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Author: Theresa Lewin
In response to consumers, shareholders and regulators seeking more demonstrable ethical and sustainable practices from companies, businesses are issuing sustainability reports and profiling their environmental, social and governance (ESG) practices. Keen to promote positive brand reputation and environmental and social responsibilities, companies showcase their credentials and attract customers and investors seeking to work with organisations committed to a sustainable future. Businesses typically detail their ESG policies but, while this focus on sustainability is a positive development, it has also led to cases of false claims.
Emerging concerns about greenwashing: a misleading practice in the communication by an organisation in which the company's credentials about how environmentally friendly, sustainable or ethical it is are exaggerated or unsubstantiated. As a result there is greater scrutiny on how organisations deal with ESG responsibilities and issues.
In many jurisdictions greenwashing is now a leading concern for shareholders, regulators, investors, customers, employees and the wider public. Investors and consumers are placing increasing value in their decision-making on the green credentials of companies they invest in, and the products and services they purchase.
The heightened focus on ESG poses challenges for organisations which need to respond to the ESG concerns of their shareholders and regulators and, in the case of certain industries, to consider the ESG priorities of their investors, including the communication of investments within an ESG framework.
In Australia compliance with ESG representation is becoming a key focus for regulators. In November 2022 The Australian Securities and Investments Commission (ASIC) released details of its enforcement priorities for 2023, which detailed a continued focus on greenwashing, including the rise of sustainable finance. ASIC will closely monitor for misleading conduct and greenwashing claims that cannot be substantiated, and take action where necessary.
The Corporations Act 2001 and the ASIC Act 2001 contain general prohibitions against businesses making false or misleading statements, or engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service. In addition, the ACCC enforcement and compliance priorities for 2023‒24 included concerns relating to environmental claims and sustainability.
Regulatory developments around greenwashing
In mid 2023 ASIC released a report detailing the 35 interventions it has made in response to its greenwashing surveillance. Its activities include ongoing surveillances and several investigations in anticipation of further regulatory action.
ASIC interventions around greenwashing include:
- net zero statements and targets
- use of terms such as 'carbon neutral', 'clean', or 'green'
- labelling of funds and the scope and application of investment exclusions and screens.
These ASIC interventions have resulted in 23 corrective disclosure outcomes, 11 infringement notices issued and the commencement of civil penalty proceedings in one case.
The Australian Competition and Consumer Commission (ACCC) also released a report on greenwashing in early 2023, detailing its findings. Of the 247 businesses reviewed, 57% were identified as having made concerning claims about their environmental credentials.
ACCC key findings around greenwashing include:
- vague and unqualified claims
- a lack of substantiating information
- use of absolute claims
- exaggerating benefits
- use of aspirational claims with limited information on how the goals will be achieved
- use of trademarks which appear to be trust marks.
The ACCC has stated it will be conducting further analysis of these issues and will undertake enforcement, compliance, and education activities where appropriate.
In early 2023 the Australian Senate launched an inquiry into greenwashing, particularly around claims made by companies, the impact of these claims on consumers, regulatory examples, advertising standards and legislative options to protect consumers. The final report is due in December 2023.
What is greenhushing and how does it apply to ESG?
As a result of this recent scrutiny we are seeing a growth in the phenomenon of greenhushing. The Australian Financial Review refers to greenhushing as companies stepping back their environmental commitments as regulators ramp up attention as to whether they're keeping their promises. Many organisations are becoming more conservative in their reporting of their green or sustainable credentials.
Recently shareholder activism is challenging businesses to clearly detail their corporate policy on managing their impact on the environment and agreeing to emissions targets. There has also been an increase in the number of regulatory actions and proposed litigation with regard to greenwashing allegations, globally as well as in Australia.
In one recent example, as a result of surveillance activities ASIC commenced proceedings in the Federal Court against an Australian superannuation fund in relation to alleged greenwashing. This misconduct took the form of offering sustainable investment options which excluded investments in companies involved in fossil fuels, alcohol production and gambling. ASIC alleges these were false representations liable to mislead potential members.
These actions put Australian businesses and more specifically their boards and directors on notice that greenwashing their sustainability credentials will not be tolerated. It also places senior managers in the position of proactively managing the potential costs involved if a greenwashing case is brought against their business by regulatory authorities or other stakeholders.
How Gallagher can help
Connect with us to request a professional and financial lines risk insurance consultation, quote or proposal in consideration of how your financial lines insurance arrangements might protect you from possible greenwashing exposures. Our insurance brokers have the expertise and experience to advise you on obtaining the insurance cover you need.
