Greenwashing: Why Overstating Organisational ESG is Risky Business

Businesses communicating sustainability reports and profiling their environmental, social and governance (ESG) practices has become more prevalent as companies look to promote positive brand reputation and showcase commitments to a sustainable future. While this focus on sustainability is a positive development, it has also led to cases of false claims, or 'greenwashing'

Greenwashing is a key issue for shareholders, regulators, investors, customers, employees and the wider public. Investors and consumers are placing increasing value in their decision-making on the green credentials of companies they invest in, and the products and services they purchase.

The greenwashing claims watchdog, the Australian Securities and Investments Commission (ASIC), made 47 regulatory interventions to address greenwashing misconduct in the 15 months up to 30 June 2024, involving over $123,000 in infringement notice payments and a civil penalty of $11.3 million¹.

These interventions targeted misleading and deceptive conduct in relation to sustainable finance-related products and services such as:

insufficient disclosure on the scope of ESG investment screens and investment methodologies,
underlying investments that are inconsistent with disclosed ESG investment screens and investment policies, and
sustainability-related claims made without reasonable grounds or without sufficient detail.

Why businesses should expect scrutiny of ESG claims

Greenwashing is a misleading practice in an organisation's communications in which the business's credentials about how environmentally friendly, sustainable or ethical are exaggerated or unsubstantiated.

Shareholder activism is also challenging businesses to clearly detail their corporate policy on managing their impact on the environment and agreeing to emissions targets.

Over recent years major Australian regulators have investigated and issued directives around companies making ESG representations, and applied scrutiny on how organisations communicate ESG responsibilities and issues.

For example, ASIC's first greenwashing case resulted in a landmark $11.3 million penalty for Mercer Superannuation (Australia) Limited. In August 2024 the Federal Court ordered Mercer to pay the penalty after it admitted it made misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.

The Corporations Act 2001 and the ASIC Act 2001 contain general prohibitions against businesses making false or misleading statements in relation to a financial product or financial service. The ACCC enforcement and compliance priorities for 2024‒25²again includes concerns about environmental claims and sustainability.

The Australian Securities and Investments Commission's (ASIC) enforcement priorities for 2024³included the intention to closely monitor for misleading conduct in relation to sustainable finance including greenwashing, and take action where necessary.

ASIC interventions around greenwashing include:

net zero statements and targets
use of terms such as 'carbon neutral', 'clean', or 'green'
labelling of funds and the scope and application of investment exclusions and screens.

Other forms of greenwashing that apply to ESG

As a result of scrutiny on greenwashing some companies are stepping back their environmental commitments as regulators focus attentions on their environmental promises.

Green wishing: expressing a desire for environmental sustainability or eco-friendly practices without taking substantive action to achieve them.
Green hushing: downplaying or deliberately concealing environmental efforts or achievements. The goal is often to avoid scrutiny on environmental impacts.
Green fatigue: a feeling of overwhelm or disinterest in environmental issues that can lead to a decrease in motivation to engage with or support environmental initiatives.

Business guidelines: how to avoid greenwashing claims

The Australian Consumer Complaints Commission (ACCC) issued a framework, 'Making environmental claims — A guide for business⁴', based on eight principles to help businesses and companies comply with obligations under the Australian consumer law, summarised here.

Principle 1: Make accurate and truthful claims

All your claims should be true and accurate.

To ensure claims are factually only make claims that represent a genuine environmental impact and do not exaggerate the benefits or level of scientific acceptance of a claim.

Principle 2: Have evidence to back up your claims

Ensure you have clear, preferably independent and scientific evidence to back up all your claims.

If you are making a representation about a future matter, you must be able to show that you have reasonable grounds, otherwise the representation will be taken to be misleading.

Principle 3: Do not hide or omit important information

Be transparent about the relevant information concerning your environmental impact. Consumers cannot make informed decisions if they are not provided with the full picture, or if important information is placed where they are unlikely to notice or find it.

Principle 4: Explain any conditions or qualifications on your claims

Theoretical environmental benefits that are not clearly explained are likely to mislead consumers. If claims are only true in certain circumstances, you should explain this to consumers clearly and prominently.

Principle 5: Avoid broad and unqualified claims

Broad claims can be misleading. Make clear, specific claims that are substantiated, which means that you clearly qualify your claims, with prominent disclaimers if there are any limitations to them.

Principle 6: Use clear and easy-to-understand language

Most consumers do not have specialist scientific or industry knowledge. It is good practice to use clear and easy-to-understand language and to avoid technical terms.

Principle 7: Visual elements should not give the wrong impression

Visual elements like green-coloured packaging, or logos representing a recycling process and/or in advertising material can significantly influence a consumer's impression of the environmental impact of a product or service.

Avoid visual elements that give the wrong impression about the environmental benefits of your product or service.

Principle 8: Be direct and open about your sustainability transition

Be cautious about making aspirational claims about your future environmental objectives unless you have developed clear and actionable plans detailing how you will achieve those objectives.

Transitioning to a more sustainable business model takes time and is often not linear. For example, if you can't reduce your greenhouse gas emissions in the short term, but are instead offsetting your impact on the environment, make this clear to consumers.

Mandatory climate reporting

The mandatory climate reporting bill was passed by the Australian Senate in August 2024. This landmark legislation requires certain organisations to make detailed disclosures about their climate-related risks and opportunities, commencing with the largest emitters and corporations⁵ from January 2025.

How Gallagher can help

We offer expertise in corporate and sustainability risk with specialty teams in both professional lines and sustainability areas. As companies, boards and directors tackle this complex and critical area we're here to help provide advice, analysis and consultation.

Last updated 10 September 2024

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Theresa Lewin

Financial Institutions Practice Leader — Professional & Financial Risks, Australia

Source

1 "ASIC's interventions on greenwashing misconduct: 2023—2024", ASIC Report 791, 23 Aug 2024

2 "Compliance and enforcement priorities 2024‒25", ACCC, accessed Sep 2024

3 "ASIC's priorities in a changing regulatory environment", ASIC, 23 May 2024

4 "Making environmental claims — A guide for business", ACCC, Dec 2023

5 "Climate reporting legislation passes Senate — reporting to commence from 1 January 2025", AICD, Aug 2024

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