Managing ‘greenwashing’ risk for your company
As environmental, social, and governance (ESG) issues have risen to the top of board agendas in recent years, this has prompted an increase in greenwashing risk for organisations within and beyond the financial services industry.
‘Greenwashing’ is defined by ASIC as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.”
With consumers increasing their awareness about climate change and lifting their expectations for businesses with regards to sustainability efforts, companies are responding with greater marketing efforts to address those expectations. However, the issue arises where what is being done by the company does not match the presented image. This may occur intentionally or unintentionally.
Regardless of the intent behind greenwashing, it’s an issue company leaders need to be wary of to protect their brand and reputation, and avoid enforcement action.
In this blog, we cover the increasing relevance of greenwashing and recent cases, disclosure standards, regulatory guidance and action, and how to avoid greenwashing as a company.
Spotlight on greenwashing
With cases of greenwashing on the rise, regulators are starting to take action and are taking a closer look at sustainability statements and activities of companies to check their language, accuracy and whether they comply with various laws and regulations.
ASIC and the ASX have recently been shining a light on greenwashing in an effort to improve transparency and accountability in relation to integrating ESG in financial products.
ASIC is cracking down on managed funds and super funds in particular, as they respond to increasing investor demand for ethical and sustainable investments. To bring the industry’s attention to the issue, the regulator released guidance (Information Sheet 271 – covered in more detail below) to remind issuers of their legal obligations.
The ASX is also pursuing instances of greenwashing, warning companies against using market disclosure to make misleading statements that exaggerate or overstate their sustainability credentials in order to attract ethical investors. This includes statements in relation to climate and emission reduction targets and achievements.
It’s not just the regulators examining sustainability statements. Investors, consumers and the wider community are now also challenging public statements made by companies regarding sustainability efforts, putting them to the test. To assist investors in making informed investment decisions, ASIC has also added new ESG information on its MoneySmart website. The information covers what ESG is and how it works and questions to ask before investing in an ESG fund. It also includes a case study about an investor who suspects greenwashing.
Two recent allegations of greenwashing close to home are that of the Commonwealth Bank of Australia (CBA) and Australia’s second largest independent oil company, Santos. Both cases were pursued on behalf of shareholders.
In November 2021, the Federal Court in Australia granted a CBA shareholder access to the bank’s confidential documents to check whether the bank complied with its climate change policy in lending to oil and gas projects. It’s the first time an Australian court has allowed a shareholder access to internal documentation to scrutinise a company’s compliance with its net-zero climate change policy. It is also unlikely to be the last time.
Another case lodged in the Federal Court is the challenge by Santos shareholder, the Australasian Centre for Corporate Responsibility (ACCR), over Santos’ claim in its 2020 Annual Report that natural gas is a “clean fuel” and that the company has a credible pathway to net-zero emissions by 2040.
Disclosure standards and requirements
It is evident that the case for greenwashing lies in disclosure. Whether a company is engaging in greenwashing is a question of whether what they claim is aligned with the reality of their sustainability practices or sustainable product offering. Two standards that set the bar for disclosure in relation to climate change and sustainability are the International Sustainability Standards Board (ISSB) climate-related disclosure standards and the Sustainability Accounting Standards Board (SASB) standards.
The ISSB is establishing comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value. The first two proposed standards, one in relation to general sustainability-related disclosure requirements and the other for climate-related disclosure requirements, were released for consultation on 31 March 2022. The standards require disclosure around governance, strategy, risk management, and metrics and targets. We expect the standards to be finalised following the conclusion of the consultation period on 29 July 2022.
The SASB standards enable businesses around the world to identify, manage and communicate financially-material sustainability information to their investors. It consists of 77 industry standards that require entities to make industry-based disclosures. SASB also provides an Engagement Guide for asset owners and asset managers to facilitate a more focused, meaningful discussion between investors and portfolio companies about financially material sustainability risks and opportunities.
As ethical investment options become more common, fund managers and super funds need to be especially careful with their disclosures and statements.
In addition to the global standards and its existing regulatory guidance, ASIC’s Information Sheet 271 was recently released to help issuers avoid greenwashing when offering or promoting sustainability-related products. This followed a greenwashing review of a sample of superannuation and investment products, highlighting areas for improvement. ASIC notes that issuers in their disclosure and promotions need to:
use clear labels,
define the sustainability terminology they use, and
clearly explain how sustainability considerations are factored into their investment strategy.
The information sheet is also designed to assist issuers to provide investors with the information It also includes useful information for industry participants, including questions to consider when offering or promoting sustainability-related products.
Longer standing guidance applicable across all industries, is the Australian Competition and Consumer Commission’s (ACCC) Green marketing and the Australian Consumer Law guide, published in March 2011. The guide educates businesses about their obligation regarding environmental claims under the Competition and Consumer Act 2010. It aims to assist manufacturers, suppliers, advertisers and others to assess the strength of any environmental claims they make and to improve the accuracy and usefulness to consumers of their labelling, packaging and advertising. The guide also includes a checklist for marketers to help identify any misleading material.
Regulators are not only providing guidance on greenwashing, but they are also acting against it. ASIC continues to run its ongoing greenwashing review of financial product providers and fund managers to ensure their “green” claims are accurate. The regulator is also working with the ISSB to develop a new framework to guide sustainable financing.
It has also been announced that ASIC and ACCC, together with the Clean Energy Regulator, will be working closely together to address the issue of greenwashing, including in relation to corporate emissions transparency.
How to avoid greenwashing
To be caught out as a company engaging in greenwashing is not worth the financial and reputational risk. This risk can be minimised by the avoidance of overstating sustainability credentials – transparency and accountability are key.
Companies should treat publishing sustainability and ESG activities as simply disclosure, not marketing. Environmental and sustainability claims should be clear, accurate and backed by objective and timely evidence. For example, any disclosure of carbon emissions targets should include information on the steps to get there and how the company is progressing towards those targets, supported by action.
How do you know whether you have properly disclosed and avoided greenwashing? Seek an external, independent review or audit against the relevant standards and guidance. Objectivity is a necessity for adequate disclosure.
How we can help
At Hall Advisory, we help regulated entities comply with regulatory requirements and thrive in an ever-changing climate. To help your business avoid greenwashing risk, we can:
Complete comprehensive compliance reviews against existing global and local standards and guidance, and
Educate directors on how to understand their climate commitments and ask the right questions to remain accountable.
Develop, uplift and implement ESG-related policies and procedures for your organisation.
For more information about the services we offer, contact us today for a confidential, no-obligation consultation.