What boards need to know about greenwashing

Greenwashing risk will remain a key focus for organisations in 2025, driven by mandatory climate reporting and increased regulatory scrutiny of false and misleading environmental claims. We explore how boards can navigate these complexities and safeguard their organisations against potential liability and reputational damage.

Corporate sustainability claims and greenwashing remain a key focus for the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) into 2025.

With mandatory climate reporting laws also commencing in January, Australian organisations’ climate exposure will come into clearer focus, bringing new challenges for boards.

Greater stakeholder scrutiny of alleged greenwashing compounds the pressures faced by boards seeking to protect their reputation and reduce legal risks.

To mitigate regulatory intervention, boards should prioritise transparent communication of what their organisation is doing – and not doing – to avoid making misleading claims about a company’s environmental efforts.

Greenwashing in an era of mandatory climate-related disclosures

‘Greenwashing’ is shorthand for misleading disclosure of an organisation’s environmental credentials. The making of misleading claims is prohibited under Australian Consumer Law, the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

Greenwashing can occur in various contexts, including climate-related financial reporting, sustainability reporting, investor communications and marketing – such as product advertising, branding or public relations.

In the context of climate-related financial disclosures, greenwashing can arise when organisations understate the risks associated with climate change concerning their corporate strategy or financial prospects or overstate their resilience to those risks.

Greenwashing not only risks regulatory intervention and reputational damage but also invites potential legal action from environmental activists and private litigants. Even accusations of greenwashing can harm stakeholder trust, negatively impact commercial outcomes, deter investors and customers, and make it harder to attract and retain top talent.

Why greenhushing is increasingly on the radar

‘Greenhushing’ occurs when organisations minimise their climate-related financial disclosures, offering limited or no information on key risks, emissions reduction targets or transition plans. This approach can lead to poor commercial and legal outcomes and is not a sustainable way to manage risk.

Greenhushing can arise in response to increased scrutiny from corporate regulators, environmental activists and shareholders. It is further driven by concerns associated with forward-looking uncertainty and incomplete data. While it may be intended to avoid scrutiny it can create more issues than it solves, leaving organisations vulnerable to legal breaches and unprepared for external review.

Chair of ASIC Joe Longo notes, “In response to ASIC’s scrutiny of greenwashing, some companies may be tempted to cease all voluntary disclosure, chasing greenwashing with a little ‘greenhushing’ ... this kind of response is just another form of greenwashing; an attempt to garner a ‘green halo’ effect without having to do the work.”

Failing to disclose material climate-related risks can violate continuous disclosure obligations and/or Australia’s new mandatory climate reporting laws (refer to the AICD’s, A director’s guide to mandatory climate reporting for more details).

Evolution of regulatory focus

ASIC

Reducing harm from greenwashing misconduct has been a strategic priority for ASIC since 2022. In its latest report on greenwashing, ASIC made 47 regulatory interventions, including commencing two Federal Court proceedings (against Active Super and Vanguard) for the 15-month period to 30 June 2024.

In September, the Federal Court ordered Vanguard Investments Australia to pay a record $12.9 million penalty after it admitted to making false or misleading representations about an ‘ethically conscious’ fund, breaching the ASIC Act.

ASIC has identified four broad areas of concern from its regulatory interventions:

1. Underlying investments that are inconsistent with disclosed ESG investment screens and investment policies.
2. Sustainability-related claims made without reasonable grounds.
3. Insufficient disclosure on the scope of ESG investment screens and investment methodologies.
4. Sustainability-related claims made without sufficient detail.

Deputy Chair of ASIC, Sarah Court, previously indicated that future cases could extend beyond misleading or deceptive conduct to include licence obligations, directors’ and officers’ duties, and other obligations. See discussion on directors’ duties and greenwashing below.

ACCC

The ACCC has recently intensified its focus on greenwashing, recognising the growing concern among consumers and investors regarding misleading environmental claims.

A 2023 ACCC report, which undertook an internet sweep examining the sustainability claims of 247 businesses across eight sectors, found that 57 per cent of all businesses surveyed made potential greenwashing claims.

Earlier this year, the ACCC launched its first greenwashing case in the Federal Court against Clorox Australia, alleging that it misled consumers by claiming its GLAD-branded bags were made of “50 per cent ocean plastic”. The ACCC claims that the use of the phrase and wave imagery created the false impression that the bags were made from plastic waste collected from the ocean.

The ACCC has released the following principles for trustworthy environmental claims:

1. Make accurate and truthful claims
2. Have evidence to back up your claims
3. Do not hide or omit information
4. Explain any conditions or qualifications of your claims
5. Avoid broad and unqualified claims
6. Use clear and easy to understand language
7. Visual elements should not give the wrong impression
8. Be direct and open.

Activists and private litigation

Private litigation for greenwashing in Australia is gaining traction as environmental groups, in particular, seek to challenge companies on their environmental claims such as how ‘clean’ a technology is or the planned path to net zero.

Greenwashing and directors duties

As highlighted above, ASIC is exploring broader directors’ duties claims regarding greenwashing. It is conceivable that a director may breach their duty of care and diligence if a company is found to have made false or misleading claims about its environmental or sustainability credentials, and the director had reason to question the accuracy of those claims but did not make appropriate enquiries with management.

How can a diligent director mitigate greenwashing risks?

A diligent director could mitigate the risk of a greenwashing claim by:

• Understanding the company’s legal and regulatory obligations;
• Being alert to the risk of greenwashing when promoting its sustainability credentials;
• Asking management for evidence to substantiate the statement; and
• If appropriate, seeking an external independent review, reaching their own view on whether there is a reasonable basis for the claim.

Directors may also wish to consider whether their D&O insurance policy adequately covers greenwashing risk.

A new legal opinion by Michael Hodge KC and Sonia Tame, commissioned by the AICD and accompanied by a practice statement, highlights that what matters is whether a director has taken reasonable steps to position themselves to guide and monitor the organisation. It also emphasises the importance of being alert to, and acting on ‘red flags’, as well as appropriately challenging management where necessary.

Questions for directors to ask management

Below is a non-exhaustive list of questions directors may wish to ask management to mitigate greenwashing risk:

1. Has our organisation conducted a review of climate and sustainability claims across all public channels? Are any revisions necessary? How will these be communicated to the market?
2. For our net zero commitments, do we have a credible pathway to achieve them? Have we clearly articulated key assumptions and uncertainties?
3. If applicable, how reliant is our transition plan on offsets or emerging technologies? Have we communicated this clearly? Is our reliance reasonable in the circumstances?
4. To what extent can we obtain external assurance to support the accuracy of our climate reporting?