Introduction

In what feels like a blink of an eye, sustainability has stormed into the mainstream. For consumers, there is plenty of demand and money to be made—half of consumers are willing to pay a sustainability premium, and around half say they’ve paid a premium for products branded as sustainable or socially responsible in the last year (see HERE). On the financial side, 83% of Australians expect their bank account and their super to be invested responsibly and ethically (see HERE). Not surprisingly, consumers and investors now face a plethora of choice when it comes to products, services and investments spruiking their “sustainable” claims, a far cry to the limited offerings of yesteryear that were relegated to the shelves of crunchy co-ops or ethical investment funds.

In the rush to meet consumer and investor demand, companies are increasingly attempting to demonstrate their green credentials, including by making forward-looking commitments to make improvements in their sustainability practices (e.g. net zero targets, gender diversity targets, etc.).

But not all is what it seems—companies may be at risk from regulators, investors and consumers that green claims have been embellished, overstated or otherwise unsubstantiated.

Regulators weigh in

Regulators have stepped in to remind businesses of their obligations under consumer and corporate law.

Earlier this year, Rod Sims, the Chair of the Australian Competition & Consumer Commission (ACCC), indicated that the ACCC’s compliance and enforcement priorities for 2022/2023 include environmental claims and sustainability, particularly in relation to consumer goods and claims made in the manufacturing and energy sectors (see HERE).

Also in 2022, the Australian Securities & Investments Commission (ASIC) released Information Sheet (INFO) 271, How to avoid greenwashing when offering or promoting sustainability-related products. Whilst INFO 271 is focused on investment products, ASIC emphasised that its principles may apply to other entities that offer or promote financial products that consider sustainability-related considerations.

It’s important to keep in mind that the legislative and regulatory framework is not new; recent guidance from regulators does not represent any new obligations or prohibitions.

What is greenwashing anyway?

Greenwashing can take many forms but generally relates to the misrepresentation of the sustainability claims or bona fides of a product or service. According to ASIC, “In relation to investments, ‘greenwashing’ is the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical” (see HERE).

What businesses can and cannot do?

The Australian Consumer Law (ACL), the Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) contain prohibitions of misleading and deceptive conduct. The ACL also prohibits businesses from making false representations of goods as being of a particular standard, quality, value, grade, composition, style or model or having a particular history or previous use, and from false representations that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits they do not have (see HERE).

The Corporations Act and ASIC Act also prohibit persons from making statements (or disseminating information) that are false or misleading (see HERE). Of particular interest to ASIC are representations made about future matters that are not supported with reasonable grounds.

In this regard, sustainability claims should be specific, accurate, able to be substantiated, and have benefits that are not overstated. Where targets are contemplated, targets should be clearly explained, including how and when targets are expected to be met, how progress will be measured, and any assumptions that have been relied upon when setting targets or measuring progress (see HERE).

What are the risks?

Both ACCC and ASIC have indicated that they have stepped up their surveillance and enforcement activities on greenwashing. Whilst it is unclear what actions ACCC would take, ASIC has indicated its approach will vary based on the circumstances, ranging from making a telephone call to “nudge” to change disclosures that are considered “marketing or aspirational” to “enforcement action” in “egregious examples of greenwashing and we think that there’s harm from that” (see HERE).

This regulatory scrutiny provides leverage for activists to pressure companies on sustainability matters. For example, in August 2022 activist group Market Forces made a complaint to ASIC regarding potentially misleading statements made by the chairman and CEO of Santos Ltd at the company’s 2022 annual general meeting, in relation to how Santos’ plans for new oil and gas projects were compatible with the International Energy Agency’s net zero emissions by 2050 recommendations (see HERE). Whilst ASIC’s response to the complaint is unclear, it is likely activists will use this approach again in the future.

Companies may also receive complaints on their advertising activities. For example, in August 2022, communications industry activist group Comms Declare filed a formal letter of complaint to Ad Standards, an independent organisation that manages self-regulation for the Australian advertising industry, regarding a Facebook post by Ampol Ltd is a breach of Ad Standards’ Environmental Claims Code relating to misleading or deceptive conduct on environmental claims. Ampol’s carbon neutral petrol and diesel, which is being piloted to Ampol’s business customers, “will be offset through the purchase of a portfolio of carbon credits” and has been certified by Climate Active (see HERE). Comms Declare’s complaint alleges that carbon offsets “cannot be proven effective in reducing all the emissions from the fuel” (see HERE). Ad Standards has yet to opine on the complaint.

In addition to the risk of enforcement action by regulators, companies may find themselves the target of litigation. The most high-profile case to date is the Australasian Centre for Corporate Responsibility’s (ACCR) case against Santos, lodged in 2021, in which ACCR claims that Santos is “engaging in misleading or deceptive conduct in potential contravention of both corporate and consumer law” (see HERE). In August 2022, ACCR filed to expand its case to include alleged misrepresentations in Santos’ 2020 Investor Day Briefing and 2021 Climate Change Report (see HERE). The case is ongoing.

Another noteworthy case in 2021 was Abrahams v Commonwealth Bank of Australia (CBA) in which shareholders sought and received access from the Federal Court to internal bank documents to ascertain whether CBA’s involvement in seven oil and gas projects aligned with its ESG frameworks and policies (see HERE). Further litigation may be possible against CBA if the documents suggest noncompliance with internal bank ESG policies.

Where to from here?

Navigating the stakeholder pressure to increase commitments and the regulatory scrutiny on claims requires the exercise of prudence so as not to overstep the mark. When determining whether to make a “green” commitment (e.g. on net zero), companies will want to consider how they actually intend to achieve that commitment. Development of credible plans to substantiate any commitment is crucial to avoid allegations of greenwashing. The planning process provides an opportunity to establish criteria against which progress will be measured, which may include quantitative indicators or project-based milestones as appropriate.

The progress criteria can then be integrated into the company’s performance management system and executive incentive arrangements. Linking performance on material sustainability matters to remuneration builds credibility of the commitments because it ensures executives will be focused on achievement.

Companies will also want to consider how to report publicly on commitments and progress. As suggested above, forward-looking sustainability commitments may give a green halo but increase greenwashing risk from failure to deliver. By contrast, keeping public sustainability commitments and targets modest limits any benefits from aspirational green signalling but keeps greenwashing risks to a minimum. This may be an attractive option for companies that are able to under-promise and over-deliver.

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