Corporate greenwashing - the latest target for climate change litigation - Climate Change

As an oil and gas giant recently became the first corporate to be hit with Australian proceedings for alleged climate-related 'greenwashing', one thing is clear: companies need to be very careful when making claims about their climate-friendly credentials.

In the environmental context, potentially misleading disclosures and claims are known as 'greenwashing', a term which encompasses a wide range of actions which exaggerate and misrepresent 'green' credentials. At one end of the scale it may be marketing spin designed to create a favourable impression about a company or its products. While at the more nefarious end it is conduct designed to mislead and deceive investors and customers.

Amid growing urgency for corporate Australia to respond to the climate crisis and the release of the Intergovernmental Panel on Climate Change's Sixth Assessment Report in August 2021, Australian companies have found themselves under increasing pressure to make climate-related disclosures and statements. At the same time, 'green' competition and the need to keep up with rivals is propelling the frequency of climate and sustainability-related business targets and product claims.

The pace of these actions, and the infancy of climate-related risk evaluation, valuation and disclosure practices creates a probability of error and misrepresentations. As shown by this latest suit brought by the Australasian Centre for Corporate Responsibility (ACCR), even a hint of a misleading climate-related disclosure or claim can quickly become a material financial and reputational risk.

Consumers, regulators and stakeholders are clearly alive to greenwashing. In an atmosphere where climate-related shareholder activism and litigation continue to loom large for corporate Australia, there is a growing need to manage and understand this risk.

'Red flag' greenwashing practices

There are several aspects of a company's climate reporting and promotion which are ripe for allegations of greenwashing:

Climate-related disclosures: financial and other disclosures regarding exposure to climate risk;
Broad corporate goals: representations in relation to drivers such as:
- alignment with Paris Agreement goals;
- achievement of net zero or other emissions reductions targets by a specified date; and
Green marketing: product and brand marketing which makes representations about products or practices being environmentally friendly, sustainable or ethical.

The latest focus: misleading or deceptive conduct allegations

If not carefully managed, each of these elements has the potential to become misleading or deceptive, or a breach of relevant reporting obligations. In turn, each raises the potential for actions from a broad range of possible claimants including class actions litigants and regulators such as the ACCC, ASIC or APRA.

Outside the financial reporting rules, actions targeting greenwashing behaviours are most likely to be brought under the Australian Consumer Law, or the ASIC Act.

The prohibitions in these statutes are deliberately drafted in wide terms, and do not require that any person is actually misled or deceived or that the organisation in question intended to mislead or deceive anyone. A mere likelihood that consumers or other stakeholders will be led into error is enough. This can arise through confusing messaging, a failure to properly disclose the bases on which representations are made where these are relevant, and representations about the future that are not based on reasonable grounds.

Legal challenges on this basis have already begun. The types of statements that are likely to be tested, and open to litigation, include:

claims about future emission reductions (including targets) which are made without a short or medium term strategy to achieve progress towards the goals, or which are only based on technological advancements that have not yet occurred; and
claims about business strategies being 'Paris-aligned', or just consistent with local or national climate policies, when on closer inspection there is not genuinely an alignment, or it only exists in some limited scenarios.

Among regulators, the ACCC has been alive to greenwashing for some time (see the 'green marketing' guide published in 2011) and has not shied away from green claim actions, nor seeking significant penalties. In December 2019, in response to action by the ACCC, the Federal Court ordered the highest penalty on record against Volkswagen ($125 million) for false representations about the compliance of 57,000 vehicles with Australian diesel emissions standards.

Challenges specific to climate representations have also already been occurring overseas. Chevron currently faces accusations of greenwashing in a false advertising complaint jointly filed by Global Witness, Greenpeace and Earthworks with the US Federal Trade Commission earlier this year. The trio complain that Chevron's promotions:

imply that its business operations do not harm (and even help) the environment, despite environmental disasters;
state that it produces 'ever-cleaner' or 'clean' energy, while spending less than 0.2% of its capital expenditures on renewable energy sources;
misrepresent the benefits of 'renewable natural gas'; and
mislead consumers with confusing phrases as 'reducing emissions intensity' while continuing to increase overall oil and gas extraction and production.

Even more recently a shareholder class action has been brought in the US against one of the world's largest oat milk companies, seeking damages said to result in part from misleading statements about sustainability. These include that the conversion from cow's milk to Oatly results in 80% fewer carbon emissions, 79% less land usage, and 60% less energy use. It is alleged (based on information gathered by an activist short-seller of Oatly shares) that those claims rely on a dated analysis of the company's operations, and that the company's sustainability credentials ignore the fact that Oatly's production process generates dangerous volumes of wastewater and that its supply chain includes an entity which has faced criticism for the environmental impact of its business on the African ecosystem.

The challenge

Climate risk and opportunity cannot be ignored. As we have previously discussed, companies are obliged to consider exposure to climate risk and make climate-related disclosures. In addition, many companies want to provide climate rated information in response to calls for corporations to take more climate responsibility and in order to remain competitive in a world where a company's green credentials are increasingly considered as important by customers and investors.

On the flip side, the infancy of climate-related disclosures and net zero and other sustainability or emissions-related targets naturally means that there is a lack of precedent, clarity and alignment for companies seeking to engage. It can be difficult to stay across the ever-changing landscape of climate-related developments, regulatory expectations and stakeholder preferences.

To the extent that companies are publishing climate-related disclosures, targets or even just mission statements, it critical to develop and integrate appropriate procedures into assessment and verification frameworks, so that disclosures and claims are legally supportable, and don't simply open up additional risks.

Where to start

There are several steps that can be taken to strike the right balance and minimise greenwashing risks. Broadly, that involves turning your mind to considerations of:

whether statements are open to misinterpretation, and if so, whether any assumptions and conditions should be made clear (for example, where scenario analysis has been used in assessing the impact of physical risks resulting from climate change). While generalised statements (for example, 'we care about climate change') may be hard to fault, care should be taken to make sure that climate related statements are not likely to mislead in the broader context of a company's operations;
whether representations about the future, such as commitments to net zero or staged emission-reduction targets, are based on reasonable grounds. That may incorporate two levels of assessment - whether the representations are 'scientifically sound and appropriately substantiated' (see Green marketing and the Australian Consumer Law for further guidance), and if they correctly reflect the company's actual intention at the time they are being made; and
whether statements which may once have been true remain so. In a fast-changing environment, it is easy for representations to move from accurate to misleading, and so regular and probing re-assessment is needed.

Similarly, in the context of setting net zero targets, Noel Hutley SC and Sebastian Hartford Davis proposed several practical steps for avoiding greenwashing in their most recent opinion, including:

developing a net zero strategy which is integrated with the company's operational strategy and documenting any assumptions;
explaining the emissions reductions the target encompasses (Scope 1, 2 and 3) and the time frame in which those reductions are to take place; and
continually reassessing the achievability of the target and disclosing changes.

For climate-related financial disclosures, there are additional steps companies should take to ensure compliance with legal requirements and avoid greenwashing allegations, discussed in a previous Insight.

Looking forward: remain on high alert

The claim launched by the ACCR is, we suspect, just the beginning. Like most other climate-related litigation in Australia in recent years, it is strategic - in the sense that it is seeking declarations and injunctions, and is ultimately aimed at setting a bar for climate-related representations.

Increased attention from regulators may well follow; for instance, ASIC has announced a review of ESG claims on investment products to see whether the practices of the funds match the promotion of the products. Regulatory action means potential exposure to significant penalties.

Perhaps even more significant is the risk of class action damages suits. These may be brought on behalf of investors if, for example, it becomes apparent that sustainability claims which attracted shareholders or customers to a company are exaggerated or untrue, and the value of the company or its shares falls as a result. Although loss will be harder to prove, claims may also be brought by customers, who have purchased products on the basis of supposed green credentials, including climate commitments, which later turn out to be misleading.

For unwary corporates it may simply be a matter of 'wrong place, wrong time' for future actions. The risk of greenwashing claims in relation to climate-related disclosures, net zero targets or other climate-related advertising and promotional materials, is unequivocally real. Equally real are the risks associated with a failure to engage with climate change from both a business, regulatory and reputational risk perspective.

It is therefore critical that companies strive to strike the right balance between engaging with climate challenges and reflecting on the potential for any representations to be misleading or deceptive before they are made public.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.