Actions speak louder than words: Climate greenwashing liability risks in Australia

Introduction

Over the last decade, the expectation from investors and customers that the businesses they deal with must behave in a responsible and ethical manner has intensified. Much of that expectation has concentrated on businesses taking committed action and making genuine progress towards lower greenhouse gas (GHG) emissions and more responsible and effective climate governance and risk management.

Reflecting that trend, before the outbreak of COVID-19, there was significant growth in shareholder activism, both globally and in Australia, in which shareholders sought to place climate-based resolutions on AGM agendas to compel boards to set and implement emissions reduction targets and other climate commitments. We also witnessed the beginning of shareholder class actions seeking to hold companies accountable for their climate commitments and ‘green’ environmental credential claims.

Now, in a rapidly transitioning economy, the scrutiny that investors and customers apply to companies’ management of climate risks and the direct and indirect GHG emissions they are responsible for has intensified.

Governments across the world have now committed to ‘build back better’ and in a recent global sustainability study, it was found that 85 per cent of consumers have changed their purchasing behaviour to actively become more sustainable in the past five years.¹ On the investor side, there are now over 4,000 signatories – which together manage more than $120 trillion in assets worldwide – to the United Nations Principles for Responsible Investment, a group with a core goal of helping investors protect their portfolios from climate-related risks.

Banks and insurers are also actively transitioning their loan, insurance and investment portfolios away from high-emitting customers – including under the auspices of global sustainability frameworks such as the Equator Principles, the UN Principles for Sustainable Finance and Insurance and the UN Net Zero Banking Alliance – and green bonds and finance are becoming more prevalent in the market.

Indeed, one of the key focus points of the upcoming 27^th Conference of the Parties to the UN Framework Convention on Climate Change, to be held in Egypt from 6 to 18 November 2022, is to quickly mobilise and expand on the US $100 billion in climate finance committed by advanced economies to support climate transition and adaptation.

And corporate regulators– including most recently the SEC in the United States and the FCA in the United Kingdom – have now set the expectation that companies must actively consider, measure, manage and disclose the key climate risks impacting their businesses.

In that context, there is considerable pressure for companies to fully and comprehensively report on the existence and management of climate risks – and further, to commit to actual GHG emissions reduction targets. This is not just an act of regulatory compliance, but also can be seen as a marketing tool, as companies can position themselves as ‘green friendly’ and responsible corporate citizens, appealing to investors, customers and key financiers, insurers and suppliers alike.

Yet, in disclosing to the market key climate risks and their management of those risks, as well as in committing to GHG emissions reduction targets and other action on climate change, there is a clear liability risk for companies and their officers.

This article concentrates on liability arising from what has become known as ‘greenwashing’. The focus is on two specific forms of greenwashing: where entities embellish their environmental credentials and selectively disclose the existence and management of climate risks they face, whether intentionally or negligently (Disclosure-Based Greenwashing); and where entities make commitments to, and imply progress towards achieving, net zero emissions or other climate targets without having in place the internal business, risk and governance practices required to meet those targets (Target-Based Greenwashing).

Target-Based Greenwashing in particular was put under the spotlight at COP 26 (the UN Climate Change Conference) in Glasgow in November 2021, and on 31 March 2022, UN Secretary-General Antonio Guterres announced the formation of a High Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities (UN Expert Group). The intention is for the UN Expert Group to develop standards and policies to verify and account for private entities’ progress towards net zero commitments and reported decarbonisation plans. The clear message – which is also reflected in Australian and global market trends from regulators, investors and other corporate stakeholders – is to ensure that businesses ‘walk the talk on their net zero promises’.²

In light of the rapidly evolving developments concerning climate risks and the manner in which those risks are being addressed by governments, regulators, companies and corporate stakeholders across the globe, now is a timely opportunity to consider the climate-based greenwashing liability risks for Australian companies and their officers. In addition to exploring these risks, this article also considers how ‘real’ the risks are in practice in the Australian market in terms of the likelihood of regulators and investors commencing enforcement action.

What are the Risks?

In Australia, both Disclosure-Based Greenwashing and Target-Based Greenwashing could result in liability for misleading and deceptive conduct under the Australian Consumer Law, the Corporations Act 2001 (Cth) (Corporations Act) and/or the Australian Securities and Investments Commission Act 2001 (Cth) – whether as a result of the omission of material climate risks in market communications or, in the case of Target-Based Greenwashing, on the basis that an entity, in setting a target, impliedly represents that it will align its internal risk, governance and business practices to achieve that target when the entity has not in fact done so.

In either case, an entity may in those circumstances also breach its continuous disclosure obligations if it is listed on the Australian Stock Exchange (ASX) or if it is otherwise a disclosing entity,³ and listed entities may be in breach of the ASX Corporate Governance Principles and Recommendations.⁴

Additionally, apart from the continuous disclosure obligations set out in the Corporations Act for listed entities and disclosing entities, the Australian Securities and Investments Commission (ASIC) has made it clear that it expects climate risks and mitigation strategies to be fully and accurately disclosed in the operating and financial review of annual directors’ reports (for listed entities)⁵ and in any prospectus or other fundraising document (for any entity seeking to raise funds from investors).⁴

Those obligations may be contravened if an entity does not accurately disclose the full range of climate risks it faces (in the case of Disclosure-Based Greenwashing) or otherwise the measures it has put in place and will implement to meet voluntary GHG emissions reduction targets (in the case of Target-Based Greenwashing).

Likewise, both forms of greenwashing may cause all entities required to prepare and file annual financial reports⁷ to breach their obligation to present a true and fair view of the financial position and performance of the company.⁸

In the case of entities that hold an Australian Financial Services Licence (AFSL), Disclosure-Based Greenwashing and Target-Based Greenwashing may result in a breach of the obligation that all AFSL holders have to do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly.⁹

For entities regulated by the Australian Prudential Regulation Authority (APRA) – banks, insurers and superannuation entities – APRA released the final version of its Prudential Practice Guide CPG 229: Climate Change Financial Risks (CPG 229) in November 2021. This is intended to assist regulated entities to manage the financial risks of climate change. CPG 229 does not of itself impose any new regulatory requirements or obligations, but compliance with the climate risk management and governance principles outlined in CPG 229 is a necessary means for regulated entities to meet the direct obligations they have to put in place effective risk management and governance frameworks under current APRA Prudential Standards.¹⁰

CPG 229 is intended to reflect the established framework for considering and managing climate risks developed by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).¹¹  Best-practice management of climate change financial risks is identified in CPG 229 as requiring the appropriate identification and measurement of the specific risks impacting a regulated entity, as well as complete and accurate disclosure and reporting and evidence of plans to manage and mitigate the climate risks that an entity faces.¹²

As far as greenwashing is concerned, the selective disclosure of climate risks facing an entity, or a voluntary commitment to an emissions reduction target without adopting sufficient internal governance, oversight and management processes to be able to actually meet the target, may cause an entity to contravene APRA’s Prudential Standards viewed through the lens of CPG 229.

In addition to the avenues for corporate regulatory breaches in relation to climate-based greenwashing identified above, in the event of a company’s contravention, individual officers face a very clear personal liability risk on the basis that they could be considered to have, in those circumstances, breached their obligations to act with due care, skill and diligence and in good faith in the best interests of the company.¹³

Enforcement – How Real are the Risks?

Recent data reveals the extent to which companies are currently ‘getting it wrong’ in relation to climate risk disclosure and target setting, leaving gaps ripe for enforcement action.

Climate Action 100+, an investor initiative led by 700 investors with USD $68 trillion in assets under management and designed to engage 166 of the world’s biggest corporate emitters on improving climate risk governance, curbing emissions and strengthening climate-related financial disclosures – including through tracking, monitoring and shareholder resolutions to compel change when required – released its latest Net Zero Benchmark Assessment of those 166 entities on 30 March 2022 (Benchmark).¹⁴

While 69% of the 166 focus companies were found to have committed to achieve net zero emissions by 2050 or sooner across all or some of their emissions footprint, the Benchmark also found that only 17% of those companies had ‘robust quantified decarbonisation strategies in place to reduce their GHG emissions’.15  There was also a failure by all focus companies to ‘integrate climate risk into accounting and audit practices’, and only 5% of focus companies had committed to ‘align their capex plans with their long-term GHG reduction targets’.¹⁶

The scope for Target-Based Greenwashing liability is significant in that context. Without aligning their risk, governance and business practices with the emissions reductions goals they set, companies can be argued to be actively misleading the market, exposing themselves to a ‘ticking time bomb’ of prospective litigation.

In terms of Disclosure-Based Greenwashing liability, in its previous monitoring and surveillance activities, ASIC found that, in a survey of 60 listed companies in the ASX 300 across 25 initial public offering prospectuses and 15,000 annual reports, there were ‘fragmented disclosure practices’, and it was apparent that ‘many disclosures were too general and not comprehensive enough to be useful for investors’.¹⁷ Further, too often specific climate risks material to a company’s business were difficult to clearly distinguish from ‘broader climate-change related background information’ and aspirational generalised statements.¹⁸ The potential for these practices to give rise to enforcement proceedings based on misleading and deceptive conduct liability (even if only inadvertent) is readily apparent.

Enforcement in the context of both Disclosure-Based Greenwashing and Target-Based Greenwashing may be instigated by both regulators and investors, as explored in further detail below.

Regulators

Internationally, there has been a strong focus on greenwashing, and the potential for regulatory action to enforce greenwashing contraventions, in the last 12 months. For example, on 30 March 2022, the Division of Examinations of the United States Securities and Exchange Commission (SEC) released its Examination Priorities, which identify that enhanced scrutiny will be applied to assess whether entities providing ESG-related advisory services and investment products are overstating or misrepresenting the climate and other ESG factors considered or incorporated into portfolio selection and management.¹⁹

Separately, the SEC voted in favour of a proposed mandatory climate disclosure rule for public companies on 21 March 2022.²⁰ The public comment period for the proposed rule has now closed, and it is expected the rule will be finalised and formally introduced before the end of 2022. For large companies, the new rule is proposed to commence in fiscal year 2023, so that it would apply to filings in 2024 and subsequently (with smaller companies given an extra year grace period).

In announcing the proposed rule, SEC Chair Gary Gensler drew attention to the fact that ‘today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognise that climate risks can pose significant financial risks to companies’ and noted that the new disclosure rule was directly responsive to ‘investors need[ing] reliable information about climate risks to make informed investment decisions’.²¹

In terms of potential greenwashing liability, the proposed rule includes the requirement for public companies to disclose – if they have publicly set climate-related targets or goals – information about the scope of the activities and emissions included in the targets or goals, the defined horizon time by which the targets or goals (and any interim targets or goals) are to be achieved, how the company intends to meet the targets and goals, and data to indicate the actual progress in doing so for each fiscal year.²²

The new SEC rule would, if adopted, create a significant risk of both Disclosure-Based Greenwashing liability and Target-Based Greenwashing Liability – and in each case the SEC has warned that it intends to rigorously enforce the standards outlined in the rule to meet the needs and expectations of investors. Yet, particularly in relation to scope 3 emissions – the indirect GHG emissions a company is said to produce as a result of its exposure to the direct emissions of its suppliers and customers, across the disclosing company’s entire supply chain – there remains little understanding of the nature and extent of these emissions, nor the means to properly quantify and assess them within the context of the disclosing company’s broader climate risk management framework.

In similar developments in the United Kingdom, since 6 April 2022, over 1,300 of the largest United Kingdom registered companies and financial institutions have been required to disclose climate-related information as part of their annual financial reporting based on the TCFD recommendations, pursuant to the Companies (Strategic Report) (Climate-Related Financial Disclosure) Regulations 2022.²³ This comes on the back of a letter issued by the United Kingdom Financial Conduct Authority to authorised fund managers on 19 July 2021, setting out what it considers to amount to greenwashing and its expectations for fund managers to comply with key guidelines and principles to ensure that ‘fund disclosures accurately reflect the nature of the fund’s responsible or sustainable investment strategy’.

This global greenwashing regulatory enforcement impetus is now also shaping the regulatory approach in Australia.

For APRA, the prospect of climate-based greenwashing liability is clear from APRA’s cautionary note that it considers

a prudent institution would continually look to evolve its own disclosure practices, and to regularly review disclosures for comprehensiveness, relevance and clarity, to ensure it is well-prepared to respond to evolving expectations in relation to climate-related disclosures.²⁴

Further, APRA has warned its regulated entities that they cannot avoid responsibility for accurately and completely disclosing the climate risks they face, and taking steps to effectively mitigate and manage those risks (relevant to both Disclosure-Based Greenwashing and Target-Based Greenwashing) simply because there is ‘a lack of absolute certainty in relation to climate risks’ future impacts’.²⁵

The ACCC has raised concerns about the extent to which ‘environmental claims can be a powerful marketing tool’ and has warned companies that make environmental or ‘green’ claims to ensure the claims are ‘scientifically sound and appropriately substantiated’, with the ACCC intending to ‘vigorously pursue businesses which breach the law’.²⁶

In a clear crackdown on greenwashing, in its Annual Compliance and Enforcement Priorities for 2022-2023, the ACCC includes consumer and fair trading issues in relation to environmental claims and sustainability as a key priority, and will apply close scrutiny to all market statements issued by companies in that context.²⁷   According to former ACCC Chair Rod Sims, this reflects the fact that ‘many consumers are increasingly considering the environmental impact of the products and services they buy’ and the ACCC’s concern that ‘some businesses are falsely promoting environmental or green credentials to capitalise on these consumer preferences’.²⁸

ASIC too has made climate-related disclosure and governance a key priority. In October 2021, ASIC reiterated that it would ‘continue to undertake targeted surveillance’ to ‘foster continued improvement in the standard of climate change governance practices in our market’ and ‘promote the provision by listed companies of reliable and decision useful climate-related disclosures that will enable investors to make fully informed decisions’.²⁹

ASIC also has a specific program of work intended to identify ‘potential greenwashing of financial products’ and possible ‘misleading statements relating to environmental, social and governance claims, particularly across social media’.³⁰  This is reiterated in ASIC’s Corporate Plan for 2021-2025 as a key focus area in reducing the risk of harm to consumers.³¹

While suggesting that it will, at least as the climate regulatory disclosure framework continues to evolve internationally, look to ‘adopt a consultative approach’, ASIC is also clear that, if entities do not take steps to put in place sufficient climate governance and risk management processes to meet their commitments to the market, and engage in ‘serious disclosure failures’ concerning the material climate risks to which they are exposed, surveillance activities will turn into enforcement activities.³²

Yet the compliance task – at least in relation to the complete disclosure of climate risks – is made all the more difficult for entities due to the fact that there is still no mandatory climate risk assessment and disclosure standard in Australia (or indeed globally). That is, while there might be an obligation to identify, manage and disclose key climate risks, the means of doing so remain unclear. While APRA³³ and ASIC³⁴ recommend following the TCFD disclosure standards, this is not mandated. Until there are clear frameworks and tools for stress testing, scenario analysis and the identification and calculation of climate risks facing an entity across the range of scope 1, scope 2 and scope 3 emissions³⁵ – and clear market practices and experience in doing so – the prospect of inadvertent Disclosure-Based Greenwashing remains high.

At COP 26, it was announced that a newly formed International Sustainability Standards Board – operating under the auspices of the International Financial Reporting Standards Foundation Trustees – would work to develop high-quality global baseline and sustainability disclosure standards, drawing on and further articulating existing TCFD and other international standards, with a consultation draft due to be released some time in 2022.³⁶  ASIC will be involved in this process through its participation as a member of the International Organisation of Securities Commission Sustainable Finance Taskforce.³⁷

Yet even if those standards are finalised and eventually embedded within the formal regulatory guidance and risk and disclosure standards of ASIC, APRA, the ACCC and the ASX, the potential for Disclosure-Based Greenwashing Liability will arguably increase, not decrease. Indeed, with the existence of a clear, tested and well-understood framework for climate risk identification, disclosure and management, it will be a much easier task for regulators (and investors) to identify selective climate risk disclosure practices and the failure of companies to identify and inform the market of known, foreseeable and quantifiable climate risks.

In terms of Target-Based Greenwashing Liability, one of the express Terms of Reference for the UN Expert Group (referred to in the introduction to this article) is to not only devise credibility criteria and standards to assess, verify and account in a transparent manner the net zero emissions pledges by private entities and their progress towards meeting their commitments, but also to set out ‘a roadmap to translate these standards and criteria into international and national level regulations’.³⁸ This will make the prospect of monitoring, tracking and holding companies to account in relation to their emissions reduction targets a much simpler process, with reference to common terminology, metrics and assessment tools. If entities fail to align their internal risk, governance and business practices in a manner where it is possible to achieve the targets and goals they set, or make insufficient progress towards in fact achieving those targets and goals, the risk of regulatory enforcement proceedings is high.

Investors

The global trend towards shareholder activist strategies seeking to compel companies to provide more complete and effective climate risk disclosure and/or to take positive measures to achieve future emissions reductions targets (whether committed to or not) is expected to continue in coming years.

Ceres, one of the five investor network partners of Climate Action 100+, has reported that the 2022 proxy season saw substantial growth in climate-related shareholder resolutions. That was especially the case in the United States, where 236 climate-related resolutions were filed in the 2022 proxy season, with an average support vote of 31.6% and 15 resolutions achieving majority support.³⁹ The intense public relations and stakeholder management pressure faced by companies subject to a resolution is reflected by the fact that, of the 236 climate-related resolutions filed in the 2022 season, 110 were withdrawn in exchange for companies agreeing to various climate action, such as setting science-based targets to reduce emissions.⁴⁰

In Australia, climate-based shareholder activism has typically taken the form of issuing climate advisory resolutions, as well as – in the case of a listed company – voting down the company’s remuneration report to force a board spill, if shareholders perceive that a company is not taking desired action to mitigate climate risks.⁴¹ In 2021, the Australasian Centre for Corporate Responsibility (ACCR), one of Australia’s primary shareholder advocacy organisations focused on informing shareholders how listed entities manage climate change and other ESG issues, reported filing 10 climate-specific shareholder resolutions, all of which were withdrawn after the relevant companies agreed to the proposals put forward relating to emissions targets and other committed action on the management of climate risks.⁴²

But beyond this, the question arises as to the extent of the risk of shareholder court proceedings seeking to pursue a company and/or its officers for greenwashing liability.

Globally, the Climate Social Science Network estimates that:

• since 2016, at least 20 judicial climate-focused greenwashing cases have been filed in courts in the United States, Australia, France and the Netherlands; and
• since 2008, at least 27 climate-focused greenwashing claims have been filed before non-judicial administrative oversight bodies in the United Kingdom, Australia, Italy, New Zealand, Denmark, the United States and South Korea.⁴³

To date in Australia, most of the litigation relating to climate change has arisen in the context of planning law – specifically, where interested persons seek to compel government decision-makers to take into account GHG emissions and foreseeable climate risks in exercising their discretion to approve a proposed development. Most recently in that context, Bromberg J held at first instance in the Federal Court of Australia that the Federal Environment Minister has a duty to take reasonable care to avoid harm to Australian children (at least to the extent of personal injury) arising from the climate impact of a mining project.⁴⁴ However, that finding was overturned on appeal by the Full Federal Court.⁴⁵

Outside of the planning law context, disclosure-based investor climate litigation is still emerging in Australia. In 2018, an early precursor for potential future greenwashing claims came in the form of a proceeding filed by a superannuation fund member in the Federal Court of Australia against the corporate trustee of a $50 billion fund.⁴⁶ Among other things, it was alleged that the trustee had misled investors (and failed to act in their best interests) by inadequately considering and disclosing the material climate risks the fund faced from exposure to entities and investments likely to be significantly impacted by physical and transitional climate risks.

This matter was ultimately settled in November 2020 without the benefit of a final judgment to help guide the approach of courts in future greenwashing matters. However, the settlement included a commitment by the trustee to ensure more effective measurement, management and reporting of climate risks to members. This demonstrates the powerful potential for investor climate litigation to compel companies to meet their expectations for complete climate risk disclosure (and to take action to implement climate targets) with the looming pressure of publicity and reputational management concerns.

Additionally, on 25 August 2021, the ACCR filed proceedings in the Federal Court of Australia alleging that oil and gas company Santos’s claims it provided clean energy natural gas and had a plan to achieve net zero emissions by 2040 were false and misleading.

Further proceedings of this nature can be expected in future years. Indeed, shareholder class actions are now the primary type of class actions in Australia, and there remains a healthy appetite from litigation funders to support novel claims.

Future greenwashing claims from investors in Australia can be expected to draw on the case theory employed in other jurisdictions around the world. For example, in the United States, there are ongoing proceedings in New York, Massachusetts, Vermont, Minnesota and Rhode Island against major fossil fuel companies alleging that the companies have misled investors and consumers about the risks posed to their businesses by fossil fuel-driven climate change, their claims about the effective management of those risks and the role of their products in causing climate change.

The key point for companies and their officers is that climate risk disclosure practices, and statements and targets concerning future GHG emissions reduction and other climate goals, carry with them a significant liability risk arising from shareholder greenwashing-based litigation claims. This risk will only continue to magnify in future years. Importantly, not only does the risk carry the very real prospect of quantifiable damages liability, but in order to avoid that outcome, companies will need to incur the expense of investing in appropriate governance, oversight, audit, reporting, accounting and legal internal processes and policies to effectively identify, disclose and align their business practices to mitigate key climate risks. Further, even if investors file claims having no intention to proceed to final judgment, the initiation of proceedings can cause significant reputational damage to a company, with adverse publicity incentivising a settlement that may include both compensation and modifications in business practices to achieve specific climate goals.

Takeaways

As climate risk disclosure standards continue to evolve – and entities develop sufficient experience and familiarity with the nature of the climate risks they face – there is significant potential for greenwashing liability for companies and their officers arising from the failure to provide the market with a complete and accurate account of all material climate risks facing the company and the manner in which those risks are being managed. There is also a clear liability risk in the context of voluntary emissions reductions targets that are not properly verified or supported by committed action and modified business practices.

With enhanced monitoring by regulators, and continued investor scrutiny and climate-based activism, enforcement action from both regulators and shareholders is likely to become more pronounced in Australia in coming years, matching the proliferation of climate litigation globally.

To minimise these risks, it is critical for boards to pay careful attention to climate governance, risk and disclosure requirements and regulatory expectations and to have in place the required expertise and internal risk management, governance, reporting, auditing and verification processes to be able to proactively monitor, quantify, disclose and manage the specific climate risks they face.

Further, if boards elect to commit to specific GHG emissions reduction targets or other climate goals, they must ensure they align their business practices in a manner that will actually achieve those targets and goals, and also continually monitor and disclose to the market their annual progress towards the targets and goals.

With climate change one of most pressing environmental, social and economic challenges the world is now facing, these are the issues that must now be at the top of all board meeting agendas and that will shape future business practices and strategies. In the words of the Chair of the UN Expert Group seeking to develop standards to combat climate-based greenwashing, when it comes to climate risks and commitments from companies, ‘transparency is the best disinfectant’.⁴⁷