Beware of forward-looking ESG statements: Pamela Hanrahan

Recent regulatory action on greenwashing draws attention to the reasonable basis requirement for representations about sustainability, writes Professor Pamela Hanrahan.

Companies and their directors are often required to make public statements about what they think will happen in the future. 

The recent regulatory crackdowns on greenwashing, which can involve claims about future sustainability, have highlighted the risks that forward-looking statements can carry. 

Australia has strong laws dealing with misleading conduct that is engaged in “trade or commerce” or in connection with financial products (including shares) and with false or misleading statements in relation to financial services. 

The various prohibitions in the Australian Consumer Law, Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) can apply to both companies and individuals. 

A company or individual can contravene the law regardless of whether they knew the information provided was misleading and without intending to deceive. 

If a statement or other behaviour leads the people to whom it was directed into error, then the person making or engaging in it contravenes the law. 

Forward-looking statements require particular care. Under relevant legislation, the law presumes that a representation with respect to any future matter is misleading if the person making it does not have reasonable grounds for it. 

The person making the representation must be able to demonstrate that they had reasonable grounds for it in order to rebut the presumption — this shifts the “evidential burden”. 

If they can establish reasonable grounds, then the presumption (that the representation is misleading) falls away and it is up to the other side to prove its case in the usual way — that is, the other side carries the “dispositive burden” of proving the conduct breached the law.

The reason why the legislation reverses the evidential burden for future statements is explained by the Full Federal Court in Australian Competition and Consumer Commission v Woolworths Group Ltd (2020) 281 FCR 108. 

In that case, the ACCC argued that Woolworths’ labelling of its Select Eco range of disposable crockery as “biodegradable and compostable” was a representation as to a future matter (that the crockery would biodegrade over time). 

The Full Court disagreed, upholding the trial judge’s decision that this was not a representation as to a future matter, but one about the present characteristics of the product. 

Therefore, it ruled that the statutory presumption did not apply. 

In the course of the judgment in Woolworths, the Full Court usefully explained the difference between statements about current facts and future matters, and the rationale for putting the burden on the person making a representation about a future matter to show reasonable grounds. 

Crucially, a representation about a future matter — for example, a prediction or a promise — is a statement of the state of mind at that time of the person making it. 

Conventional representations of facts do not concern the state of mind of the person making them. 

They are “either true or false — and capable of being demonstrated to be so — at the time that they are made, and irrespective of the state of mind of the person making them”. 

But representations as to future matters often take the form of an opinion or prediction that something will occur in the future. 

They are about what the person is thinking at the time the representation is made. 

The law, therefore, puts an evidential burden on the person making the representation to show that they had reasonable grounds for it. 

The test is objective — and what is reasonable depends on the facts and circumstances existing at the time. 

ASIC and greenwashing 

Recent regulatory attention on greenwashing has led to renewed focus on what is a reasonable basis for making statements about a company’s future sustainability. In June 2022, 

ASIC released its Information Sheet 271 dealing with the “practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”. 

The information sheet was specifically directed at investment fund managers and superannuation trustees that offer sustainability related investment options or products, such as ESG funds. 

However, it included a note that its principles “may apply to other entities that offer or promote financial products that take into account sustainability-related considerations. Examples include companies listed on a securities exchange or entities issuing green bonds”. 

INFO 271 calls out the risks associated with forward-looking statements about ESG matters. 

It says, “Particular risks of breaching the misleading statement prohibitions arise in relation to representations made about future matters that are not supported with reasonable grounds. For example, if you stated that you will achieve a certain carbon emissions target (such as net zero carbon emissions) by a particular date, this may amount to a representation about a future matter. Such a representation may be deemed to be misleading if you do not have reasonable grounds for making the representation.” 

In its Report 763, released in May, ASIC outlined its surveillance and enforcement activities in relation to greenwashing over the nine months from July 2022 to March 2023. 

This built on its earlier work in INFO 271. ASIC’s activities identified net zero statements and targets, and claims of decarbonisation, which did not appear to have a reasonable basis, or were factually incorrect. 

It also identified instances where entities described their operations, projects or products as “carbon neutral”, “clean” or “green” when there appeared to be no reasonable basis for these claims.

These claims were identified in prospectuses, product disclosure statements and market announcements. 

While most of ASIC’s regulatory attention was focused on investment fund promoters and managers, it was not restricted to them. 

Tellingly, ASIC’s enforcement outcomes detailed in Report 763 included infringement notices, issued under the ASIC Act, against listed energy companies Black Mountain Energy Ltd and Tlou Energy Ltd. 

These companies were not promoting investment products in the traditional sense. Instead, they were talking about their own projects. 

The infringement notices were based on ASIC’s contention that the listed companies had contravened a provision of the ASIC Act that prohibits a person “in trade or commerce, in connection with the supply or possible supply of financial services or in connection with the promotion by any means of the supply or use of financial services, making false or misleading representations with respect to the standard, quality, value or grade of services”. 

The “financial services” in question here were the companies’ own securities. 

Given the regulators’ increased focus on greenwashing in forward-looking ESG statements, companies and boards will need to pay even closer attention to whether these statements about the future have a clear and documented reasonable foundation before they are made.

This article first appeared under the headline ‘Beware False Promises’ in the July 2023 issue of Company Director magazine.