What is greenwashing?
‘Greenwashing’ is when a company misrepresents its sustainability related risks, business credentials or strategies in relation to its products or services. Such misrepresentations may breach misleading disclosure provisions under the Corporations Act 2000 (Cth) and ASIC Act or the general prohibition on misleading or deceptive conduct under the Australian Consumer Law. While greenwashing is not a new risk facing businesses operating in Australia, the increased regulatory scrutiny should be of concern for company boards and senior management.
Greenwashing claims are commonly made in three main areas:
- Climate change – greenhouse gas emissions reduction targets: Setting targets or making commitments may be misleading if they have no reasonable basis, for example, if there is no genuine intention to pursue them, or there are no credible efforts towards implementation.
- 'Truth to label' - on products and services: Accountability for labelling products or services as 'green' or 'sustainable' without the science or credentials to prove it.
- Corporate credentials and advertising: Overstatement of green credentials that may be deemed misleading or deceptive in light of a company's other activities.
Amid current and impending regulatory action, multiple NGOs and activist shareholders are also taking corporations to task over their climate credentials This has included, in some recent instances, complaints to the ACCC and ASIC over potentially misleading and deceptive conduct in regards to net zero commitments. On top of this, shareholder resolutions on climate-related issues have increased in recent years, especially in the energy, resources and financial services sectors.
What do these developments mean for Australian companies?
For Australian companies, recent trends in greenwashing have put companies on notice to not only understand the significance of their disclosures and commitments, but also ensure they have the right governance in place to best operationalise those commitments.
For addressing climate risk at a board level – it's not about what you know, it's about what you ought to know. Understanding climate risk, including litigation risks posed by greenwashing, is essential for directors to discharge their duties - including due care and diligence in risk oversight and disclosure," says Sarah Barker, Partner, Head of Climate & Sustainability Risk Governance.
Climate change is a lead ESG indicator and "ESG is no longer just a ‘nice to have’ for organisations. With this increasing scrutiny from both regulators and the broader community, getting ESG strategy, governance and disclosures right is crucial to safeguarding business value," says Cecile Walton, Director, MinterEllison Consulting.
What's needed to safeguard my organisation against greenwashing?
The well-intentioned impetus for many companies to join the pledge to achieve net zero emissions by 2050 must be met with the science, strategy and action to back it up,”
Cecile Walton, Director, MinterEllison Consulting
MinterEllison has highlighted three key areas where companies should uplift:
1. Building organisational climate capability
Boards, executive management teams and in some cases, frontline employees must be across climate-related risks and opportunities and how it can affect business. Adequate training at a company-wide level is a 'must have' to operationalise a company's climate strategy, ensuring there are no anomalous investments or decisions that might contravene a company's commitments.
At a board level, as highlighted by the Investor Group on Climate Change (IGCC), ensuring climate-related skills are included in a board's skills matrix helps to build investor and shareholder confidence. To help build boards' climate capabilities, MinterEllison recently partnered with the Australian Institute of Company Directors to publish an introductory resource for directors on climate risk governance.
2. Reviewing disclosures with a fine tooth comb
In March 2022, APRA issued a voluntary climate-risk self-assessment survey to medium-to-large APRA-regulated entities, assessing the quality of organisations' disclosures and alignment with the Taskforce on Climate-Related Financial Disclosures (TCFD). In August, APRA found that while 90% of survey respondents did report within the TCFD-aligned framework, there was wide variation in the quality and scope of the disclosure provided.
In a heavily-scrutinised environment, companies must ensure their periodic disclosures (as well as other year-round disclosures) not only align to their pre-existing commitments, but also reflect widely accepted science, and broader evolving community expectations.
Interestingly, at the Commonwealth Bank of Australia's 2022 Annual General Meeting, many of the critical questions asked from both shareholder activists and retail investors were in regards to the company's 80-page Climate Report. The nature, quantity and range of questions highlighted the sophisticated level of scrutiny of climate-related disclosures, reiterating the necessity for organisations to be discerning in terms of what they publish. Moreover, ensuring that there is a sufficient level of understanding at a board and executive leadership level regarding climate-related disclosures is essential to give the market confidence in a company's ability to respond to the risk of climate change.
3. Devising and implementing effective Climate Risk Governance
It is crucial to look at climate risk governance in a context that looks at risks and opportunities from both a financial and liability sense. In a greenwashing sense, this means ensuring there is an adequate process to operationalise climate strategy and properly integrate it within company operations.
As a starting point, this means that external statements or commitments should marry up to internal processes or policies that demonstrate both the will and intention to fulfil those promises.
Internal governance
Clarity around roles and responsibilities matter, and there should be sufficient distinction between teams that set a climate strategy to those that operationalise and report; and those that review and audit performance. In the rush to appoint sustainability leads, or executive accountabilities, many companies might not take the time needed to ensure an appropriate risk governance structure is in place – for example a RACI – to ensure that everyone has (and knows) their role. Climate risk, like any other form of risk, should follow best practice in a 'three lines of defence' model. Having a coordinated internal approach to climate risk management can ensure better understanding of roles and responsibilities, identify important gaps, and provide important avenues of escalation where issues arise.
Board governance
From a board perspective, effective governance in terms of committee structures, charters, and board skills is key to equipping directors to constructively challenge management's approach to climate-related risks and opportunities. Asking the right questions in the right forums can ensure the best outcomes in navigating an organisation's response to climate change. Moreover, having the correct frameworks in place allows a board to be well-prepared to input into discussions on strategy, or climate-related KPIs or remuneration decisions.
