Regulators step up enforcement action over greenwashing claims

The practice known as ’greenwashing’ is attracting close regulatory scrutiny and businesses need to keep up with rapidly changing societal and regulatory expectations, according to Partner Jacob Uljans.

Both ASIC and the ACCC have prioritised investigating and taking enforcement action in connection with misleading disclosures or marketing in relation to environmental, social or governance (ESG) issues. While regulators are scrutinising all companies’ ESG disclosures, he said businesses in the financial services sector were a particular area of focus for the corporate regulator, ASIC.

‘You can no longer get away with puffery and generalised or unsubstantiated statements about ESG issues,’ said Mr Uljans. ‘Where ESG terminology – such as “sustainable”, “responsible”, “impact”, “ethical” and “ESG investing” – is used without explanation and clear evidence to back up those claims, you can at least expect a regulatory “please explain”.’

‘ASIC is particularly concerned with the vagueness and ambiguity of such terminology, and will require businesses to actually articulate what it is that makes their practices or products “sustainable”, “socially responsible” or “ESG”, for example.’

What is greenwashing? Why is it a problem?

ASIC’s chair Joe Longo has defined greenwashing as ‘the potential for an entity to overrepresent the extent to which its practices are environmentally friendly, sustainable, or ethical.’

Mr Uljans said ESG is an area that is becoming more prominent and important, given changes to consumer and investor behaviour that is increasingly guided by ESG considerations.

Many consumers and investors are actively avoiding investing in, purchasing products or services from, or otherwise associating with, companies that are perceived as environmentally or socially harmful or unsustainable. Correspondingly, there is an increasing demand for products or services that have positive ESG characteristics. This has the consequence of more organisations seeking to promote their ESG credentials, but in some cases the marketing is not backed up by evidence.

‘The rapid growth in popularity of ESG investments in recent years has led to some poor practices, with ESG credentials being overstated in some cases. ASIC’s concern is that greenwashing can erode investor confidence in the market, which it says poses a threat to a fair and efficient financial system,’ said Mr Uljans.

Action will be taken regardless of whether misleading claims are accidental or deliberate

‘Ultimately, “greenwashing” is simply a form of misleading or deceptive conduct’, Mr Uljans said.

‘False or inaccurate representations do not have to be deliberate for them to be considered misleading or deceptive – although deliberate misrepresentations about ESG matters will inevitably be treated more seriously by regulators, and attract greater sanctions.

‘ASIC is looking to drive change in the market more broadly. We have already seen ASIC undertake a greenwashing thematic review, and there are recent examples of enforcement action being taken. And it’s important to note that the ACCC also has greenwashing as one of its strategic priorities as well. Consumer and fair trading issues in relation to environmental claims and sustainability is one of the ACCC’s current enforcement and compliance priorities.’

What actions should companies take to avoid greenwashing?

As ESG issues are attracting more scrutiny by regulators, companies need to apply more scrutiny to their internal processes, Mr Uljans said.

‘Marketing materials and disclosure documentation need to be carefully reviewed to ensure that any representations about the business or products having ESG characteristics are accurate and properly supported,’ he said. ‘In some cases, legal review of marketing materials may be required.’

‘Any claims by a business promoting a product’s ESG credentials, which might in the past have been allowed through to the keeper without a need to substantiate those claims, will now be scrutinised and potentially treated as misleading if they can’t be backed up.

‘There needs to be a concerted effort when making statements about ESG to explain what is meant specifically when using ESG terminology – what a company really means when it asserts its business practices are “sustainable”, for example. And you need to ensure there is reasonable objective evidence to support those assertions in relation to the product or practice in question, particularly when making representations about things that may happen in future.’

Mr Uljans noted that it was a positive development that ASIC was seeking to intervene at an early stage – for example, by proactively reviewing and requiring modifications to ESG claims in product disclosure statements for listed entities prior to the disclosure document being approved and released to market – rather than treating the issues solely as a matter for investigation and enforcement after the event.

Mr Uljans said it was vital to understand that expectations in this area are constantly evolving.

‘It is a rapidly changing space. Business needs to be aware that what was acceptable yesterday in terms of representations about ESG matters may no longer be acceptable today, and the position is likely to change again tomorrow,’ he said.

‘We’re seeing moves towards international standardisation about climate and sustainability related disclosures, which will no doubt lead to further developments and adjustments to expectations in this area.’

Tune into our podcast series on ESG for more insight into the latest trends and legal developments in ESG and how to be ESG wise.


Jacob Uljans

Jacob is a commercial dispute resolution lawyer, acting for clients in contractual disputes, corporations and equity matters.

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