Greenwashing scrutiny among key trends in ESG

As the global focus on environmental, social, and governance (ESG) factors continues to grow, Australian businesses are facing an evolving landscape of risk. In 2023, ESG issues are at the forefront of corporate agendas, and companies across various industries are navigating a complex web of challenges and stakeholder expectations.

Since our article of September 2022, summarising trends in ESG litigation and regulatory response, the landscape has continued to evolve, seeing increased regulatory activity in this space.

Australian regulators are tightening their grip on ESG compliance with companies experiencing heightened regulatory scrutiny, especially in relation to “greenwashing” claims. Greenwashing (or climate-washing) refers to environmental and sustainability claims which cannot be substantiated or are otherwise false or misleading. ASIC has made clear its intention to intensify its focus on exposing greenwashing conduct with “Action against Greenwashing” named as one of the regulator’s 2023 Enforcement Priorities.

Recent regulatory action includes the following cases:

ASIC commenced civil penalty proceedings in the Federal Court against LGSS Pty Limited (Active Super) alleging misrepresentations and misleading conduct relating to a range of claims around environmental sustainability and social responsibility. ASIC alleges Active Super members were exposed to investments they claimed to have excluded including those linked to gambling, tobacco, Russian entities (an excluded country following the invasion of Ukraine) and coal mining.

Misrepresentations are alleged to have been made on Active Super’s website, disclosure documents as well as social media channels including LinkedIn and Facebook.

ASIC commenced a case against Vanguard Investments alleging misleading conduct in relation to claims about certain ESG exclusionary screens applied to investments in a Vanguard fund.

ASIC alleges Vanguard made false and misleading statements and engaged in conduct liable to mislead the public in representing that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund) were screened against certain ESG criteria. The Fund was marketed to investors seeking, amongst other things, securities with an ethically conscious screen.

ASIC Deputy Chair Sarah Court said ‘‘We consider that the screening and research undertaken on behalf of Vanguard was far more limited than that being promised to investors, and we consider this constitutes another example of greenwashing.’

ASIC’s first court proceedings relating to greenwashing were brought against Mercer Super and the marketing of their ‘Sustainable Plus’ investment options. The investment option was described as “suitable” to members who are ‘deeply committed to sustainability” due to the exclusion of exposures to carbon intensive fossil fuels as well as alcohol production and gambling. However, ASIC alleges members who took up the option did indeed have investments in companies involved in industries which were markets as “excluded’. As such ASIC alleges Mercer made misleading and false statements to investors and engaged in conduct that could mislead the public.

ASIC Deputy Chair Sarah Court said ‘ASIC will continue its focus on alleged greenwashing conduct and we continue to stress to the financial services industry that if exclusions in investments are promised, these exclusions need to be applied and promises upheld,’ concluded Ms Court.

To date, ASIC has issued over $140,000 in infringement notices relating to alleged greenwashing.

In March 2023 the ACCC released findings of its 2022 internet sweep which reported 57 per cent of businesses reviewed were making potentially misleading environmental claims. Following these findings draft guidance was released in July aiming to improve the integrity of environmental and sustainability claims made by businesses and protect consumers from greenwashing.

ACCC Chair Gina Cass-Gottlieb said:

“False or misleading claims can undermine consumer trust in all green claims, particularly when consumers are often paying higher prices based on these claims.”

“Similarly, businesses that are taking genuine steps to adopt sustainable practices are put at a competitive disadvantage by businesses that engage in ‘greenwashing’ without incurring the same costs.”

The draft guidance outlines eight practical principles of good practice when making environmental and sustainability claims and sets out obligations under the Australian consumer Law.

These steps by the ACCC indicate an effort to stamp out greenwashing practices ensuring businesses are put on notice that they must be prepared to substantiate their claims.

Formed in 2019, The Environmental Defenders Office (EDO) is the largest public interest environmental law centre in the Australia/Pacific region. It runs litigation and leads law reform advocacy on environmental issues. The EDO has been involved in at least 10 complaints to the ACCC and ASIC about greenwashing. Partially funded by state and federal government, the EDO also relies on pro bono work from legal practitioners and scientific experts.

Shareholder activism is on the rise globally with climate and sustainability a strong area of attention. A 2022 report by Diligent Market Intelligence ranked Australia 3^rd in the world behind the USA and Japan in terms of shareholder activism. The majority of activist environmental demands were related to climate change and greenhouse gas emissions. In 2022, 61 Australian companies were targeted.

The COVID-19 pandemic exposed vulnerabilities in global supply chains, prompting businesses to reassess their sourcing strategies and resilience. In 2023, ESG considerations are playing a crucial role in these decisions. Companies are evaluating the social and environmental impacts of their supply chains, seeking to reduce exposure to reputational and operational risks associated with unsustainable practices or human rights violations.

ESG risks related to human rights and labour practices are gaining prominence in Australia. Consumers, investors, and regulatory bodies are demanding greater accountability and transparency in these areas. Companies are taking steps to improve labour conditions, eliminate modern slavery from their supply chains, and promote diversity and inclusion within their organizations. Failure to address these issues can lead to reputational damage and legal consequences.

Stakeholder engagement is becoming increasingly critical for managing ESG risks. Companies are recognising the importance of actively engaging with a diverse group of stakeholders, including employees, customers, investors, and local communities. Effective engagement can help identify ESG risks early, build trust, and foster collaboration, ultimately contributing to long-term sustainability.

Australia has long been susceptible to the impacts of climate change, including droughts, bushfires, and extreme weather events. Businesses are increasingly recognising the need to adapt to these challenges. Companies are investing in sustainable infrastructure, resilient supply chains, and renewable energy sources to reduce their carbon footprint and minimise climate-related risks. Additionally, investors are demanding greater transparency regarding climate risk disclosures, pushing companies to assess and disclose their exposure to climate-related threats.

Directors’ & Officers’ Liability insurers are paying careful attention to the extrinsic impacts and how Boards are taking steps as regards the “S’ and the ‘E” in ESG. Insurer’s awareness of these issues is acute. However given the infancy of such litigation, insurers remain highly cautious of greenwashing allegations where the assessment of liability and the extent of such liability remains relatively unknown – where terms of reference (such as ASICs greenwashing guide) are only 15 months old and outcomes of litigation are scant, insurers are finding it difficult to assess the veracity of a Board’s compliance with its own ESG reporting and how this could affect the value of a company beyond financial risk.

The nature of ESG litigation and the allegations or actions giving rise to such cases, being acts or errors, committed by board members in their directorial or official capacity are likely to trigger claims brought under Directors’ and Officers’ liability insurance policies.

Directors’ & Officers’ Liability insurance provides cover to boards for the legal defence costs in the event a regulator such as ASIC or public interest organisations bring actions alleging greenwashing against companies.

Insurers of larger (especially publicly traded) companies are asking direct sets of questions surrounding ESG and target-setting statements made in public documents. ESG policies have historically put companies in favour with insurers however this is no longer satisfactory – demonstrating implementation and accurate reporting is required. Independent audits by external third parties of ESG compliance is another tool to assist boards in understanding shortcomings in the above process.

Looking ahead, consideration of how novel duties of care may wax and wane in relation to societal attitudes and new norms as well as their treatment by courts will inform all stakeholders. Presently however “E” and “S” are expected to drive D&O liability for the foreseeable future.

To thrive in this evolving environment, companies must not only assess their ESG risks comprehensively but also integrate sustainable practices into their core operations. By doing so, businesses can position themselves for long-term success while addressing the growing expectations of stakeholders and contributing to a more sustainable future.

In terms of making statements relating to environmental and sustainability targets and policies, companies should ensure the accuracy of their claims can be verified to protect against regulatory and legal action.

For further information and advice relating to ESG risk, please contact our risk advisory team via the form below.