Beware the risk of greenwashing

Intense scrutiny and action against greenwashing is escalating worldwide, putting organisations and their leaders on notice regarding overstatements or misleading claims and incurring potential reputation and regulatory risk.

The term “greenwashing” applies to the actions of a company that gives an impression of acting in an environmentally aware and sustainable fashion, but is merely ticking the boxes for marketing and reputation purposes.

Oil and gas giant Santos is currently in the headlines as the first company in the world to have a legal case launched against it challenging the accuracy of its net-zero emissions target. Brought by the Environmental Defenders Office (EDO) on behalf of Santos shareholder, the Australasian Centre for Corporate Responsibility (ACCR), and listed for hearing later in 2022, the case will challenge the company’s claims that natural gas is “clean fuel” and that it has a credible pathway to net-zero emissions by 2040.

Announcement of the case coincided with news that DWS Group, the asset management arm of German lender Deutsche Bank, is also being investigated by US regulator the Securities and Exchange Commission, and its German equivalent, BaFin. This action is in response to the firm’s former head of sustainability, Desiree Fixler, blowing the whistle and alleging the group had misrepresented its use of environmental, social and governance (ESG) metrics to analyse companies across its investment platform.

Such high-profile cases are sending shock waves through corporations globally as they face more aggressive approaches to greenwashing — and a likely multitude of similar cases to come.

Greenwashing risk is — like climate change itself — highly dynamic and escalating in importance. “You can’t get away with loose language and vague amorphous puffery anymore,” warns Sarah Barker MAICD, partner and head of climate risk governance at law firm MinterEllison. “Terms like ‘science-based’ and ‘Paris-aligned’ now have specific meanings, and the bar on those, and the nature of what they imply, is getting higher and higher.”

Impetus on greenwashing is coming from converging factors, including the recent rush of net-zero and emissions-reduction targets that accelerated in the lead-up to the 2021 United Nations Climate Change Conference (COP 26) held last November, and an increasing awareness and societal concern fanned by the ongoing findings of the UN Intergovernmental Panel on Climate Change (IPCC).

Also critical is pressure from investors who, in effect, have been riding an ESG-led market boom, along with the arrival of more widely accepted measures, definitions and frameworks for climate disclosure — with the speedy consultation process for the International Sustainability Standards Board (ISSB) draft framework, aimed at providing consistent reporting standards, now underway.

Legal risk on the rise

Add to these pressures the upsurge of climate litigation and it is little wonder greenwashing is becoming a fast-rotation agenda item for boards and their risk committees.

There is rising interest in the use of corporate and commercial law to drive impact on climate action, with the aim of changing corporate behaviour in relation to emissions, says Brendan Dobbie. One of 16 lawyers on the EDO’s climate team, he manages the areas of corporate/commercial and gas developments.

Environmental NGOs, for instance, are increasingly interested in using corporate and commercial law as avenues they can pursue to keep companies accountable in terms of net-zero and emissions-reduction targets, he says. Also in keen focus are proper disclosures to the market and shareholders in corporate documents about climate risks, “whether that’s associated with a warming climate, likely prevalence of natural disasters or with transitioning away from fossil fuels, in particular around having stranded assets”.

Dobbie notes the law hasn’t changed — it has long been unlawful for companies to make misleading and deceptive claims. “What has changed is a new focus on what companies are saying, and consumer and corporate law are valuable tools in the arsenal of organisations like ours and our clients’ that are willing to dig into company statements to check their accuracy and their lawfulness — and to challenge claims that potentially don’t stack up.”

Both Australian Consumer Law and the Corporations Act 2001 (Cth) will be used in the Santos case. While there’s no case for damages, if the Federal Court holds that the company’s statements are unlawful, Santos will face an injunction that requires it to correct the record, and not make such statements in the future (see breakout).

Running the case against Santos in court will be eminent barristers Noel Hutley SC and Sebastian Hartford Davis, recognised as thought leaders for their series of opinions on directors’ duties and climate change published since 2016 by the Centre for Policy Development.

In their third opinion, released in April 2021, the pair announced the pendulum had swung on directors’ duties and climate change. They highlight the risk of liability for misleading disclosure, or “greenwashing”, should there be inconsistency between a company’s stated position and ambition on climate risk management, and its internal strategy, plans and actions.

The opinion states: “A misalignment places the company, and its directors’ and officers’ at risk of ‘greenwash’... There is a reason to think that ‘greenwashing’ claims of the kind outlined in this memorandum will become an acute source of risk.” (bit.ly/3w9URus).

This indicates potential liability for misleading disclosure in relation to a future matter under the Corporations Act, Australian Securities and Investments Commission Act 2001 or Australian Consumer Law. That may, in turn, lead to “stepping stone” exposure to liability for a breach of the directors’ duty of care.

The Santos case highlights a shift in the landscape. Once, greenwashing claims were substantially the preserve of regulators — and there’s certainly vigilance on green among the watchdogs of Australia now (see breakout). But the latest surge against greenwashing is gaining momentum from a burgeoning number — and disparate range — of stakeholders that are calling companies to account for their green credentials.

Ilona Millar, is a partner at law firm Gilbert + Tobin’s banking and projects practice, and specialises in global climate change. She says this is an important area to watch. “Companies need an awareness of the range of stakeholders who may potentially bring a claim,” says Millar. “That includes regulators, whistleblowers, consumers, shareholders, competitors, other stakeholders and interested parties.”

Stronger competitor action looms with the growth of startups established as pure environmental plays, which will have a deep interest in taking out competitors that aren’t genuine because their whole business model depends on sustainable products, suggests Alan Kirkland, CEO of Australian consumer group CHOICE.

Earth quakes

Barker says the big game changer in strategic litigation of greenwashing is not only the new cast of plaintiffs, but the might of the environmental philanthropists with big bucks to fund cases run by very professional, savvy and well-resourced law firms. “It’s not the environmental activists and litigants of the 1980s and ’90s, or Friends of the Earth passing round a hat,” she says.

Much of this activity is emanating from Europe. “And Australia is a very attractive jurisdiction for strategic litigants — our laws are very permissive,” adds Barker, pointing to the Shell case with environmental charity ClientEarth, which is being run by a public interest law firm from the US.

There’s local action, as well. In the Federal Court in 2021, long-term CBA shareholder Guy Abrahams led a class action run by Equity Generation Lawyers. They successfully sued Australia’s biggest bank to gain access to documents detailing its decisions to finance oil and gas projects, potentially in breach of its own climate policy.

While some do not seek damages, Barker believes such cases are a strong indicator that we’re heading into a new era of plaintiff class actions “because these kinds of firms don’t do things for fun”. She sorts the types of cases into three buckets:

• Emissions reductions, now in sharp focus in Australia due to the explosion of corporate emissions-reduction targets and the spotlight of the Australian Securities and Investments Commission (ASIC).
• Truth-to-label relating to product labels and financial services — for example, the current investigation of DWS Group and the literal misleading labelling issue of Lipton Ice Tea, called to account by the Advertising Standards Authority for claiming its bottle as 100 per cent recyclable — but that didn’t actually include the cap and the label.
• Enterprise branding, when organisations are presented as clean and green. BP’s “Keep Advancing” and “Possibilities Everywhere” advertising campaigns came to an abrupt end in December 2019 when ClientEarth lawyers lodged a complaint alleging BP had misled the public by focusing on low-carbon energy products while the company was still investing 96 per cent of capital expenditure into oil and gas rather than renewables.

The last two are garnering more attention overseas, notes Barker, while it’s the first that’s now making Australian boards anxious. “When you add forward-looking claims to climate change, boards get very, very nervous,” she says, reporting “a significant uptick in boards reviewing and elevating their approaches to due diligence, verification and assurance on any statement made around their emissions reduction plans.”

However, inaction is not an option. “Boards have to face up to this wicked problem,” says Barker. “It’s increasingly difficult to claim you are acting in the best interests of any company if you are not considering how a transition to a net-zero economy may impact on your business. Where governance falls down is when you treat targets as ambit positioning statements and don’t follow through — that’s where people are getting themselves into trouble.”

In the third Hutley opinion, the authors indicated it’s not safer for directors to avoid making net-zero or emissions-reduction commitments. As a director, you have to determine what is in the best interests of the company and the broader stakeholder environment in which companies are operating, where there are expectations that climate risk will be taken into consideration.

Wrangling climate risk

According to Millar, further perplexing directors is how to qualify climate-related risks for a company, linked to the challenges of understanding what transitional risks are, due to policy uncertainty around climate change and energy in Australia.

Under the law, directors need to not only have a genuine intention to follow through, but to be able to show reasonable grounds on how each representation can be supported. They’re in for a lot of “tyre kicking” when it comes to setting strategy, according to Barker. “Investors are asking for credible effort. If it’s two steps forward, one step back, so be it. You’ve got to be on the trajectory.”

Amid all the hyperbole about greenwashing, Dr Katherine Woodthorpe AO FAICD, a director with a deep background in science and innovation, is concerned that hesitation over the sharper focus on greenwashing may risk “throwing the baby out with the bathwater”.

“Not being perfect is not an excuse not to do anything,” says Woodthorpe, who sits on the boards of ASX-listed AnteoTech and unlisted Vast Solar, two companies working on climate change solutions, and chairs Natural Hazards Research Australia.

While greenwashing “doesn’t enter the parlance” of her current boards, Woodthorpe thinks about it with a disciplined scientific mind. “The solution to greenwashing risk is about transparency and auditing,” she says. “When it comes to investing in new technologies, there’s always someone out there to check them for you and plenty of people to help you put your climate change program together... If there were more scientists on boards, of course, it would help.”

In terms of abatement, and even the recently hotly debated offsets market, “most are extremely honourable, high-integrity and heavily audited. There’s a lot of very high-quality activity going on out there,” says Woodthorpe.

“Educating directors on how to understand their climate commitments and ask questions to get to the nitty-gritty information that’s auditable and accountable” are among the outcomes Woodthorpe, president of the NSW division of AICD and a member of the steering committee of the AICD-hosted Australian Chapter of the Climate Governance Initiative, is keen for the new group to achieve.

So, where might boards trip up? One high- risk area is where the set targets are reliant on technology that has yet to be invented. The International Energy Agency (IEA) has recognised that to get to net zero by 2050, there may still be technologies that are yet to be commercialised — and possibly even discovered. The most recent IPCC report indicates limiting warming to 1.5oC presents a massive challenge that requires a complete scaling-up of responses in the next five years — by 2030, not 2050.

Millar says boards now have their sights on medium-term targets. “We’re seeing more of short- to mid-term targets being articulated with transition plans to achieve that. The challenge for boards in setting medium-term targets requires a real focus and attention on the means of implementation. When you’re setting ambitious targets, you have to be confident you’re going to be able to achieve them. If it’s dependent on things like technology that hasn’t been developed yet, you need to disclose that.”

Another potential snafu is when the best intentions to be green turn into greenwashing. Renewable energy, for instance, and the many months, even years, of negotiating and signing substantial long-term Power Purchase Agreements (PPAs) by companies intent on making a clean energy transition might look like a no-brainer to a board that is inspired by sustainability.

“Australia has seen a high volume of corporate PPAs over the past five years, with a number of ASX 200 companies contracting for their energy requirements,” says Simon Corbell, chair and CEO of the Clean Energy Investor Group and associate professor at the ANU Energy Change Institute. Among frontrunners with PPAs are Wesfarmers, Westpac, Coles and Woolworths, but Corbell says smaller enterprises with less in-house capacity for procurement can be at risk.

PPAs allow companies to make the clean energy switch and frequently claim to enable extra clean energy generation to come into the market by contributing to building solar or wind farms. “Those procuring an offtake from an existing established generator may overstate their impact from procurement,” warns Corbell. “They need to be careful about their claims.”

He says boards shouldn’t be in the position that the first time they’re seeing a PPA is when the request comes through to agree to the contract. “Ideally, you want the board to have been advised of the process... to determine the successful counterparty for the clean energy PPA, and the board should be asked what broader outcomes it would like to see realised. What’s the trade-off between those outcomes and price?”

Another clean energy procurement area to watch is the management of projects that may expose companies to unexpected sustainability risks, from poor relationships with landholders to other environmental impacts, says Corbell. “A company that hasn’t done its due diligence may be tarred with the same brush.”

Eco babble

According to CHOICE, Australians are increasingly aware of the environmental and ethical impacts of the products they buy, and this influences their purchasing decisions.

Eco labels such as Fairtrade, Rainforest Alliance and the Green Tick are meant to provide certainty that the choices we make are good for the environment as well as the workers in the supply chain.

According to the Eco Label Index, there are 57 different labels in use in Australia, as well as various international rankings and ratings, purchasing guides, certificates and certifications.

A 2021 CHOICE survey revealed 57 per cent of consumers said it was important to them that the products they purchase are environmentally friendly.

Yet only two out of five people considered it was easy to make environmental choices. Unclear or confusing labelling was listed as one of the main reasons for this difficulty.

ACCR vs Santos

The upcoming case against Santos being brought by the Australasian Centre for Corporate Responsibility (ACCR) will challenge the clean energy representations in the oil and gas company’s 2020 annual report that the natural gas it produces is a “clean fuel” and provides “clean energy”.

Santos made statements that it had a “clear and credible” plan to achieve “net-zero” Scope 1 and 2 greenhouse gas emissions by 2040. A large amount of this reduction is anticipated to come from future CCS (carbon capture and storage) processes and blue hydrogen.

ACCR claims these statements are potentially misleading because Santos plans to increase its greenhouse gas emissions through the expansion of its natural gas operations; and Santos’ net-zero plans rely on a range of undisclosed qualifications and assumptions about CCS processes.

Beyond a world-first test case of a corporate net-zero target, the proceedings will also be the first to legally and scientifically test the reasonableness of a company’s assumptions about the role of CCS and blue hydrogen technologies in achieving emissions reductions.

Scope 3

In March, US regulator the Securities and Exchange Commission (SEC) released a draft ruling mandating the disclosure of climate risk and Scope 1 to 3 emissions by listed companies in their financial statements. The new rules would include a phase-in period for all registrants, with an additional phase- in period for Scope 3 emissions.

The SEC proposal would require Scope 3 disclosures if they are material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.

“These proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks,” it says.

However, the new rules would also provide a safe harbour for liability from Scope 3 emissions disclosure and an exemption from disclosure requirements for smaller reporting companies.

The SEC says these proposals are similar to what many companies already provide based on “broadly accepted disclosure frameworks” like the Task Force on Climate-related Financial Disclosures and the Greenhouse Gas Protocol — “the most widely used global greenhouse gas accounting standard”.

Reviewing the draft ruling, law firm Clayton Utz flags a growing pressure for mandatory disclosure regimes and “the potential for such scrutiny to reach Australian shores if it is perceived that companies are not doing the right thing”.

The Greenhouse Gas Protocol defines Scope emissions as follows:

Scope 1 emissions are direct GHG emissions occurring from sources owned or controlled by the company, including emissions from company- owned or controlled machinery or vehicles, or methane emissions from petroleum operations.

Scope 2 emissions are those emissions primarily resulting from the generation of electricity purchased and consumed by the company.

Scope 3 emissions are all other indirect emissions not accounted for in Scope 2 emissions. These emissions are a consequence of the company’s activities, but generated from sources neither owned nor controlled by the company. These might include emissions associated with the production and transportation of goods a registrant purchases from third parties, employee commuting or business travel, and the processing or use of the registrant’s products by third parties.

Never mind the offsets

The use of offsets to achieve carbon neutrality is now a hot-button issue. “A lot of companies don’t understand offsets are not a universal panacea,” says Barker, noting investors are scrutinising not only the quality of offsets purchased, but the difference between avoided emissions vs emissions removals. “They’re looking at the ways companies are purporting to use offsets as an alternative to structural or strategic change within business, more negatively than positively.”

As yet untested in terms of claims and litigation, she says “offsets need to be utilised as temporary and marginal”.

Regulatory action

ASIC is running an ongoing review of financial funds and products to ensure they are as ESG-focused or green as claimed. It was announced at COP26 that it is also working closely with the ISSB on development of the new framework to guide sustainable financing in 2022.

The Australian Competition and Consumer Commission (ACCC) has long been alert to greenwashing, releasing a green marketing guide in 2011 with a subsequent string of green claim actions. Notably, the Federal Court awarded the highest penalty on record against Volkswagen in 2019 for false claims about the compliance of vehicles with diesel emissions standards, and says a key priority is environmental claims and sustainability in 2022–23.

“This will include focusing compliance and enforcement efforts on businesses which make false or misleading environmental or ‘green’ claims in relation to consumer goods, or about the carbon neutrality or environmental benefits of their production processes at the retail or corporate level,” says the ACCC.

ASIC and ACCC have announced they will be working closely together — as well as with the Clean Energy Regulator, which administers the federal government’s voluntary Corporate Emissions Reduction Transparency scheme.