Assessing modern governance with emerging ESG factors: Green targets and ‘greenwashing’

It is now widely accepted that Australian law requires any material exposure to climate change risks be incorporated into the various financial disclosures mandated by the Corporations Act 2001 (Cth) (Corporations Act), particularly in directors’ reports (s 299 and s 299A(1)), annual financial reports (s 295) and continuous disclosure obligations (s 674).

ASIC specifically requires climate-related disclosures to be included in a company’s operating and financial review under section 299A(1)(c) of the Corporations Act where climate risk is a material issue that affects the company’s achievement of its financial performance.

Where directors fail to do so, it is becoming increasingly apparent that they may be open to personal liability under section 180 (Duty to act with reasonable care and diligence) and section 181 (Duty to act in good faith in the best interests of the company and for proper purposes) of the Corporations Act.

Companies, however, need to be careful when making disclosures and commitments under this regime as they can give rise to liability risks where such commitments are considered misleading or deceptive under the Australian Consumer Law; Corporations Act and ASIC Act 2001 (Cth).

Potentially misleading disclosures and claims in the environmental or climate change context could be seen as ‘greenwashing’, a term which involves making an unsubstantiated or misleading claim about the environmental status of a business or the environmental benefits of a product, service, technology or company practice.

Noel Hutley SC & Sebastian Hartford Davies in their latest Opinion (April 2021) note that: 

• “greenwashing” is providing inaccurate climate- related statements and disclosures, including flawed climate scenario analysis and “net zero” commitments that are misleading or made without a reasonable basis; and
• “It is foreseeable that a company and its directors could be found to have engaged in misleading or deceptive conduct by not having had “reasonable grounds” to support the express and implied representations contained within its net zero commitment.” 

There are several aspects of a company’s climate reporting obligations which lends itself to allegations of greenwashing, including:

• Climate-related disclosures: financial and other disclosures regarding exposure to climate risk;
• Broad corporate goals and representations in relation to:
  • 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.

Companies involved in ‘greenwashing’ will fall foul of section 1041H of the Corporations Act which prohibits conduct which is misleading or deceptive, or likely to mislead or deceive.¹

Of particular importance is the fact that a ‘net zero’ commitment, being in some cases a promise to achieve a certain carbon emissions profile by a certain date, will constitute a representation about a future matter. Section 769C of the Corporations Act provides that, if a person makes a representation about a future matter, and the person “does not have reasonable grounds for making the representation”, then the representation is “taken to be misleading”.² Directors must therefore ensure that net zero commitments are founded upon ‘reasonable grounds’. For there to have been reasonable grounds, there must have existed ‘facts sufficient to induce that state of mind in a reasonable person.’

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.

Regulators are increasingly becoming alive to the practice of greenwashing with ASIC announcing that the will ‘crackdown’ on the practice of greenwashing.³ In December 2019, in response to action by the Australian Competition and Consumer Commission, 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.⁴

Legal challenges on this basis have already begun.⁵ 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.

In the context of setting net zero targets, Noel Hutley SC and Sebastian Hartford Davis proposed several practical steps for avoiding greenwashing, 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
  
  These developments make it clear that companies will be subject to increased and more rigorous scrutiny from regulators and stakeholders alike and serve as a clarion call for companies and their directors to take steps to: (i) identify and manage climate risks; (ii) make accurate and appropriate disclosures in public announcements, including in mandatory and voluntary reporting frameworks; and (iii) ensure that there is a proper and substantiated basis for any public commitments relating to climate risk.