Experts: 'greenwashing' could expose companies (and directors) to the risk of litigation

6 minute read  28.04.2021 Kate Hilder, Mark Standen, Siobhan Doherty, Sarah Barker

A brief overview of the key points in the new supplementary opinion by Noel Hutley SC and Sebastian Hartford Davis on climate change and directors' duties.

Key takeouts

  • A new supplementary opinion by Noel Hutley SC and Sebastian Hartford Davis provides an update on the duty of directors to consider, disclose and respond to climate-related risks in light of recent developments. In particular, the authors flag that 'greenwashing' may expose both individual directors and companies to the risk of litigation.
  • The opinion includes several suggested steps that directors/companies can take to minimise/mitigate this risk.

MinterEllison, barristers Noel Hutley SC and Sebastian Hartford-Davis have provided an expert opinion discussing the increasing standard of care expected of directors in managing climate-related risks and providing insight into the legal risks of 'greenwashing' for both directors and companies.

A summary and discussion of the opinion is set out below. A further analysis of the practical implications of Mr Hutley's latest opinion for corporate boards, and key questions that directors and officers should now consider, has been prepared by the MinterEllison Climate Risk Governance Team for our clients.

Identification and disclosure are no longer enough: Directors need to explain how they are managing climate risk

The updated opinion builds on earlier opinions published in 2016 and 2019 into the extent to which the duty of care and diligence imposed by s 180(1) of the Corporations Act 2001 (Cth) permits/requires directors to respond to climate change risks. You can access copies of the previous opinions and our summaries here for the 2016 Opinion and here for the 2019 Opinion. A key message in the 2021 opinion is that the standard of care with respect to climate change has risen and looks set to continue doing so. The authors comment that there is 'a growing sense of regulatory, investor and community pressure for directors to understand, and to convey that they understand, that the financial risks of a changing climate are to be taken seriously as economic and operational risks'.

In the authors' view, this means that in practice directors are now expected to ensure that active steps are being taken not only to identify but to manage the risks posed by climate change. The authors write,

'…it is no longer safe to assume that directors adequately discharge their duties simply by considering and disclosing climate-related trends and risks; in relevant sectors, directors of listed companies must also take reasonable steps to see that positive action is being taken: to identify and manage risks, to design and implement strategies, to select and use appropriate standards, to make accurate assessments and disclosures, and to deliver on their company’s public commitments and targets'.

'Greenwashing' constitutes an 'acute litigation risk' for directors and for companies

In light of these rising expectations, the authors observe that net zero commitments are becoming increasingly common with many directors appearing to regard such statements as 'an appropriate or necessary step in the discharge of their duties'.

However, the authors caution that where these commitments are made without 'reasonable grounds' for doing so – where the claims are effectively 'greenwashing' – both directors and companies could leave themselves exposed to the risk of litigation. They write,

'It is foreseeable that a company (and its directors) could be found to have engaged in misleading or deceptive conduct or other breaches of the law by not having had reasonable grounds to support the express and implied representations contained within its net zero commitment'.

Further, depending on how a commitment is phrased, the authors caution that net zero commitments may be found to constitute a representation about a 'future matter'. One implication of such a finding, is that it would mean that the person making the representation would be required to adduce evidence that they had reasonable grounds for making it.

In addition, the authors observe that individual directors could also face personal liability, if it is found that they breached their own duties of care by facilitating the making of a misleading representation.

In the authors' view this risk 'may not be adequately appreciated within corporate Australia'.

Refraining from making a net-zero commitment is not 'safer'

The authors make clear that in their view, refraining from making a net-zero or similar commitments is not necessarily a 'safer' option for companies or for directors.

'To be clear, in our view, risks relating to greenwashing do not mean it is safer for directors to avoid making net zero commitments…Indeed, given the developments cited above, the risks of inaction on this front appear to be profound. Nor do we think that companies can only set out such targets or commitments if they have a complete roadmap or plan for how they will be achieved. Rather, a company must have a genuine intention, on reasonable grounds, to follow through with reasonable strategic efforts and commitment of resources as may reasonably be expected to fulfil the intent implied by the announced target. A company must also take care to convey accurately the stage of its progress on the journey when such commitments are announced, updated or impacted'.

'Reasonable grounds': Suggested steps to reduce the likelihood of liability arising from a net zero (or similar) commitments

The opinion sets out a number of suggested steps companies and directors could consider taking to reduce the likelihood of liability arising from net zero (and similar commitments). These include the following.

Develop a net zero strategy

  • The authors advise that directors should develop a net zero strategy, clearly identifying how the company plans to achieve its commitments, explaining the assumptions behind it and how they were tested, and documenting any relevant deliberations. Where appropriate, the authors suggest that qualified external advisers could be used to assist in the formulation and review of the strategy (though this will not absolve directors from liability).
  • This strategy should be integrated into the company's operational strategy. The authors' view is that 'An internally integrated decarbonisation strategy is likely to provide a surer footing for directors than a decarbonisation strategy contingent on unknown contingencies: such as the emergence of new technologies, or different carbon offsets, or other businesses in the company’s supply chain reducing their emissions'.

Be specific

  • The authors advise that 'particular care' should be given to expressing the scope of commitments and the timing around when specific commitments will be achieved. t the net zero strategy should clearly explain which emissions (Scope 1, 2 or 3) it includes and also clearly state the timeframe for achieving emissions reductions. Particular care should be taken in expressing the scope or timing of a commitment.

Disclose setbacks promptly

  • The authors advise that if there are set-backs to achieving the strategy eg where achievement of the strategy is reliant on significant advancements in carbon capture/storage technology occurring within a specific timeframe, and they do not occur, it's important that this is communicated promptly in light of the fact that 'failure to disclose may readily constitute misleading or deceptive conduct through silence'.

[Sources: CPD media release 25/03/2021; Full text: Supplementary Opinion April 2021; Roundtable conclusions]