Globally and in Australia there is an increasing focus on the environmental and sustainability credentials of organisations. This in turn has led to claims and regulatory action in which it is alleged that companies have overpromised. While the first 'greenwashing' civil penalty proceedings in Australia involve superannuation and investment funds, the risks are not limited to participants in the financial services industry. Consumers are increasingly interested in purchasing (and often paying more for) sustainable or environmentally friendly products and shareholders are more willing to invest in companies that have environmental, social and governance (ESG) and sustainability goals which align with their values. Sustainability and ESG have shifted from being an afterthought to an essential aspect of a business offering in a competitive market.
Amid rising consumer and shareholder demand and sophistication, greenwashing is a key area of risk for companies, their advisers and insurers. While there is no one accepted definition, in general terms 'greenwashing' occurs when a company allegedly conveys false or misleading representations about the extent to which its products, practices or brand are environmentally friendly, sustainable or ethical.
There is currently no Australian legislation specifically aimed at greenwashing. Consistent with the experience internationally, to date greenwashing claims have generally been bought under legislation with provisions which prohibit misleading or deceptive conduct in trade or commerce or financial services, such as the Corporations Act 2001 (Cth) (Corporations Act), Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth).
The Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) consider that companies 'overreaching' on their sustainability claims are the biggest cause of greenwashing in corporate Australia. Both ASIC and the ACCC declared greenwashing to be a top enforcement priority for 2023. This has been borne out by ASIC's willingness to test the issue through the Courts.
ASIC greenwashing actions
Following on from ASIC's first greenwashing infringement notices against Australian companies in various industries (as discussed in an earlier Limebite here), ASIC commenced separate legal actions against Mercer Superannuation (Australia) Limited (Mercer), Vanguard Investments Australia Limited (Vanguard) and LGSS Pty Limited (Active Super) for alleged greenwashing conduct in contravention of the misleading and deceptive conduct prohibitions applicable to financial services under the ASIC Act.
In February 2023, ASIC commenced its first civil penalty proceedings for alleged greenwashing against Mercer. ASIC alleges that from at least 23 January 2022 to at least 18 November 2022, Mercer (as trustee of the Mercer Super Trust) made misleading statements on its website about the features of seven 'Sustainable Plus' investment options offered by the Mercer Super Trust. According to the Concise Statement, these options were marketed as suitable for members that are 'deeply committed to sustainability' and purportedly excluded investments in businesses engaged in the extraction or sale of carbon intensive fossil fuels, production of alcohol and gambling. ASIC alleges that the 'true position' was that the Sustainable Plus funds held 15 stocks from companies involved in carbon intensive fossil fuels and 34 stocks across the alcohol and gambling sectors.
ASIC is seeking declarations, pecuniary penalties, injunctions and adverse publicity orders against Mercer. The hearing is set down for 7 December 2023.
The Mercer proceeding is also the first time ASIC used its enhanced powers to take action regarding a broader range of superannuation trustee conduct, following the Financial Services Royal Commission.
In July 2023, ASIC commenced a greenwashing case against Vanguard. ASIC alleges that between 7 August 2018 to 17 February 2021, Vanguard made false and misleading statements and engaged in conduct likely to mislead the public by allegedly representing that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (the Fund) were researched and screened to exclude investment in securities that did not satisfy certain ESG criteria. The composition of the Fund was based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (the Index).
According to the Concise Statement, ASIC alleges a significant proportion of securities in the Index and the Fund were from issuers that were not researched or screened and which violated the applicable ESG criteria. For example, ASIC alleges a fossil fuel screen, as in effect from 15 July 2020, did not cover companies that derived revenue from the transportation or exploration of thermal coal. The first case management hearing is listed on 27 November 2023.
In its latest action, ASIC alleges that LGSS as trustee of Active Super made false or misleading representations and engaged in conduct liable to mislead the public in relation to investments that would not be made or held by Active Super. Specifically, it is alleged that Active Super made representations on its website about its commitment to ethical and sustainable investment by eliminating investments in gambling, tobacco, and nuclear weapons for example. ASIC also alleges that from in or around May 2022, Active Super stated that it had added Russia to its list of excluded countries following the invasion of Ukraine.
However, ASIC has identified that between 1 February 2021 to 30 June 2023, Active Super directly and indirectly invested in companies that derived revenue from the excluded investments including via, for example:
- direct holdings in Amcor PLC, a manufacturer of plastic packaging that provides specialty cartons for the tobacco industry;
- indirect holdings in companies involved in gambling, including Skycity Entertainment Group Limited, Tabcorp Holdings Limited and The Lottery Corporation Limited. Some of these were held via Active Super's interests in the ASX200; and
- indirect holdings in Russian entities such as Gazprom PJSC and Rosneft Oil Company.
ASIC is seeking declarations, pecuniary penalties, adverse publicity orders and an injunction against Active Super. The proceeding is provisionally listed for hearing on liability on 25 and 26 March 2024.
ACCC greenwashing actions
As a result of the ACCC's two internet sweeps in October 2022 (as referred to in our earlier Limebite), the ACCC identified that 57% of businesses reviewed across various industries such as energy, vehicles, electronics, food and beverages, made potentially misleading environmental claims which included:
- using vague or unclear environmental claims;
- not providing sufficient evidence for their claims;
- setting environmental goals without clear paths for how these will be achieved; or
- using third-party certifications and symbols in a confusing way.
In July 2023, the Victoria Forest Alliance filed an ACCC complaint against VicForest (a Victorian government agency) regarding potentially misleading statements on the VicForests website about the impacts of industrial logging on carbon stores in forests. The ACCC has been asked to investigate whether the statements on VicForests' website may be false and misleading within the meaning of sections 18 and 29 of the Australian Consumer Law.
Strategic litigation by shareholders and consumers
In addition to the increasing number of regulatory actions, shareholders and consumers in Australia are also filing a number of ESG claims against Australian companies.
The first such claim was filed in in the Federal Court of Australia in September 2021 by the Australasian Centre for Corporate Responsibility (ACCR) a shareholder advocacy and research organisation, against large oil and gas company Santos alleging breach of the misleading and deceptive conduct prohibitions in the Corporations Act and Australian Consumer Law.
The ACCR alleges that Santos engaged in misleading or deceptive conduct by making statements in its 2020 Annual Report that natural gas provides 'clean energy' and regarding its net zero emissions plan. Amongst other things, the ACCR alleges the plan did not account for expected production and/or emissions growth from oil and gas exploration opportunities beyond 2025 and depends on undisclosed assumptions about the effectiveness of carbon capture and storage processes. The proceeding has yet to be allocated a trial date.
Most recently, in August 2023, the Australian Parents for Climate Action (AP4CA) commenced a proceeding in the Federal Court of Australia against Energy Australia, a major electricity and gas provider, for alleged greenwashing.
The AP4CA alleges that Energy Australia engaged in misleading or deceptive conduct by marketing its 'Go Neutral' product as 'carbon neutral' and having 'a positive impact on the environment' when it is primarily generated by burning fossil fuels. AP4CA also alleges that Energy Australia cannot truly be carbon neutral by relying on buying carbon offsets. The first case management hearing in the matter is listed on 2 November 2023.
The above are some of the more notable developments in 2023 and continues a trend of increased litigation and regulatory action, which shows no sign of abating.
There was no change in the law in Australia in 2023 (see Part 2 for changes expected in 2024). However, regulators and claimants are using the existing laws to drive increased accountability and for their own agendas. Corporate Australia can and should expect their decisions and representations relating to climate risks and ESG will be closely scrutinised by a wide range of stakeholders including regulators, investors, employees and customers. Undoubtedly, this will capture directors and senior management.
As we head into another Australian summer with warnings of bushfire risks, the risks of climate related litigation and the detrimental impact this can have on a company's reputation, are particularly acute.
In Part 2 of our Limelight update on this topic, we will focus on the year ahead with an overview of upcoming changes to Australian corporate reporting requirements with the proposed introduction of mandatory climate disclosure from 1 July 2024 for large entities and large emitters.
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