Out-Law Analysis 5 min. read

Increased regulatory scrutiny of greenwashing: the critical risks to businesses

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Corporate and financial regulators in Australia and around the world appear poised to investigate and prosecute inadequate reporting and management of climate change risks, which is seen as a form of greenwashing.

Regulators are more actively scrutinising climate-related corporate behaviours, and climate-related reporting standards are becoming increasingly burdensome. In the meantime, the number and ambition of corporate emission-reduction policies are expected to increase as companies respond to the COP27 climate summit.

Increased regulatory scrutiny

The Australian Competition and Consumer Commission (ACCC) has been monitoring greenwashing for over a decade and now other corporate and financial regulators are following suit.

The ACCC published guidance on green marketing in 2011. In the last few years, there has been a significant increase in scrutiny of climate-related issues from the ACCC, Australian Prudential Regulation Authority (APRA) and Australian Securities and Investment Commission (ASIC). Recently, APRA finalised its draft guidance for financial institutions on climate-related financial risk management, it is currently reviewing climate risk governance and is conducting a vulnerability assessment of Australia's banks, financial systems and economy to climate risks.

On 9 August 2022, ASIC released guidance for Superannuation and Investment funds on avoiding misleading or deceptive conduct and disclosure in relation to climate change and sustainability. ASIC said that greenwashing will remain a priority area of its regulatory focus. On 27 October 2022, ASIC announced that it has taken its first action for greenwashing against Tlou Energy Limited (an ASX Listed Company). Tlou was issued four infringement notices by ASIC and is required to pay $53,280. On 4 October 2022, the ACCC launched two internet sweeps to identify misleading environmental and sustainability marketing claims and fake or misleading online reviews of at least 200 companies. The ACCC has stated that it will follow up this sweep with compliance, education and enforcement activities.

Higher standards for climate risk management and disclosure

The coordinated engagement of financial regulators in the disclosure and management of the climate-related business has elevated the standard of care required from directors. Climate disclosure frameworks, such as those developed by the Taskforce for Climate-Related Financial Disclosure (TCFD), have gone from best practice to industry standard, and now, in countries such as the UK and New Zealand, they are mandatory. In Australia, there is no mandatory financial disclosure for climate change risks.

However, 60 companies in the ASX200 have voluntarily adopted the TCFD framework. ASIC have released guidance on the requirements of truth in promotion and clarity in communication when promoting sustainability-related products.

The Taskforce on Nature-related Financial Disclosures (TNFD) is developing an additional disclosure framework to support shift in global financial flows away from nature-negative outcomes toward nature-positive outcomes. The TNFD will build upon support shift in global financial flows away from nature-negative outcomes toward nature-positive outcomes.

It is highly probable that the combination of increased regulatory scrutiny and higher regulatory standards about climate change risk disclosure and management will lead to regulatory action against directors and businesses that fail to identify, disclose, or manage the foreseeable climate-related risks that cause harm to a company.

Types of greenwashing

Businesses need to understand the major types of greenwashing to mitigate the risk of climate litigation. There are two common types of greenwashing cases, both of which concern misleading and deceptive conduct.

‘Type one’ cases involve misleading and deceptive claims about the climate impacts of a product.

For example, in the Advertising Standards Authority (ASA) ’s ruling on Ryanair Ltd, Ryanair ran a series of advertisement boasting of “low carbon dioxide (CO2) emissions” and of being the "lowest emissions airline" at 66g CO2 per passenger-kilometres flown. The airline justified this assertion with technological and average load factor arguments.

The ASA concluded the company’s claims were misleading. The ASA considered the CO2 per passenger distance metric appropriate, and that consumers would understand the relative nature of the claim. However, the ASA also found that consumers would find insufficient information in the advertisement to substantiate that they would reduce their personal CO2 emissions compared to flying with another carrier. It also put in doubt the data references used by Ryanair and underlined the fact that well-known competitors were absent from the calculation.

‘Type two’ cases concern emission reduction targets that lack credibility, meaning they are misleading and/or deceptive.

For example, Australasian Centre for Corporate Responsibility v Santos is the first case to challenge the credibility of a corporation's net zero emissions target. The ACCR made two allegations regarding Santos. First, Santos' representation that gas is a 'clean fuel' providing 'clean energy' misrepresents that effect of that gas on the environment. Second, Santos' claim that it has a clear and credible plan to achieve net zero emissions by 2040 is misleading because it relies on undisclosed assumptions about the efficacy of carbon capture and storage technologies that do not yet exist. The claim is pending in the Federal Court of Australia.

These greenwashing allegations are also affecting Santos’ shareholders. In a letter sent to UniSuper’s chief executive, directors and trustees last month, the Environmental Defenders Office (EDO) said the company’s AUS$163.8 million stake in Santos “may amount to a breach of the law. While ACCR v Santos was the first type two greenwashing case, it is not the only of its kind.

What can directors do to reduce greenwashing risks?

Keep in mind the key principles and laws underlying the various cases: in essence, these all require that a company must not mislead or deceive in the statements it makes to its investors, its customers, and to the wider public.

ASIC’s guidance on avoiding greenwashing for financial product issuers may not be relevant to all companies but it provides some useful guidance on the type of questions that boards should be asking themselves when considering climate related disclosures.

ASIC’s guidance sets out three principles and how to achieve them.

  • Clear disclosure with reasonable basis for sustainability-related claims

    When making sustainability-related claims, companies should avoid vague terminology, test that there is a reasonable basis for the statements; and disclose and state clearly the assumptions on which statements are made –particularly if new, untested, or not yet developed technology is relied on to meet targets.

  • Sustainability targets

    Net-zero commitments or other sustainability targets must be supported by clear, time-based action plans. To avoid breaching the misleading and deceptive statement laws companies should clearly explain what the target is, how and when the target will be met, how progress towards this target will be measured, and any assumptions relied on when setting that target or when measuring progress.

  • Keep abreast of international developments

ASIC also recommends that Australian companies prepare themselves to transition to any future ISSB standards applied in Australia.

ASIC recommends that Australian listed companies using the recommendations of the G20 Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD) as the primary framework for voluntary climate change-related disclosures; considering all guidance published by the TCFD; and keeping up to date with international standards for climate disclosure.

Co-written by Patrick Hart of Pinsent Masons.

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