Greenwashing under scrutiny: Australian regulators cracking down on environmental claims – part 2 – the year ahead
As outlined in Part 1 of our Limelight update on greenwashing, which reviewed the developments in this space during 2023, there has been closer regulatory scrutiny by Australian regulators on environmental and sustainability claims being made by Australian companies and a higher frequency of greenwashing litigation in Australian Courts being brought by shareholders and consumers.
In light of these developments, Australian companies and their directors are facing an increasing risk of liability for misleading and deceptive conduct under Australian legislation, such as the Corporations Act 2001 (Cth) (Corporations Act), Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth)).
The regulatory pressure on Australian companies and their directors in relation to environmental, social and governance (ESG) issues is set to further intensify in the coming year, with the upcoming mandatory climate reporting obligations proposed to be phased in from mid-2024 which will require Australian companies to disclose the impact of climate-related risks to their businesses.
Australian regulatory guidance on greenwashing
As part of their regulatory focus on greenwashing, the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have both released regulatory guidance for Australian companies in relation to making environmental and sustainability claims about their products, services and businesses.
ASIC’s guidance is aimed at entities which issue or offer financial products or investment strategies that are marketed as environmentally friendly, sustainable or ethical e.g. managed funds, investment vehicles and companies listed on a securities exchange. ASIC’s key concern is that misrepresentations by companies in this context can distort the relevant information that a current or prospective investor requires to make informed investment decisions, particularly with the rise in investor demand for sustainability-related financial products in the Australian market.
The key principles outlined in ASIC’s guidance on avoiding misleading statements that could constitute greenwashing are for Australian companies to:
- comply with existing prohibitions against misleading and deceptive statements and conduct in relation to a financial product or financial service under the ASIC Act and Corporations Act, as well as disclosure obligations under the Corporations Act;
- engage in voluntary disclosure in accordance with the guidelines issued by the Taskforce for Climate-related Financial Disclosures (TCFD);
- consider whether the product is “true to label”, in the context of the underlying investment strategy (including approach to stewardship, if relevant) and asset holdings;
- avoid using broad, unsubstantiated sustainability-related terminology, statements or jargon without providing clarifying information, e.g. terms such as “socially responsible” or “ethical investing” or “impact investing”;
- disclose and clearly explain methodology or policy for integrating sustainability-related considerations into investment decisions and stewardship activities, e.g. exclusionary or negative screening; and
- ensure that there are reasonable grounds for a stated sustainability target, and clear explanation of the target and the manner in which the business will measure progress against that target.
In July 2023, the ACCC published draft principles-based guidance to assist businesses with making environmental and sustainability claims generally across industries. The ACCC’s draft guidance was open for public consultation until 15 September 2023 and is expected to be finalised by the ACCC for 2024.
The ACCC’s draft guidance sets out the following 8 principles for businesses to apply to ensure that environmental and sustainability claims are accurate, easy to understand, verifiable and supported with evidence, and less likely to mislead consumers and contravene the Australian Consumer Law:
- make accurate and truthful claims
- have evidence to back up claims
- do not hide important information
- explain any conditions or qualifications on claims
- avoid broad and unqualified claims
- use clear and easy to understand language
- visual elements should not give the wrong impression; and
- be direct and open about sustainability transition.
Upcoming changes – mandatory climate reporting for Australian companies
One of the most significant upcoming changes to Australian corporate reporting requirements is the proposed introduction of mandatory climate disclosure. The Australian Government plans to phase in new mandatory climate disclosure reporting requirements which will be aligned to international climate disclosure reporting requirements for the reporting period starting 1 July 2024 for large entities and large emitters. The requirements are proposed to be phased in for other companies over the financial years commencing 1 July 2026 and 1 July 2027 based on their organisational size.
The content of these new requirements will be set out in new Australian Sustainability Reporting Standards (ASRS) which are in the process of being developed by the Australian Accounting Standards Board (AASB). In October 2023, the AASB released draft ASRS for consultation, which are open for submissions until 1 March 2024. The draft ASRS are based on disclosure requirements in the IFRS S2 standard from the International Sustainability Standards Board (ISSB), which takes effect from 1 January 2024.
The IFRS S2 standard incorporates and builds on the guidelines issued by TCFD. However, IFRS S2 requires more detailed and quantitative disclosures of current and anticipated financial effects of climate change over the short, medium and long-term.
As mandated by IFRS S2, companies, directors and officers are required to disclose where climate-related risks and opportunities are concentrated in their business and the financial effects, inputs and parameters used to identify climate-related risks (e.g. data sources), as well as any transition plans and climate related targets for their business. Such disclosures must include climate effects throughout the business’ value chain, which means that companies not falling “within scope” of the mandatory climate reporting requirements themselves may still be the subject of information requests from those companies which are captured by the mandatory requirements. This shows an increasing focus to hold companies, officers, directors, and executives accountable.
It is proposed that climate disclosures required under the new mandatory climate reporting requirements to be set out in the ASRS will be located in the Annual Report of Australian companies which are required to report under the proposed new mandatory climate disclosure framework.
In addition to these developments on climate disclosures, in September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) made final recommendations to complement the IFRS S2 mandatory reporting obligations for climate disclosures. The recommendations aim to provide a framework for organisations (at an international level) to make disclosures on nature-related risks, which are similar but not the same as climate-related risks which are the subject of the TCFD guidelines, ISSB and ASRS being developed by the AASB.
In light of the increasing risk of liability for misleading and deceptive conduct related to potential greenwashing allegations in this heightened regulatory climate, Australian companies and their directors and officers should follow the guidance from the Australian regulators and take the following steps if they are intending to make environmental or sustainability claims or climate risk disclosures as part of their business:
- When making representations regarding environmental or sustainability practices associated with the business or its products, ensure that there are reasonable grounds or evidence for making such representations. Forward looking statements can be misleading and may pose a particular greenwashing risk for the business if there are no reasonable grounds for making such statements. These issues must be considered and disclosed in the same way as any other material information.
- Review websites, marketing materials and public announcements to ensure that they accurately reflect the company’s true position regarding environmental impact, sustainability and ethical practices.
- Implement risk management frameworks to address and assess disclosure requirements in relation to ESG practices, particularly in light of the proposed new mandatory climate disclosure reporting requirements to be phased in from July 2024 onwards.
- Ensure that there is a documented plan that includes the process for internal and external reporting on ESG related initiatives, credentials and projections for the company and the status of the company’s sustainability transition.