Regulatory action for greenwashing is upon us

Last week, the Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings for alleged greenwashing against Mercer Superannuation (Australia) Limited (Mercer). This is in addition to ASIC having issued penalty notices to at least four companies for alleged greenwashing, since October 2022. Last year, ASIC identified investigating greenwashing and taking enforcement action where greenwashing is identified, as key priorities for 2023. True to its word, with the above actions ASIC appears to have switched from educating the market about greenwashing to enforcement and it seems highly likely that further such action will be taken.

In this article we review the proceedings and penalty notices issued by ASIC to identify any themes as well as ways to minimise the risk of greenwashing.

What is Greenwashing?

ASIC defines greenwashing as ‘the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical’[i].

Consideration of the facts underlying ASIC’s civil penalty proceedings against Mercer and each of the penalty notices issued by ASIC, provides some initial insight into the various ways in which greenwashing has been claimed to arise and some indications as to how to minimise it.

So far, communications in which greenwashing has been alleged to arise include statements on websites, product disclosure statements and statements to the ASX.

Statements on websites

In the Mercer case, ASIC alleges that Mercer made statements on its website about seven ‘Sustainable Plus’ investment options offered by the Mercer Super Trust. These statements marketed the Sustainable Plus options as suitable for members who ‘are deeply committed to sustainability’ because they excluded investments in companies involved in carbon intensive fossil fuels like thermal coal. Exclusions were also stated to apply to companies involved in alcohol production and gambling.

However, ASIC alleges that members who took up the Sustainable Plus options had investments in companies involved in industries the website said were excluded, including:

1. 15 companies involved in the extraction or sale of carbon intensive fossil fuels;
2. 15 companies involved in the production of alcohol; and
3. 19 companies involved in gambling.

Similarly, ASIC issued a penalty notice to Diversa Trustees Limited (Diversa) based upon concerns ASIC had about statements on a website.  Diversa is the issuer of a superannuation product Cruelty Free Super (CFS), as trustee for Professional Super, a sub-fund of the Tidswell Master Superannuation Plan. ASIC was concerned that statements on CFS’ website may have been false or misleading by overstating exclusions, otherwise known as “investment screens”. In these statements, CFS claimed to prevent investment in companies involved in ‘polluting and carbon intensive activities’, ‘financing or support of activities which cause environmental and social harm’ and ‘poor corporate governance’.

ASIC alleged that while some investment screens were applied by CFS, they were more specific and implemented on a more limited basis than CFS’ website had suggested.

Diversa paid $13,320 in compliance with the infringement notices, which is not, however, an admission of guilt or liability.

Product disclosure statements

ASIC issued infringement notices to Vanguard Investments Australia (Vanguard), alleging that product disclosure statements for the Vanguard International Shares Select Exclusions Index Fund may have been liable to mislead the public by overstating an exclusion claimed to prevent investment in companies involved in significant sales, again, known as an ‘investment screen’. The Vanguard Funds were structured to exclude certain investments in tobacco. However, while the screen excluded manufacturers of cigarettes and other tobacco products, ASIC alleged that it did not exclude companies involved in the sale of tobacco products.

Vanguard paid a fine of $39,960, which again does not constitute and admission of liability.

Statements to the Australian Securities Exchange

ASIC issued four infringement notices to Tlou Energy (Tlou), a listed energy company, alleging false or misleading sustainability-related statements made to the Australian Securities Exchange (ASX), such as that it would be carbon-neutral and had environmental approval and the capability to generate certain quantities of electricity from solar power.

ASIC’s concern was that “Tlou either did not have a reasonable basis to make the representations, or that the representations were factually incorrect.”

Tlou Energy paid a fine of $53,280, which again does not constitute an admission of liability.

Finally, so far, infringement notices were also issued to Black Mountain Energy (BME) in relation to statements contained in ASX announcements made by BME which claimed that:

• BME was creating a natural gas development project with ‘net-zero carbon emissions’, and
• the greenhouse gas emissions associated with Project Valhalla would be net zero.

ASIC was concerned that BME either did not have a reasonable basis to make the representations, or that the representations were factually incorrect.

BME paid $39,960 to comply with the infringement notices which again does not constitute an admission of guilt or liability.

Directors may be personally liable for Greenwashing

It is important to note that, as well as companies being held liable for greenwashing, directors can also be held personally liable. ASIC has stated that avoiding being involved in greenwashing is part of a director’s duties and so the usual test applies, is the director doing what a reasonable director would do when faced with the circumstances?

How to minimise the risk of Greenwashing

Some suggestions about how companies and directors may minimise the risk of greenwashing include the following:

1. Ensure the truth and factual correctness of all statements and representations made in public documents, including on websites, in announcements and marketing material and in public disclosure statements.
2. Be aware of how greenwashing can arise, for example by overstating an ESG claim or not identifying that while the claim is factually correct in one aspect of a business it is misleading in relation to other aspects of the business or supply chain.
3. Do not overstate green or other ESG credentials. Ensure that such statements and representations are specific and appropriately limited. Consider how they apply to the business broadly. Claims may need to be moderated, for example, if there is a supply chain issue.
4. Ensure that there is valid and reliable evidence available and a reasonable basis to back up and substantiate all ESG representations and statements. For example, sustainability claims such as aspirational goals regarding meeting future targets require valid and reliable evidence to support them, such as that there are genuine measures in train going towards meeting these goals.
5. Boards require visibility over ESG claims so they can pick up potentially misleading statements.
6. Boards need to make enquiries of management as to the truth and factual correctness of the use of green credentials and ESG claims and what evidence there is to support the representations.
7. Companies need to have systems in place to check and review ESG claims and the evidence to support them to pick up any changes over time or inadvertent publications of factually incorrect claims.

Where a greenwashing or other ESG claim is identified as being inadvertently misleading, remedy it quickly and publish a correction as soon as possible.

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Authored by:

Susan Goodman, Partner

[i]ASIC Information Sheet (INFO 271) How to avoid greenwashing when offering or promoting sustainability-related products