Greenwashing - what do recent developments mean for company directors and directors’ and officers’ insurers?

Key Points:

• “Greenwashing” litigation is on the rise, both in Australia and overseas.

• Directors and officers should be fully aware of their duties under the Corporations Act 2001 (Cth) and Australian Consumer Law to follow through on commitments to meet their organisation’s climate goals and outcomes.

• Directors’ & officers’ insurers should be cognisant of recent litigation trends, the potential for directors to be pursued for alleged greenwashing, and the potential coverage implications that could arise from regulatory investigations and litigation.

Introduction

Greenwashing. We have heard this term used frequently in recent times. Why do company directors need to be aware of it? What are Australian regulators saying about greenwashing and what litigation trends are we seeing emerge? What is the potential impact of greenwashing litigation on the insurance industry?

With the federal government’s climate targets now enshrined in law, there has arguably never been more of a focus on climate emissions and targets than right now. So, let’s delve into the above issues and consider recent developments on greenwashing in Australia and globally. 

What is greenwashing?

“Greenwashing” is the practice of misrepresenting the extent to which a product or service is sustainable or environmentally friendly. Intentionally or unintentionally, it manipulates the information that a current or potential investor or consumer might need to make an informed investment or purchasing decision.

Changing community and regulator expectations

It is now largely accepted that it is prudent for company directors to consider and manage climate-related financial risks. It is also expected that any statements made about a company’s net zero or other commitments should be made on reasonable grounds, carefully considered, substantiated, and any subsequent adjustments disclosed in a timely manner.^[1] Why? Apart from the duties directors owe their companies under the Corporations Act 2001 (Cth),^[2] the expectation of regulators, investors and the wider community has shifted. All eyes are on companies and their directors as we transition, globally, to a lower carbon economy to ensure that companies follow through with and act on their climate commitments. 

Likely in response to community and investor expectations and the increase in “green” products and services, Australian regulators have made it abundantly clear that their sights are set firmly on “greenwashing”. This year alone, we’ve seen both the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) separately indicate that they would be targeting “greenwashing”. The ACCC chair acknowledged that greenwashing is an issue for both consumers and businesses, as there are "growing concerns that some businesses are falsely promoting environmental or green credentials to capitalise on these consumer preferences".^[3] More recently, ACCC Deputy Chair indicated that the ACCC would be scrutinising “green” claims, in particular, “when companies are out there saying, ‘we’re going to net zero, we’re reducing our carbon footprint’, we will be looking at those claims and making sure that they are doing what they say they’re doing”.^[4]

ASIC has also confirmed that it will be monitoring the market for greenwashing and has encouraged boards to ask whether their company’s disclosure around environmental risks and opportunities accurately reflects the reality of the company's practices. In June 2022, ASIC released “INFO271”, an information sheet on “How to avoid greenwashing when offering or promoting sustainability-related products” (INFO271).^[5] INFO271 includes a number of questions that companies can ask in order to avoid misleading or deceptive greenwashing practices, including: “Is your product true to label?”^[6] and “Do you have reasonable grounds for a stated sustainability target?”^[7]

While INFO271 primarily aims to assist responsible entities of managed funds, corporate directors of corporate collective investment vehicles and trustees of registrable superannuation entities, it offers practical guidance and suggestions for all companies and directors on how to avoid greenwashing.  Indeed, ASIC’s Deputy Chair Karen Chester has acknowledged that INFO271 was released to ensure that companies know what their obligations are because ASIC "is watching".^[8]  

On 22 August 2022, ASIC’s newly released Corporate Plan 2022-26 revealed that sustainable finance practices are a priority for ASIC, and that ASIC will be “taking enforcement action against misconduct, including misleading marketing and greenwashing by entities”.^[9] According to ASIC's Chairman Joseph Longo: “If people make outrageous claims about their green credentials and don’t have anything to back them up, that’s not something [ASIC is] going to tolerate".^[10]

Investigation and litigation trends

With the increased focus by regulators on greenwashing, we are also starting to see investigations against companies for alleged greenwashing.

In August 2022, ASIC confirmed that it is conducting at least two investigations into greenwashing, including one investigation into a publicly listed company.^[11]

In September 2022, a collection of “green groups” made formal greenwashing complaints to the ACCC and ASIC about mining company Glencore, asking the regulators to investigate 12 statements made by Glencore about its plans to reach net zero emissions by 2050.^[12] The complaint argues that Glencore’s net zero statements misuse an emissions pathway that is not applicable to its coal-dominated business, and therefore breaches Australian Consumer Law.^[13] Complaints have also been made against Glencore to Australian Ad Standards, alleging potential breaches of both the Environmental Claims Code and Australian Association of National Advertisers Code of Ethics.^[14]

We are also seeing an increasing number of litigated proceedings which include allegations of greenwashing against companies. We set out some examples below:

• In 2021, the Australasian Centre for Corporate Responsibility (ACCR) commenced proceedings against oil and gas giant Santos^[15] for engaging in alleged misleading and deceptive conduct by promoting natural gas as “clean fuel” and asserting it had a clear pathway to net zero emissions by 2040.^[16] The ACCR also alleged that Santos had breached the Corporations Act 2001 (Cth) and Australian Consumer Law by engaging in misleading or deceptive conduct relating to its “clean energy” claims and its net zero plan in its 2020 Annual Report.^[17] The ACCR has since expanded its case with more allegations following additional information produced by Santos in the litigation discovery process and alleged greenwashing in Santos’ 2020 investor day briefing^[18] and 2021 Climate Change Report.^[19] At the time it was filed, the case against Santos was the first court case in the world to challenge the veracity of a company’s net zero emissions target. We anticipate this decision to provide some judicial guidance on “greenwashing” and corporate accountability in relation to entities promoting and offering sustainable products. 

• In the United States of America, two securities class actions were launched against oat milk company Oatly Group and its directors and officers in 2021 alleging, amongst other things, that Oatly had included misleading statements regarding greenhouse gas emissions and energy consumption in the registration statement for its product.^[20]

• On 15 March 2022, ClientEarth, a non-profit environmental law firm took steps in commencing a derivative action in England against Shell’s 13 executive and non-executive directors.^[21] ClientEarth asserts that each of Shell’s board of directors was personally liable for the company’s failure to manage its climate risk that is, to “implement a climate strategy that truly aligns with the Paris Agreement”.^[22]  

• In July 2022 we saw a proposed class action complaint filed against fashion giant H&M alleging that despite its position as a fast-fashion giant, H&M has created an extensive marketing scheme to “greenwash” its products in order to present them as environmentally-friendly when they are not.^[23]

Key takeaways for directors and their insurers

Current trends demonstrate that not only is litigation being commenced against companies for greenwashing, but directors are also being pursued. There is evidently a push by investors and activist organisations to ensure that corporations are meeting the commitments that they publicly disclose. 

Prudent companies and their boards should be cognisant of these trends and developments and take steps to proactively manage and mitigate the liability risks posed by climate change, particularly that of “greenwashing” in their market disclosures or marketing campaigns. Insurers (particularly directors’ and officers’ insurers) should also ensure that they are aware of the litigation trends emerging in this space, and work with their insureds to navigate and mitigate the risk posed by climate litigation.

Insurers should consider some of the potential coverage implications which could arise from regulatory investigations, including the possible imposition of fines and penalties for alleged greenwashing and also the risk of climate-related class actions.
 
Hicksons Lawyers’ Climate Risk & Insurance teams have extensive expertise in this area and are available to help with any questions you may have.
 
This article was authored by Persia Navidi, Partner, and Alana Novak, Graduate