The 'third wave' of climate litigation: greenwashing

5 minute read + pdf download  07.10.2021 Sarah Barker, Donna Worthington

With the sharp evolution of sustainability into a material financial issue, greenwashing has become an acute legal risk for organisations. How can you manage the risk?

Poorly implemented climate policies are putting organisations at risk. Regulatory investigations into 'green' levels and strategic litigations seeking to hold companies to account for bold emission reduction promises are becoming increasingly common – both in Australia and internationally.

Companies and their boards are finding themselves exposed, and at risk of misleading or deceptive conduct when they don't articulate or deliver on their climate policies effectively.

 

The pendulum has swung on directors’ duties and climate change… There is a reason to think that 'greenwashing' claims… will become an acute source of risk. Cases of this kind have been emerging overseas. Greenwashing could prove to be the focus of what has been called the 'third wave' of climate litigation.”
Hutley opinion

Understanding greenwashing

‘Greenwashing’ is a misrepresentation of the sustainability credentials of a company, or of its products or services. If those misrepresentations are made in annual reports or market filings, they may fall foul of the misleading disclosure provisions under Part 7 of the Corporations Act, or Part 2D of the ASIC Act. If they are made in trade or commerce, they may contravene the general prohibition on conduct that is misleading or deceptive (or likely to mislead or deceive) under section 18 of the Australian Consumer Law, or the specific prohibitions against misrepresentations in the supply of goods or services under Part 3.1 of that Law.

The pressure on boards and management around sustainability-related disclosure has never been greater – or more consequential. Companies need to:

  • Ensure sustainability-related disclosures are aligned with strategy;
  • Be readily able to substantiate the disclosures if challenged;
  • Ensure the measures are appropriately resourced through clear action plans; and
  • Embed climate goals in enterprise risk and compliance frameworks.

With heightened demands on corporate sustainability from investors and customers on the one hand, and elevated scrutiny from both regulators and strategic litigants on the other, an ability to navigate the risks associated with ‘green’ claims has never been more important.

Emerging risks in greenwashing claims

In practice, where does the risk lie? Greenwashing claims are increasingly common in three main areas:

Climate change - emissions reduction targets

Commercial corporations and financial institutions are scrambling to meet heightened market expectations on ‘net zero’ emissions by 2050. This is to fall in line with the Paris Agreement goals. There need to be significant interim reductions over the short and medium term. Such targets may be misleading if they have no reasonable basis, there is no genuine intention to pursue them, or there are no credible efforts towards implementation.

For example, in August 2021, activist shareholders commenced Federal Court proceedings against Santos Ltd in relation to a number of alleged misrepresentations in its 2020 Annual Report. The claim alleges (in part) that the description of Santos’ plan to reach net zero emissions by 2040 as ‘clear and credible’ is misleading contrary to the Corporations Act, as its achievement is subject to material, undisclosed contingencies and dependencies.

‘Truth to label’ – on products and financial services.

Companies and financial institutions alike are being held to tighter account in their use of terms such as ‘sustainable’, ‘green’ or ‘Paris-aligned’. These have moved from being amorphous (and broadly defensible) to imply a more defined and much higher standard of conduct.

Prudential and securities regulators around the world – from ASIC to the US SEC – are focusing on whether financial institutions’ ‘green investing’ credentials are misleading. For example, in September 2021, both the US SEC and German BaFin announced investigations into claims made by a former employee of Deutsche Bank subsidiary DWS that its investment processes do not integrate sustainability considerations to the standard promoted.

Corporate credentials and advertising

With heightened expectations on corporate sustainability from both investors, customers and other stakeholders, companies are keen to promote green credentials. Overstatement of those credentials can result in significant reputational and legal risk.

For example, in 2020, public interest law firm Client Earth lodged a complaint under the OECD Guidelines for Multinational Enterprises against BP's ‘Advancing Possibilities’ advertising campaign. The complaint alleged that, by focusing on BP’s investment in low-carbon products, the campaign created a misleading impression as to the extent of BP’s shift away from fossil fuels to renewable energy, when more than 96% of its capital expenditure remained in fossil fuels. BP subsequently withdrew the campaign, and committed to end ‘corporate reputation advertising’.

 

Give me the target with the intermediary step, give me the leader who is responsible… and give me the money you're putting in it, and then I will start believing you. If not, this is greenwashing.”
Philippe Joubert, Fellow and Member of the Cambridge Institute for Sustainability advisory board

Proactively change the approach to climate-related disclosure

Legal developments in Australia represent a culmination of pressure that has been building on companies and financial institutions. Companies and financial institutions need to both accelerate their ambition to reach 'net zero' greenhouse gas emissions and disclose their strategy for managing climate-related financial risks across the plausible range of future climate scenarios.

Led by their boards, companies and financial institutions need to take a number of steps:

  • Review current-climate related disclosures and identify potential exposures before they crystallise;
  • Ensure climate-related disclosures and action plans are able to be substantiated;
  • Identify and implement actions to rectify any potential or real greenwashing risk. Embed these as ‘business as usual’ in enterprise risk and compliance frameworks.

Our team can help you take these steps using our robust, flexible independent review methodology, which can be tailored to meet the level of assurance and uplift your company requires.

Find out more about greenwashing in our special insight, To green or not to green?

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