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Legal implications of greenwashing and the rise of sustainability

As ESG issues gain more traction in the legal market and the climate crisis intensifies, greenwashing is becoming more commonplace amid rising sustainability demands. In response to this, lawyers not only need to have the risk of greenwashing front of mind when advising clients but also steer towards corporate and government accountability.

user iconLauren Croft 04 October 2023 Big Law
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Environmental, social and governance (ESG) has been revealed to be one of the top key trends for the legal profession in 2023 – with tech and ESG also tipped to drive merger and acquisition throughout the year.

A report from Herbert Smith Freehills late last year also revealed that ESG was a concern for 90 per cent of business leaders – with greenwashing being a key issue for both organisations and lawyers.

Greenwashing refers to the deceptive marketing tactics used by organisations to make their products or operations appear more environmentally friendly or sustainable than they actually are.

 
 

While there isn’t currently specific legislation around greenwashing, the Corporations Act, ASIC Act and Australian Consumer Law, all contain prohibitions against engaging in misleading or deceptive conduct, and organisations that make false or misleading sustainability claims risk falling foul of these legislative provisions.

Increased demand for sustainability = increased greenwashing

Following the growth of the ESG sector in recent years, it’s no surprise that investor and consumer appetite for environmentally friendly purchases and investments has grown – but this growth has also resulted in an increased level (and incentive for) greenwashing.

“Greenwashing has become increasingly prevalent over the last five [to] 10 years, as more organisations have sought to capitalise on the growing consumer and investor demand for environmentally friendly and sustainable products and practices,” Greenpeace Australia Pacific general counsel Katrina Bullock told Lawyers Weekly.

“Lawyers should be familiar with greenwashing as many types of greenwashing can lead to acute reputational, regulatory and litigation risks for organisations and their directors.”

In March this year, the Australian Competition and Consumer Commission (ACCC) conducted an internet sweep of Australian organisations, which revealed that 57 per cent of the organisations reviewed made concerning claims that may constitute greenwashing, such as making vague or unclear environmental claims, not providing sufficient evidence for those claims, and setting environmental goals without a clear plan on how to achieve them.

And over the last three years, the term “greenwashing” has “certainly become part of the lexicon for commercial lawyers”, according to Gilbert + Tobin partners Ilona Millar and Jeremy Jose.

“Environmental and sustainability claims – whether they be organisation-wide statements, product-specific claims, or linked to a third-party certification, and whether they be on websites, advertisements, packaging or in company reports – are everywhere, which is to be expected given we live in a world where consumers are wary of the environmental and social impacts of their purchases, and organisations face pressure to set ambitious ‘net zero’ and other sustainability-linked targets,” the pair said.

“Against that backdrop, perhaps it’s unsurprising that concerns about greenwashing have arisen. Accordingly, lawyers assisting clients with drafting any publicly facing materials need to be familiar with the signs of greenwashing and associated legal risks and be equipped to help clients ensure that any statements they make about the environmental or sustainability credentials of their business or their particular products or services are accurate and made with a reasonable basis.”

Regulatory bodies cracking down

While the law prohibiting false or misleading claims is not new, the increasing amount of greenwashing means more regulator actions from both the ACCC and the Australian Securities and Investments Commission (ASIC), which have highlighted greenwashing as a current enforcement priority, outlined Clayton Utz partner Kirsten Webb.

“I think regulatory bodies have identified greenwashing as an enforcement priority because the amount of greenwashing has increased,” she said.

“The ACCC’s draft greenwashing guidelines say that a growing number of businesses are making environmental claims about their products, services, and operations. ASIC says listed companies, managed funds and superannuation funds are increasingly making claims about their ESG credentials.”

To date, regulatory actions and “strategic litigation” have tended to target large energy companies and financial services firms, with a strong focus on statements about “net zero” and “carbon neutrality”, as well as the use of sustainability-related investment screens, according to Ms Millar and Mr Jose.

“As an example, ASIC’s first publicised greenwashing enforcement action targeted energy company Tlou Energy Limited in relation to statements made in ASX announcements about the emissions intensity of its gas-to-power project (among other things), and ASIC’s first court proceedings for greenwashing were brought against Mercer Superannuation in relation to statements about the sustainable nature and characteristics of some of its superannuation investment options,” the pair said.

“The ongoing Federal Court action by the Australasian Centre for Corporate Responsibility against Santos Ltd alleging misleading or deceptive conduct in relation to Santos’ strategy for achieving ‘net zero’ scope 1 and 2 greenhouse gas emissions by 2040 is also worth mentioning: commenced in August 2021, it is one of the first examples of strategic greenwashing litigation in Australia, and we expect there to be strong interest in its outcome.”

In the period between July 2022 and March this year, ASIC initiated 35 interventions linked to greenwashing.

The regulator recently commenced proceedings against Active Super for alleged greenwashing after the fund claimed it had eliminated investments that posed too great a risk to the environment and the community, including tobacco manufacturing, oil tar sands and gambling. This followed the news that a legal claim against Energy Australia was launched in an Australian first, after ASIC launched proceedings against Vanguard for greenwashing, following a crackdown on greenwashing in recent months, bringing its first court action for greenwashing in February this year and warning of more to come in March.

In late March, an Australian Competition and Consumer Commission (ACCC) complaint was lodged against Etihad Airways after the airline displayed allegedly greenwashed advertisements during a 2022 soccer match, following Future Super receiving an infringement notice from ASIC in May after concerns were raised about a Facebook post.

Back in 2021, Volkswagen was also slapped with a $125 million pecuniary penalty following an emissions scandal.

“It’s not only regulators who are holding companies to account for greenwashing. Investors and consumers are, too. In addition to the $125 million pecuniary penalty Volkswagen paid, it also dished out around $120 million to eligible Australian motorists in response to a consumer class action lawsuit over the emissions cheating vehicles,” Ms Bullock explained.

“We are also seeing investors demand accountability over climate transition claims. For example, shareholder advocacy and research organisation Australasian Centre for Corporate Responsibility (ACCR) has sued Santos, claiming the energy giant engaged in misleading or deceptive conduct relating to its clean energy and net zero claims.

“Greenwashing allegations are not confined to company targets. The Australia Institute, for example, has filed a complaint with the ACCC alleging ‘state-sponsored greenwashing’ in relation to the government’s ‘climate active’ trademark. The initiative is a government-backed certification scheme that certifies Australian businesses (including fossil fuel retailers) [that] have offset some of their emissions. Similarly, Greenpeace organisations based in Europe have filed a lawsuit against the European Commission in the European Court of Justice over the inclusion of gas and nuclear energy in the EU’s Green Taxonomy, which is designed to help investors make sustainable investments.”

Lasting implications of greenwashing and ‘greenhushing’

In terms of legal implications, entities and their directors could face liability under the Corporations Act, ASIC Act and Australian Consumer Law, with regulatory crackdowns on greenwashing to continue moving forward.

Both regulators have the power to apply to court to seek penalties and other legal sanctions for conduct that is deemed misleading or deceptive, and maximum penalties for breaches of the Australian Consumer Law have recently increased to be up to $50 million per contravention or 30 per cent of the adjusted turnover of the company during the breach period, Ms Millar and Mr Jose emphasised.

“Apart from the risk of regulatory action from the ACCC, ASIC and others, organisations also risk facing strategic litigation from NGOs, [which] have shown a particular interest in greenwashing over the past two years, both in Australia and overseas,” they said.

Organisations that engage in greenwashing, Ms Bullock agreed, could face “a plethora of negative consequences, including substantial pecuniary penalties, infringement notice penalties, a loss of consumer and investor trust, reputational damage, divestment, boycotts, class action litigation and regulatory action”.

“Some entities have become nervous about making green claims due to the growing regulatory action and public scrutiny. ‘Greenhushing’ is the practice of withholding environmental information that would be of use to consumers and investors as a result of such concerns. It’s important to understand that the risks of not engaging with sustainability far outweigh the risks of engaging in good faith and not getting it 100 per cent right. For example, when setting a net zero target, an entity does not need to have a detailed methodology for achieving the target,” she added.

“However, such an announcement carries an expectation that the entity has a genuine intention, formed on reasonable grounds, to pursue strategies to achieve the target in good faith. It also carries an expectation that entities will provide progress updates benchmarking the net zero commitment against credible short- and medium-term targets and, in particular, that it will disclose setbacks promptly. Failure to fulfil these expectations places the entity and its directors at risk of liability for greenwashing.”

While this “phenomenon” of greenhushing may be tempting for organisations that are looking to avoid scrutiny, leaders have strongly criticised it, added Ms Millar and Mr Jose.

“[Greenhushing] goes against the tide of an emerging movement both in Australia and overseas towards transparent sustainability-related disclosures,” the pair said.

“With the recent release of the International Sustainability Standards Board’s global sustainability reporting standards, and consultations on a framework for mandatory climate-related financial risk disclosures for Australian businesses, organisations should be focusing on making transparent and reasonable decarbonisation and other sustainability commitments, and their lawyers should be supporting them to do so.”

The climate crisis and lawyers

In line with the rise of the clean energy space, and with renewables reportedly “here to stay” in law, climate litigation has also experienced a surge in the Australian legal landscape; the country has the second-highest level of climate change litigation activity in the world. This has resulted in ESG being an issue that sits firmly in boardrooms and C-suites, as well as climate-conscious lawyering is growing in popularity.

This climate litigation includes greenwashing, which Ms Bullock said is a “barrier to meaningful action to tackle the climate crisis”.

“Greenwashing can seriously hinder progress on climate action and environmental protection by misleading consumers and shareholders into supporting an entity that is perpetuating environmental harm rather than reducing or eliminating it.

“A misleading or ambiguous claim breaches consumer trust and erodes confidence in both the claim itself and sustainability claims in general. It undermines market integrity and, thus, fair, efficient and informed markets. We need stronger greenwashing regulation in Australia. Entities that genuinely pursue more sustainable products and services often incur additional production or research costs. False or misleading sustainability claims unfairly disadvantage entities who are doing the right thing,” she emphasised.

“In the context of greenwashing, lawyers who are advising on environmental representations should ensure that there is a documented plan in place to support climate-related projections, that there is a proper basis for making statements and a process in place for reporting on environmental credentials and initiatives.”

The ACCC has previously announced that “consumer and fair trading issues in relation to environmental claims and sustainability” is an enforcement and compliance priority moving forward, and ASIC clearly stated their support for the establishment of the International Sustainability Standard Board to develop high-quality baseline climate and sustainability disclosure standards.

As such, lawyers have been urged to use their legal skills to respond to the climate crisis – by keeping updated with any and all reforms, having real conversations with their clients and committing to supporting the community.

A good case has already been made that leading with an ESG strategy is good for business, as well as why legal teams should go beyond compliance issues and offer their clients a variety of lessons on the ESG front.

“In an era of escalating climate impacts, organisations are facing pressure to make ambitious decarbonisation commitments, and over 60 per cent of the ASX200 have set ‘net zero’ targets. In parallel, greenwashing with respect to ‘net zero’ commitments has been a key focus for regulators and strategic litigants. Importantly, forward-looking statements like ‘net zero’ targets can pose a particular greenwashing risk because the law presumes that representations about future matters are misleading if the person making it does not have reasonable grounds to do so. For this reason, it is critical that organisations making net zero or other decarbonisation or sustainability commitments have – and can show they have – reasonable grounds,” Ms Millar and Mr Jose explained.

“Perhaps more fundamentally, greenwashing undermines credible work to combat climate change: where organisations overstate their decarbonisation efforts, they risk delaying urgent climate action by promoting a false sense among the community that more has been done to reduce emissions than is, in fact, the case.

“Greenwashing risk should be front of mind for any lawyer assisting a client with the preparation of public-facing materials. As a matter of best practice, lawyers should keep track of not only the law in this space and the outcomes of key proceedings but also the emergence of good practice guidance from regulators – such as the ACCC’s draft guidance for business on environmental and sustainability claims – and strive to help clients make environmental and sustainability claims that are accurate, easy to understand, verifiable, and supported with evidence.”

Moreover, the law can be a powerful tool in fighting the climate crisis and can be “an instrument for structural change”, Ms Bullock posited.

“As lawyers, we are uniquely privileged in our understanding of and ability to help mould the law to ensure it is a progressive force for positive change. Yet, we are often taught to advise clients in a way that externalises responsibility for climate action or limits corporate accountability. That needs to stop. Our paramount duty is to the court and to the administration of justice. Justice cannot be achieved in the absence of corporate and government responsibility for climate emissions.

“We have been socialised over many decades to act as advisors, never decision makers. We have been trained to remain at arm’s length from issues [that] appear political in nature, and in Australia, the climate transition has been highly politicised. But the reality is that the climate crisis is not a partisan political issue, and this mentality strips lawyers of their agency and value in the shared fight to tackle the climate crisis. The climate crisis is an existential threat that transcends political, social, or ideological interests, allegiances or grievances. It impacts everyone everywhere, and the onus is on all of us to contribute to the transition to a low-carbon economy and secure a safe and healthy environment,” she concluded.

“All lawyers, not just environmental and climate lawyers, have a duty to consider, integrate and apply issues of climate change and climate justice in their practice of the law.”