Seen to be Green: ASIC Enforcement of Greenwashing and Lessons for ESG Practices

Introduction

Regulators have made it clear that ‘greenwashing’ is presently a key focus and that they have a mandate to bring enforcement action in the area.  

At the same time, disclosure standards for sustainability-related products are still developing and the demand for ethical and sustainable products and services continues to rise. 

This creates new and emerging risks to businesses across all sectors.  A recent internet sweep by the ACCC found that a significant proportion of businesses are making concerning claims about their environmental or sustainability practices.ⁱ

Entities need to carefully review their approach to ESG and ethical and sustainability-related marketing otherwise they risk exposing themselves to prosecution and the imposition of significant penalties.

Entities that engage in greenwashing could also face claims by investors, consumers or others seeking damages or other relief.

ASIC and the ACCC prosecution focus 

In late 2022, the ACCC and ASIC each announced that they would be targeting greenwashing.ⁱⁱ

ASIC has since investigated and issued infringement notices to Tlou Energy Ltd,ⁱⁱⁱ Vanguard Investments Australia Ltd (AUD $39,960),^iv Diversa Trustees Ltd (for AUD $13,320)^v and Black Mountain Energy Ltd (again AUD $39,960) in respect of disclosures made to investors and the public.^vi 

The announcements the subject of ASIC’s investigations pertain to the companies’ abilities to reduce carbon emissions and improve sustainability practices.  In each instance, ASIC alleged those announcements were inaccurate or made without a reasonable basis. 

The adoption of the infringement notice regime is unusual because:

• Until now, it has not been an approach ordinarily employed by ASIC;

• Recipients may elect to pay an infringement notice without any admission of liability;

• ASIC in effect reserves its right to revoke the infringement notices and commence formal court proceedings against the entity at a later stage if it wishes to do so.

By approaching prosecutions in this manner during the latter half of 2022, ASIC was able to significantly increase market awareness around the risks of “greenwashing” within a reasonably short period. 

However, 2023 appears to have signalled a step-change in how ASIC intends to prosecute greenwashing cases.

On 28 February 2023, ASIC commenced its first Federal Court prosecution in respect of alleged greenwashing against Mercer Superannuation (Australia) Ltd.^vii In a prosecution such as this, the penalties able to be ordered by a Court are far greater than those typically imposed under the infringement notice regime.

It is not surprising that a superannuation fund was ASIC’s first prosecution target given the lack of control that members of such funds usually have with regard to specific investment decisions made by the fund and the fact that those members are particularly reliant on representations they make regarding the application of certain ESG criteria when investing.

ASIC has since disclosed that it has several other investigations underway in respect of greenwashing by superannuation funds (amongst others) and that it expects that those investigations will likely result in court action.^viii

Further, recent publications released by the ACCC on 2 March 2023,^ix 7 March 2023 and 8 March 2023 suggest that it will be following ASIC’s lead in respect of its focus on greenwashing in the market.^x   

In light of the above, we have put together a “best practice” guide to inform companies about what needs to be included (and excluded) from statements made to the market in order to comply with relevant legislative requirements.

What can be done to avoid a ‘greenwashing’ prosecution by regulators?

The key takeaway is that any company representing that they have ESG-related credentials or aspirations must have a proper basis to do so. 

Where a business has climate change or similar lending policies in place, its public statements and conduct should reflect those policies. 

Companies should be precise when making any statement about ethical and sustainability-related matters.  Otherwise, companies can expect extreme scrutiny from regulators (not to mention special interest groups or their own shareholders or consumers).

Companies and their directors should:

• read, and become familiar with ASIC guidance in relation to ESG, ethical or sustainability-related claims and products – some relevant materials include ASIC’s RG65 disclosure guidelines and Information Sheet 271 on greenwashing;

• avoid using vague and unqualified terms like ‘environmentally friendly’, ‘green’, or ‘sustainable’ without explaining the basis for making those statements and without having a proper basis for making the statement;

• be transparent when marketing ESG-related products to investors, consumers and the public and ensure that supporting material is easy to locate;

• use precision when communicating with the public.  If a company says that it plans to do something in the future it should ensure that there is a sufficiently detailed plan in place to achieve that outcome and that the company has the ability to implement the plan; 

• disclose any impediments to the company’s ability to implement its ESG plan. For example, if a company requires funds (or the completion of some other step) in order to develop such a plan then this should be disclosed;

• research the credentials of ‘sustainable products’ that are used as part of the provision of goods and services to consumers to ensure that any statement made in respect of the sustainability of those products is accurate;

• ensure that there is proper and adequate evidential support for all statements (for example reliable scientific reports or reputable third-party certification);

• be careful in the selection of labels for investment options and ensure that any ‘sustainability’ labels reflect the underlying assets and risk profiles for the investment;

• ensure that the criteria for ESG, ethical or sustainability-linked outcomes are clear and well documented;

• explain how sustainability-related factors are taken into account and measured for the purposes of making relevant disclosures;

• establish a dedicated committee comprising key board members to i) monitor new developments in this emerging area ii) ensure compliance with the latest best practice and iii) review the company’s ESG claims and policies;

• adopt appropriate policies and charters for the company and any committee established to monitor ESG compliance, which provide for staff to receive training and professional support in order to ensure adherence to best practice and any new regulatory requirements;

• be aware that whether a statement or conduct is found to be misleading will depend on all the circumstances and the overall impression given to the market.  This means that it will likely be necessary to review marketing materials on a regular basis to ensure they stay current.

Readers can also refer to our previous articles on ASIC reports on climate risk disclosure, and navigating ESG concerns.

For more information, please contact Chris Hood and James Delesclefs.

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ⁱ Australian Competition and Consumer Commission (“ACCC”), Greenwashing by businesses in Australia – findings of the ACCC’s internet sweep of environmental claims, 2 March 2023.

ⁱⁱ Australian Securities and Investments Commission (“ASIC”), 22-302MR ASIC announces Enforcement Priorities for 2023, 3 November 2022; ACCC, Businesses told to be prepared to back up their environmental claims, 20 September 2022.

ⁱⁱⁱ ASIC, 22-294MR ASIC acts against greenwashing by energy company, 27 October 2022.

^iv ASIC, 22-336MR ASIC issues infringement notices against investment manager for greenwashing, 2 December 2022.

^v ASIC, 22-379MR ASIC issues infringement notice against superannuation trustee for greenwashing, 23 December 2022.

^vi ASIC, 23-001MR ASIC issues infringement notices to energy company for greenwashing, 5 January 2023.

^vii ASIC, 23-043MR ASIC launches first Court proceedings alleging greenwashing, 28 February 2023; Australian Securities & Investments Commission v Mercer Superannuation (Australia) Limited (Federal Court of Australia, VID117/2023, commenced 27 February 2023).

^viii Hannah Wootton, ASIC pursues ‘several’ super funds for greenwashing, expects court action, Australian Financial Review, 13 March 2023.

^ix ACCC, Greenwashing by businesses in Australia – findings of the ACCC’s internet sweep of environmental claims, 2 March 2023.

^x ACCC, 2023-24 Compliance and Enforcement Priorities, 7 March 2023.; Australian Broadcasting Corporation, ACCC takes aim at price gouging, greenwashing, 8 March 2023.