Clifford Chance

With an increase in regulator attention over greenwashing claims in Australia, how can businesses best equip themselves to ensure their ESG efforts are defendable and form part of their public messaging?

Businesses are under immense pressure from investors and regulators to make rapid strides towards net-zero targets, after the IPCC report released in March this year issued dire predictions and pleaded with humanity for urgent reduction to emissions. The IPCC sees government at the centre of these developments, citing increased finance for climate investments and policy focused at reducing barriers and paving the way for change. The private sector also has its part to play, as policy and regulation evolve in line with government.

Here's a snapshot of what's been happening so far this year in Australia on the Environmental, Social and Governance (ESG) front.

The Australian Federal government announced earlier in May that it would set up a Net Zero Authority, setting a number of agenda items including access to new employment opportunities, initiatives for clean energy industries and helping companies reach those net-zero targets.

On the enforcement front, the Australian Competition and Consumer Commission (ACCC) and Australian Securities and Investments Commission (ASIC) have been vocal in their crackdown on greenwashing claims – particularly in the super fund and financial services sector – and in recent months we have seen the first legal case by ASIC raised against an Australian corporation, starting with the landmark lawsuit against Mercer in February 2023. Civil penalty proceedings have also been launched against a superannuation fund in July 2023, alleging misleading conduct over ESG claims the fund made in public statements. In their public statement, ASIC noted it had already issued almost AUD 40,000 in infringement notices to the company for separate greenwashing conduct. ASIC has also indicated that, along with persistent surveillance techniques across industry, they have "several investigations underway and anticipate further regulatory action".

According to the ACCC, as many 1 in 2 Australian businesses are currently overstating their green credentials, which could expose them to legal action. ACCC Deputy Chair, Catriona Lowe, has stated "where we have concerns, we will be asking businesses to substantiate their claims" and indicating, much like ASIC, there are a number of active investigations underway.

On the reporting front, Australia is set to introduce new sustainability-related accounting standards (and, in due course, auditing standards) to bring local standards in line with international standards. The developments, drafted as amendments to the ASIC Act, will give the Australian Accounting Standards Board the ability to establish reporting requirements in line with international standards, as well as allowing auditing and assurance standards for sustainability purposes and greater strategic oversight. At this stage, the requirements will be voluntary and non-binding, although further developments could change this. Draft legislation was provided to the public late in 2022 as part of a consultation process. Currently, no timeline has been set for it to be tabled in parliament.

Of course, the crackdown on greenwashing is not restricted to Australia. In the UK, airlines have been a target of the Advertising Standards Authority, with UAE carrier Etihad Airways being banned in April this year from advertising their "sustainable aviation" approach. In April, the Monetary Authority of Singapore announced a "Finance for Net Zero Action Plan" which included their views on safeguarding against greenwashing risks.

South Korea reportedly became the first country to seek to specifically criminalise misleading the public about green credentials and environmental impact in advertising, in their draft legislation announced earlier this year. It is anticipated the legislation will likely pass by the end of the year.

With attention on greenwashing intensifying as the deadline to net-zero looms and within an active regulatory environment, there is debate as to whether this will tip the pendulum towards "greenhushing".

A survey by climate change activist company South Pole in 2022 revealed that greenhushing is prevalent. The survey of over 1,200 organisations globally found that some 23% were refusing to publicise their science-based emission reduction targets and progress, despite making efforts towards net zero.

Could Australian businesses respond to these developments by withdrawing their public-facing ESG commitments and walking back their green commitments for fear of being penalised? For instance, will companies revise or remove commitments from their online presence? Will they suppress or downplay efforts to improve their environmental impact or sustainability? Will they deprioritise or hold off setting ESG targets for concern they will be held to account on those targets?

So, what can be done? How can businesses mitigate the risk of greenwashing or greenhushing allegations?

Steps to take could include:
- With sustainability reporting imminent, best practice will involve collaboration between business, finance and legal teams to develop taxonomy and prepare disclosures in line with the new standards. Good data will be key to this collaboration, as well as business-wide training and education on the new standards.

- Setting realistic ESG targets, revisiting them regularly and maintaining transparency in the processes and approach that sit behind targets. This could include disclosures of net-zero targets, accurate emissions data and waste management practices. Companies have been put on notice that they will be required to demonstrate the scenarios used, prove up assumptions and verify progress.

- For targets that are set, businesses should establish proactive mechanisms to ensure that the business is actually staying within the lane set in the targets. The Mercer case being litigated by ASIC hinges on promises made by the company that its fund wouldn't invest in certain companies, despite allegedly doing exactly that. Companies should review internal processes in an effort to avoid this kind of situation.

- Internal reporting and whistleblowing can also act as an internal health check and prompt further inquiry.