targeted at greenwashing liability) has now closed with further consultation foreshadowed later in 2023. Whatever internationally aligned standards are adopted (eg. by reference to the TCFD or ISSB), companies may be forced to increase their climate-related disclosures and commitments which will be a further source of greenwashing scrutiny.

5. Investment impact: There will continue to be perceived commercial incentives to expand climate-related statements. Not only has there been an increasing demand for sustainability choices and investments from consumers but the large superfunds, banks and asset managers are demanding corporate action so they can comply with their own ESG commitments. Those funds have continued to target investments which not only align to their own net zero targets but also actively assist funds to reach their targets and manage their own climate-related risks. Companies which deliberately mislead or inadvertently issue inaccurate ESG claims are likely to not only be the target of greenwashing claims but also lose investment opportunities.

6. Don’t forget other ESG commitments: ASIC's actions have reinforced that greenwashing allegations are not limited to climate-related statements. In addition to ethical investment statements, we expect biodiversity and nature positive commitments to be given increasing scrutiny with the Taskforce for Nature Related Financial Disclosures to be released in September 2023.

Key takeaway

To address the above matters, increasingly, companies will be required to establish systems and processes to manage sustainability statements and to undertake greenwashing audits to manage such risks. This includes processes to substantiate any third party's claims which companies are relying upon for net zero targets or statements and ESG supply chain due diligence.

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.