Australia: The regulator crack-down: will it all come out in the greenwash?

Recently, regulatory authorities in Australia have begun to crack down on the practice of greenwashing, particularly in light of increasing demand for environmentally conscious business practice. Active legal, regulatory and compliance action by the Australian Securities and Investments Commission (ASIC) and Australian Competition and Consumer Commission (ACCC) has seen entities' conduct come under heavy scrutiny as a result of their alleged misrepresentations.

The action taken by regulatory bodies has shown no signs of slowing down, with ASIC recently issuing an infringement notice to Future Super Investments Services Pty Ltd (Future Super) for overstating its environmental impact in a Facebook post made in 2019.

The recent and increasing number of regulatory actions is a reminder for entities to be vigilant of their obligations under the Corporations Act 2001 (Cth) (Corporations Act) and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

What is greenwashing?

Greenwashing is the practice of misrepresenting, or inflating representations of, how environmentally friendly, sustainable or ethical a particular financial product or investment strategy actually is. This can take many forms but the most common appear to be:

1. where entities intentionally or negligently exaggerate their environmental credentials and selectively disclose the existence and management of climate risks they face; and
2. where entities make commitments to net zero emissions or other climate targets without having the relevant internal practices in place to meet those targets.

Why are regulators concerned by greenwashing practices?

Greenwashing risks breaching entities' obligations under the Corporations Act and the ASIC Act. As ASIC explained, greenwashing "distorts relevant information that a current or prospective investor might require in order to make an informed investment decision". In an era of increased interest in environmentally and socially conscious entities, greenwashing can "erode investor confidence in the market for sustainability-related products".

Both ASIC and the ACCC have taken steps to pursue "greenwashing" claims. In doing so they aim to improve the governance and accountability of entities.

Recent action taken by ASIC

Since October 2022, ASIC has issued over $150,000 in infringement notices regarding greenwashing contained in statements to the market, disclosure documents, marketing material and, most recently, on social media.

Infringement notices

In addition to infringement notices, ASIC made headlines earlier this year for commencing its first proceeding pursuing a claim in the Federal Court of Australia for misleading and deceptive conduct as a result of greenwashing by Mercer Superannuation (Australia) Limited (Mercer).

ASIC alleges that Mercer made false or misleading representations in respect of its "Sustainable Plus" superannuation investment fund. Mercer claimed that "Sustainable Plus" would exclude investments in companies in the alcohol, gambling and fossil fuel industries. Mercer made representations to current and potential investors that the "Sustainable Plus" fund was suitable for those "deeply invested to sustainability". Despite these representations, it is alleged that Mercer continued to invest heavily in companies such as AGL Energy, Glencore, BHP, Heineken and Budweiser.

ASIC seeks a declaration that Mercer made misleading representations when they stated that they were not invested in, or deriving profit from, companies in the alcohol, gambling or fossil fuel industries. ASIC also seeks pecuniary penalties, adverse publicity orders and an injunction against Mercer. The fines could be significant, with ASIC seeking pecuniary penalties under s 12GBB of the ASIC Act.

Section 12GBB of the ASIC Act

This section allows the Court to make an order for a pecuniary penalty that it sees fit, noting that the pecuniary penalty must not be more than the pecuniary penalty applicable to the contravention of the civil penalty provision. The maximum pecuniary penalty applicable for entities is the greater of:

• 50,000 penalty units (currently $11.1 million)
• three times the benefit obtained and detriment avoided, or
• 10% of annual turnover, capped at 2.5 million penalty units (currently $555 million).

Concerns for ACCC

The ACCC recently conducted a "greenwashing sweep" of the internet. The preliminary findings were published in March 2023, and demonstrated that more than half of the businesses reviewed made representations about their environmental and sustainability products or protocols which alarmed the ACCC. Concerning conduct by businesses included:

1. Using vague or unclear terms, such as 'green', 'eco-friendly', which have little value for consumers.
2. Not providing sufficient evidence for their claims or representations.
3. Setting environmental goals without clear plans for how these will be pursued.
4. Using third-party certifications and symbols in a confusing way.

The ACCC has reiterated how important accountability and accuracy is when it comes to environmental and sustainability concerns given the greater widespread support for, and attention to, climate change, Net Zero targets and emissions reduction.

As to the impact of greenwashing on competition in the market, the ACCC has commented that "many businesses go to extraordinary lengths to make their processes, products, and services more sustainable" and that "this innovation and investment should be protected from unscrupulous behaviour of other businesses making green claims without incurring the same costs."

Although no legal action has been taken to date, the ACCC has indicated that it will target greenwashing more vigorously and beyond consumer and fair trading issues to include competition law and product safety concerns. They will be issuing substantiation notices to businesses making environmental claims and will also engage in a range of educational activities to help businesses comply with the legislation. In that regard, the ACCC also plans to release "guidance material" which will assist businesses to avoid making misrepresentations which may amount to greenwashing. A breach of the Australian Consumer Law (ACL) can result in large penalties.

Part IV of the Competition and Consumer Act 2010

The maximum pecuniary penalties for breaches of Part IV are the greater of:

• $50,000,000;
• if the Court can determine the reasonably attributable benefit obtained, 3 times the value of that benefit; or
• if the Court cannot determine the benefit, 30% of adjusted turnover of the corporation during the breach turnover period for the offence.

Further, penalties can be issued to individuals who contravene the ACL of up to $2,500,000 per breach.

Recently, the Environmental Defenders Office (EDO) made a complaint with the ACCC against Etihad Airways (Etihad) in relation to statements made by the airline as to its plans to reach net zero emission by 2050 through a series of advertisements that are alleged to be misleading. The EDO allege that the misleading statements made by Etihad (1) created the false impression to the public and its customers as to the environmental impact the airline would have and (2) were unsupported and speculative, with no credible factual or scientific basis.

Impact of increased regulatory scrutiny on insurance

The Mercer proceeding and the infringement notices issued by ASIC appear to only be the beginning of a potential new wave of investigations and litigation by regulators. In addition to entities being liable for misleading and deceptive conduct under the Corporations Act and/or the ASIC Act, entities could also be in breach of their continuous disclosure obligations if it is listed on the ASX or, if it is a disclosing entity, in breach of the ASX Corporate Governance Principles and Recommendations. Not only can entities be liable for greenwashing, but directors of an entity can also be personally liable.

There is also the increased risk of claims by shareholders and others seeking to hold entities and their board accountable. For example, Australasian Centre for Corporate Responsibility v Santos which was the first case to challenge the credibility of a corporation's net zero emissions target in the Federal Court of Australia. ASIC has also specifically said that it is a director's duty to avoid being involved in greenwashing. Directors risk being in breach of ss. 180 - 181 of the Corporations Act. The new regulatory focus on greenwashing is therefore another concerning development for insurers.

Insurers will no doubt see an increase of Claims against various policies (beyond simply D&O insurance) as a result of the increased number of investigations and litigation being commenced alleging greenwashing. There is a risk that entities will have increased investigation costs and face the risk of increased penalties or fines (for entities and directors). Insurers will need to look at the wording of the suite of policies they have issued to entities and consider which may respond to Claims arising from allegations of greenwashing (and ESG generally) by regulators (and others). It is therefore important that insurers consider the coverage implications of a company's environmental (as well as social) policies and the representations they make about their credentials during the underwriting process. Insurers should be requesting a detailed explanation of an insured's management of their sustainability practises, together with supporting documents, and interrogate their representations.