With the increasing spotlight and expectations on companies around environmental, social and governance issues come new and evolving areas of risk for boards and insurers.
Listed companies, super funds and managed funds are firmly in ASIC’s sights for potential “greenwashing”. This emerging area of risk will continue to develop.
What is greenwashing?
Shareholders and investors are increasingly demanding transparency about steps being taken to manage environmental, social and governance risks.
The term “greenwashing” has been coined to describe the act of over-stating or mis-representing a financial product or company’s environmental credentials or the achievability of forward-looking targets. For example, making vague or unsupported claims about reductions in emissions or not taking into account all relevant metrics or having sufficient grounds when committing to a net zero target.
ASIC demonstrates it will pursue enforcement action in serious cases of greenwashing
Climate related governance has become a key area of focus for Australian regulators in recent years.
ASIC Chairman Joseph Longo told the Australian Financial Review on 23 August that ASIC is conducting at least two investigations, including one listed company and several other entities were being monitored for greenwashing practices and potential breaches of the Corporations Act.
As outlined in its Corporate Plan released on 22 August, sustainable finance is identified as one of ASIC’s four external strategic priorities. Improving sustainable finance practices and disclosure of climate risks is one of the core strategic projects.
“As climate change and sustainability become the dominant themes of our times, we are seeing investment increasingly being driven by values-based decisions. In response, there has been a proliferation of investment products and companies appealing to consumers with sustainable or ‘green’ investments and ‘net zero’ emission promises.
A core part of ASIC business is to ensure that firms comply with disclosure requirements and do not mislead investors. It follows that improving climate-related governance and disclosure are key priorities for ASIC.” [1]
ASIC guidance
ASIC’s Information Sheet 271 “How to avoid greenwashing when offering or promoting sustainability related products” provides helpful guidance for responsible entities of managed funds and trustees of superannuation entities but the key principles can also be applied to listed companies.
It sets out nine questions to be considered with key examples. As to sustainability targets, companies need to be checking whether they have reasonable grounds for a stated sustainability target. Have you explained how this target will be measured and achieved?
what is the target?
how and when is it expected to be met?
how will progress or milestones be measured?
what assumptions are relied on when setting that target or when measuring progress? [2]
D&O exposure
Failure to properly factor in climate issues on the one hand and unsubstantiated or misleading future representations concerning net zero commitments or other sustainability targets on the other, may open companies and directors to legal risk.
We’ve now seen regulatory investigations are underway. As is activist class action litigation, for example the Santos case discussed below.
Forward looking statements and the potential for greenwashing require particular care. Securities class actions for breach of continuous disclosure laws and misleading and deceptive conduct are foreseeable.
Legal costs and expenses involved in responding to and defending these actions will be a key exposure for directors and officers insurers as climate related risk continues to expand.
Australian Landmark Greenwashing litigation
There were also developments in August in Australia’s first greenwashing related litigation against oil and gas producer, Santos Limited.
Shareholder activist group, the Australian Centre for Corporate Responsibility commenced proceedings in the Federal Court in 2021 alleging that Santos breached the Corporations Act and the Australian Consumer law by engaging in misleading and deceptive conduct relating to its clean energy claims and net zero target plan in its 2020 Annual report.
The pleadings were expanded to include more detailed allegations of greenwashing, including in Santos’ 2021 Investor Day Briefing and 2021 Climate Change Report. [3]
It is alleged the company’s plans lacked sufficient scrutiny, detail and achievability. The plaintiffs are challenging the technical viability of carbon capture and storage, the representations that hydrogen produced from natural gas with CCS (blue hydrogen) is “clean” and the dependance on offsets to achieve the target of net zero by 2040.
The case remains before the Federal Court, with a hearing unlikely until 2023. It will be one to keep a close eye on as a major test in this evolving area.
Global Climate Disclosure Standards
According to information gathered by the Australian Institute of Company Directors (AICD) at the Climate Governance Forum on 1 August, 103 of the ASX 200 companies are voluntarily reporting on climate risks and strategy. [4]
The International Sustainability Standards Board (ISSB) was established to develop a global consistent approach on sustainability financial disclosures for capital markets. New international standards for climate risk disclosure are expected to be finalised in 2023. The ISSB draft Climate Related Disclosure standards, issued for consultation this year, would require a company to identify their sustainability and climate-related risks and opportunities and give detailed disclosures with their financial reporting.
This includes detailed information about:
Governance — processes, controls and procedures used to monitor and manage sustainability and climate-related risks and opportunities;
Strategy — the approach for addressing sustainability and climate-related risks and opportunities that could affect a company’s business model and strategy over the short, medium and long term;
Risk management — processes used to identify, assess and manage sustainability and climate-related risks; and
Metrics and targets — information used to assess, manage and monitor a company’s performance in relation to sustainability and climate-related risks and opportunities over time.
Under the draft guidelines, companies would need to report direct and indirect greenhouse emissions, including emissions from a company’s supply chain such as raw materials suppliers.
How the draft Climate Related Disclosure standards are implemented in Australia and the interplay between increased mandatory disclosures and Australia’s legal framework of director and officer exposure will be an area to watch.
In submissions on the draft guidelines, the AICD strongly supported harmonised international sustainability standards but they outlined some areas of concern including the higher liability risks in Australia compared to other jurisdictions. They pointed to heightened regulator risk in Australia because ASIC can pursue directors for breaches of their duty of care and diligence, Australia has a uniquely facilitative and active shareholder class action regime and there is no safe harbour exemption for forward looking statements. [5]
Key take aways
Boards need to not only report environmental and climate related risks but also ensure that any forward- looking statements they make are not misleading and are based on reasonable grounds that can be substantiated.
Taking steps to ensure positive action is taken to address environmental and climate related risk comes with the need to balance against potential greenwashing. This is a new area of regulatory and litigation risk for companies, directors and insurers to monitor closely going forward.
At a general level, some of the basic questions that a company needs to ask themselves are:
Do they have appropriate governance frameworks and risk management practices in place to manage and monitor climate risks and impacts
Have they properly factored in costs associated with sustainable or carbon neutral policies?
Are their sustainability representations and sustainability / net zero targets sufficiently detailed and based on reasonable, demonstrable grounds? How are they measured and tested and what assumptions are they based on?
Have any circumstances changed over time such that a representation should be reviewed, and appropriate disclosure made in accordance with continuous disclosure obligations.
[1] Looking ahead: ASIC’s priorities -Speech by ASIC Chair Joseph Longo to the Committee for Economic Development of Australia (CEDA), 23 August 2022
[5] 15 July 2022, AICD Submissions on international standards for sustainability and climate related disclosures. https://www.aicd.com.au/news-media/policy-submissions/2022/aicd-submissions-on-international-standards-for-sustainability-and-climate-related-disclosures.html (opens a new window)
