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.

Greenwashing cases

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.