Civil penalty proceedings commenced for alleged 'greenwashing'
ASIC has commenced civil penalty proceedings in the Federal Court for alleged greenwashing conduct by Mercer Superannuation (Australia) Limited (Mercer), in relation to statements on Mercer’s website about its ‘Sustainable Plus’ investment options. This is a landmark case, marking the first time the corporate regulator has taken a company to court for greenwashing, and comes just months after ASIC announced its first formal enforcement action for greenwashing against ASX listed company Tlou Energy Limited. The proceeding also adds Mercer to a growing list of superannuation firms who have faced legal action in relation to their climate and sustainability-related claims.
The proceeding signalled the beginning of a busy week for Australian regulatory action on greenwashing, with the ACCC releasing findings on Thursday of a review which found that more than half of the businesses surveyed had made concerning claims about their environmental or sustainability practices.
This article considers the key aspects of ASIC’s greenwashing litigation against Mercer Superannuation and how regulated entities offering sustainable investment products can reduce risks of similar claims by ASIC. Scrutiny of companies’ sustainability and climate-related claims and commitments is likely to remain a focal point for Australian regulators throughout 2023.
What is ‘greenwashing’?
‘Greenwashing’ broadly describes the practice of providing a false impression or misleading information presenting a company's products or initiatives as more environmentally friendly than is in fact the case. In relation to investments, ASIC defines greenwashing as ‘the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical’.
ASIC’s court action against Mercer
According to its press release , ASIC’s proceeding against Mercer alleges that Mercer (as trustee for the Mercer Super Trust) misled prospective members of its ‘Sustainable Plus’ investment options by claiming on its website that it excluded investments in companies involved in carbon intensive fossil fuels such as thermal coal, and companies involved in alcohol production and gambling. Further, Mercer allegedly made statements on its website marketing the Sustainable Plus funds as suitable for members who ‘are deeply committed to sustainability’.
However, ASIC alleges that its investigations have revealed that the Sustainable Plus funds held 15 stocks from companies involved in carbon intensive fossil fuels and 34 stocks across the alcohol and gambling sectors. ASIC therefore claims that by reason of Mercer’s marketing statements that the Sustainable Plus funds were suitable for members ‘deeply committed to sustainability’ and its promotion of these sector exclusions, Mercer engaged in conduct that could mislead the public and made false and misleading statements to consumers in breach of its legal obligations.
ASIC is seeking declarations and pecuniary penalties from the Federal Court, as well as injunctions preventing Mercer from continuing to make any of the alleged misleading statements on its website, and orders requiring Mercer to publicise any contraventions found by the Court.
The date for the first hearing is yet to be set down by the Court.
Significance of ASIC’s proceeding against Mercer for alleged ‘greenwashing’
ASIC’s case against Mercer is significant in a number of respects. Primarily, it marks the first time the regulator has taken a company to court for alleged greenwashing. Importantly, unlike infringement notices (the payment of which does not amount to an admission of liability), the proceeding if successful will result in a definitive finding of liability for greenwashing by the Federal Court and consideration of an appropriate penalty. The action clearly reflects that ASIC is prepared to go further than issuing infringement notices and pursue court action where its concerns about companies’ sustainability claims go unremedied.
The proceeding also marks the first time that ASIC has used its enhanced powers to take action regarding a broader range of superannuation trustee conduct following legislative amendments arising from the Financial Services Royal Commission. Following the Royal Commission, the Government introduced a number of reforms in the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) which expanded ASIC’s role in regulating the superannuation industry. The reforms included widening the scope of superannuation trustee conduct subject to obligations under the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 ASIC Act ), and providing ASIC with an express consumer protection and market integrity mandate under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).
Under the reforms, ASIC can enforce multiple prohibitions on false or misleading statements, and engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service under the Corporations Act and the ASIC Act
Strategic litigants and corporate regulators continue to target greenwashing
Greenwashing litigation on the rise in Australia and overseas
Greenwashing has proven a focal point for strategic litigation by NGOs in Australian and overseas courts over the past two years, with proceedings to date tending to target energy companies and financial services firms.
The ongoing Federal Court greenwashing action commenced in 2021 by the Australasian Centre for Corporate Responsibility (ACCR) against Santos Ltd alleging misleading or deceptive in relation to Santos’ strategy for achieving ‘net zero’ scope 1 and 2 greenhouse gas emissions by 2040 is well-known. Greenwashing has also proved a focus for strategic litigants overseas: in 2021, German bank DekaBank faced a claim from a consumer group for allegedly misleading investors over the social and environmental impacts of one of its ‘Sustainability Impact Fund ’; and last year, Greenpeace and a number of other NGOs commenced proceedings in a French court against TotalEnergies SE arguing that the company’s claims to be aiming for ‘net zero’ by 2050 are false (among other things).
ASIC’s case against Mercer adds Mercer to a growing list of superannuation firms who have faced threatened or actual legal action in relation to their sustainability claims. In 2018, a member of Retail Employees Superannuation Trust (REST) Mark McVeigh brought legal proceedings against REST. McVeigh alleged that by failing to provide information about the climate change risks to REST’s investments, the fund’s trustee breached its duty under the Corporations Act to provide its members with information reasonably required to make an informed judgement about the fund’s management and financial condition. The case settled in 2020, with REST agreeing to publicly disclose the fund’s portfolio holdings and encourage its investee companies to disclose in line with the recommendations of the Task Force on Climate-related Financial Disclosures.
More recently, in August last year, the Environmental Defenders’ Office (EDO) wrote letters to HESTA and UniSuper on behalf of members raising concerns that these funds had engaged in misleading or deceptive conduct in breach of the Corporations Act and ASIC Act by making various representations about being leaders on climate action while simultaneously investing in carbon intensive industries. The EDO also raised that the trustees and directors of the funds may be in breach of the SIS Act based on their management of the fund’s climate risks potential to result in negative member financial returns. The EDO requested responses to the greenwashing issues raised, and reserved their right to take these issues further, including notifying the relevant regulators or commencing legal proceedings. Hesta and UniSuper have not publicly responded to the letters and the EDO have not taken further publicly known action to date.
ASIC and the ACCC prioritise greenwashing enforcement actions
Outside the courtroom, Australian regulators including the ACCC and ASIC have taken a particular interest in combatting greenwashing over the past two years, and more recently, have demonstrated a willingness to take enforcement action against companies who make false or misleading statements about the sustainability of their products.
Greenwashing is listed as one of the ACCC’s compliance and enforcement priorities for 2022/2023, and the ACCC announced this week that it will investigate a number of businesses for greenwashing, following an ‘internet sweep’ of 247 businesses across eight sectors that identified 57% of those businesses as making what the ACCC considered to be concerning environmental claims.
The ACCC considers that businesses making false or misleading claims about the sustainability of their goods and services damages consumer trust in sustainability claims and undermines effective competition. In its report on findings from the sweep, the ACCC highlights a variety of greenwashing practices that it found businesses to be engaging in, including:
making vague claims about their products being “green”, “sustainable”, or “eco-friendly”;
making claims about the sustainability of their goods and services without providing any supporting evidence;
making absolute claims, such as products being “100% plastics free”, which the ACCC considered had a high potential to be false in the absence of strong evidence;
exaggerating sustainability benefits (or omitting negative attributes); and
claiming affiliation with environmental certification schemes, and in some instances creating their own certification schemes.
The ACCC has encouraged businesses to self-report if they became aware that they have made false or misleading environmental or sustainability claims, rather than wait for the ACCC to discover any problems, and has also encouraged consumers to report greenwashing concerns to the Commission.
Moving back to ASIC, targeting greenwashing of financial products has been an ongoing concern for ASIC since 2021 , and tackling misleading conduct in relation to sustainable finance, including greenwashing, is listed as a key enforcement priority for the regulator this year. In addition to its court action against Mercer, ASIC reports to have issued over $140,000 in infringement notices in response to greenwashing issues so far, a number of which relate to claims about the emissions intensity of products offered by energy companies or superannuation firms including:
(a) Tlou Energy Limited - In October last year, ASIC announced its first formal enforcement action for greenwashing against Tlou Energy Limited (Tlou). Tlou included reports and presentations about its business operations in ASX announcements made in October 2021, which were said to include claims that:
electricity produced by Tlou would be carbon neutral;
Tlou had environmental approval and the capability to generate certain quantities of electricity from solar power;
Tlou’s gas-to-power project would be ‘low emissions’; and
Tlou was equally concerned with producing ‘clean energy’ through the use of renewable sources as it was with developing its gas-to-power project.
Tlou was required to pay $53,280 in infringement notices to ASIC in relation to these claims, which ASIC alleged were false or misleading in contravention of s 12DB(1)(a) of the ASIC Act (see our article on this action here).
(b) Diversa Trustees Limited - in December 2022, Diversa paid $13,320 in ASIC infringement notices for alleged greenwashing in relation to its ‘Cruelty Free Super’ (CFS) superannuation product. Statements on the CFS website claimed to prevent investment in companies involved in “polluting and carbon intensive activities”, “financing or support of activities which cause environmental and social harm” and “poor corporate governance”. ASIC was concerned that these statements may have been false or misleading as to the extent of the investment screens being implemented. ASIC considered that whilst some of the investment screens had been applied, they were more specific and implemented on a more limited basis than the CFS website had suggested.
(c) Black Mountain Energy - in January this year, Black Mountain Energy paid $39,960 in three separate ASIC infringement notices in relation to statements made to the ASX which said it was creating a natural gas development project with “net zero carbon emissions,” and that the greenhouse gas emissions of the project would be net zero. According to the notices, ASIC was concerned that these representations were factually incorrect, or that Black Mountain Energy did not have a reasonable basis to make them. ASIC alleged that the representations were false or misleading as Black Mountain Energy had not progressed any specific works or allocated funding to support its “net zero” claims at the time of publishing.
While the focus of these infringement notices has primarily related to climate-related statements, it is important to note that ASIC is also targeting broader ESG claims. In December 2022, investment management company Vanguard Investments Australia Ltd was required to pay $39,960 in ASIC infringement notices relating to allegedly overstating an exclusion in a Product Disclosure Statement (PDS) for the Vanguard International Shares Select Exclusions Index Funds which claimed to prevent investments in companies involved in tobacco sales. Similarly, ASIC’s allegations against Mercer also relate to claims arising as a result of the fund’s investments in companies involved in alcohol production and gambling.
How can companies reduce risks of similar greenwashing claims?
Superannuation firms and other regulated companies under the Corporations Act and ASIC Act should be aware of their obligations to comply with statutory prohibitions against misleading or deceptive conduct or making false or misleading statements when offering or promoting sustainability-related products. The Mercer proceeding, in combination with the various infringement notices issued by ASIC to companies for alleged greenwashing over recent months, highlights the importance of ASIC-regulated companies taking care to ensure the accuracy and reasonableness of all statements regarding the sustainability of their products.
The proceedings will also no doubt further sharpen the focus of Australian company directors and officers on mitigating greenwashing risks for their companies and ensuring they discharge their duties in relation to the management of climate related risks in order to avoid claims involving potential personal liability like that commenced against the Board of Shell in the UK (see our article here for more information).
Companies also have specific disclosure obligations when preparing a PDS for financial products, including sustainability-related products. Further, particular care must be taken where making representations made about future matters that are not supported with reasonable grounds at the risk of the representations being deemed as misleading.
Helpfully, ASIC recently published guidance for responsible entities of managed funds, corporate directors of corporate collective investment vehicles, and trustees of registrable superannuation entities, outlining key factors to consider when promoting a financial product or investment strategy as environmentally friendly, sustainable or ethical. Although targeted at funds, the principles outlined in the guidance can be usefully used by other entities that offer or promote financial products that take into account sustainability-related considerations. Key questions outlined in the guidance are:
Have you used vague terminology? Broad and unsubstantiated sustainability-related statements, including ‘socially responsible’, ‘ethical investing’ and ‘impact investing’ should be avoided.
Are your headline claims potentially misleading? Headlines on communications and disclosures containing sustainability-related matters should not in itself be misleading, and exceptions or qualifications should not be used to clarify the claim.
Is your product true to label? Whilst there is currently no standard for labelling sustainability-related products, companies should ensure that their label is not misleading and accurately reflects the substance of their product.
Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities? An issuer’s disclosure stating that it ‘considers’ sustainability-related factors is not enough to help investors understand the product’s sustainability-related strategy. Issuers should disclose and clearly explain their methodology for integrating sustainability-related considerations into investment decisions and stewardship activities.
Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved? Issuers making commitments such as reaching “net zero carbon emissions across all investment portfolios” should provide investors with information and evidence about how and when it expects to achieve this target, including providing adequate information about its strategy or progress towards achieving its “net zero” objective.
Have you explained how you use metrics related to sustainability? Companies that rely on sustainability-related metrics (such as ESG scores) should implement and follow robust verification processes to ensure that its sustainability statements can be substantiated, including through documentation procedures and obtaining legal advice where appropriate.
Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications? Investors should have a clear idea of whether any investment screens apply only to a certain product offering or to the issuer as a whole. Broad promotional statements describing an investment screen should be avoided.
Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described? Issuers that are able to influence the composition of an index against which portfolio composition is determined or performance is measured should disclose that level of influence.
Is it easy for investors to locate and access relevant information? Issuers should ensure that all information they publish that is relevant to a retail investor's investment decision regarding a particular sustainability-related product is easy to locate and readily available.
Regulated companies and their boards should carefully consider each of these questions, which may involve auditing all of their published sustainability claims regarding their products, to assess whether revisions are needed to ensure accuracy.
Further, in light of the greenwashing practices identified in the ACCC’s report on findings from its review of environmental claims, companies may also benefit from auditing their products for evidence of such practices (for example, absolute claims, or claims of affiliation with environmental certification schemes) and making revisions accordingly where an inaccuracy is identified.
Finally, companies should carefully monitor the outcomes of both the Mercer claim and the ACCR’s action against Santos as the Federal Court’s findings in both cases are likely to provide important guidance on the standards expected of companies and their directors when making sustainability-related claims about their products.
Looking to the broader sustainability disclosure landscape, with the International Sustainability Standards Board in the process of finalising the content of proposed sustainability and climate-related disclosure standards, and the Federal Government consulting on a mandatory climate-related financial risk reporting framework for Australian companies last month , we expect scrutiny of company’s sustainability and climate-related claims and commitments to remain a focal point for litigation throughout 2023, and for regulator activity in this space to continue.