Beware of greenwashing: navigating the ethics of your sustainability agenda

A straightforward approach

ASIC alleges that the "sustainable" option in the Mercer superfunds, which targets members "deeply committed to sustainability", includes investments in companies involved in industries Mercer claimed to be excluded investments, such as coal, and fossil fuel, alcohol and gambling.

A great deal of ink will be spilt on how ASIC's enforcement is causing shockwaves and ripples in the financial industry. Let's take a step back. Did you notice that ASIC is not dictating to the industry how its ESG propositions should look, and Mercer is not being dragged to court because of the quality of their sustainable solutions; instead, the quality of Mercer's claims is the object of scrutiny. The message and strategy of the regulator are straightforward: if you make a claim, you must substantiate it, whether you are a listed company, a superannuation fund or an investment management company.

While Mercer is being sued, other players in the industry have recently received over ten infringement notices for alleged greenwashing since October 2022.

It is evident from the recent enforcement activity that many companies are being challenged in managing their sustainability agenda and meeting their disclosure obligations effectively. The struggle is emphasised by the numerous sustainability claims and statements verging on the cusps of being false, misleading and unsubstantiated.

If we consider greenwashing to be a newcomer in terms of regulatory attention, it is worth considering whether the rules of the "disclosure" game have changed. Has the bar been set for sustainability disclosures in the financial industry, or has it been overlooked, indicating an evolution in awareness?

The unchanging Principles

The enforcement action against ASX listed Company Tlou Energy Limited (TLOU) in October 2022, may be a first of its kind. However, the fundamental principles of disclosure, compliance with the Corporations Act and ASIC's expectations remain unchanged. Companies should not make false, misleading and deceptive claims, regardless of the context, ie., whether they are related to their sustainability objectives or otherwise.

Any claim made by a company in offering its securities should be accurate and provide adequate supporting materials to demonstrate the claim's veracity, ie., confirm the existence of a reasonable basis for statements or claims. The rules are the same regardless of the context of these claims, ie., whether they are financial, mining, sustainability-related or ethical investments.

Why are companies unwittingly falling foul of the law and receiving infringement notices?

ASIC has highlighted that greenwashing is misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical – and sustainable finance is a key priority. With infringement notices against Vanguard Investments Australia Ltd (Vanguard), ASIC further sharpens the message that greenwashing extends to misleading ethical propositions.

Vanguard promoted ethical investing by making representations in its product disclosure statement that its investments excluded the securities involved in significant tobacco sales, which was found to be inaccurate. Vanguard was thus found to be engaging in conduct that was likely to mislead the public as to the nature, the characteristics or suitability of purpose of a financial product.

The representations made by Tlou, and Black Mountain Energy (BME) were via communications to investors, such as presentations lodged on the ASX announcement platform. The representations consisted of both diagrams and statements, which were found to be inaccurate, factually incorrect, false and misleading.

Tlou, amongst other things, represented that:

• all electricity generated by their power station would be carbon neutral;
• environmental approval to develop a solar farm that could generate 20MW of gas-fired power and 20MW of solar power;
• Tlou was concerned about producing “clean energy” through solar and hydrogen; and
• its gas to power project will be “low emissions”.

The representations were found to be false and misleading. Overall, Tlou was unable to support the above claims. Tlou failed to demonstrate it had a reasonable basis for making the representations. Tlou has not done sufficient work to test the integrity of these claims, e.g., there was insufficient modelling or investigation to substantiate their claims on carbon neutrality via carbon sequestration to the extent that even the cost or timeframe of carrying the plans was uncertain. Surprisingly, at the time of the representation, Tlou did not have a licence or environmental approval and had yet to acquire or install solar power infrastructure.

BME made representations on their commitment to net zero carbon emissions, reducing carbon emissions and utilising carbon credits to eliminate their scope 1 and scope 2 emissions. However, these claims were alleged to be false and misleading since BME failed to conduct any analysis of expected carbon emissions, failed to allocate resources towards their net-zero goal, and ultimately BME lacked a credible or practical plan.

From a company's perspective, the concept of sustainability can be challenging and complex to navigate. As businesses aim to demonstrate their commitment to sustainability and appeal to eco-conscious investors, they may face conflicting opinions and approaches to what "sustainability" truly means.

However, the problem of greenwashing persists, as companies either fail to fully understand the facts or get caught up in the novelty of the subject matter, leading to false or misleading claims about their sustainability efforts.

The key takeaways from the infringement notice blitz

ASIC has warned that it is currently investigating a number of listed entities, and companies are on notice that ASIC is monitoring the market for potential greenwashing and will take enforcement action, including Court action.

It is clear that ASIC has sharpened its scrutiny, keeping a vigilant watch on sustainable claims. A board can glean valuable insights and take heed of cautionary tales from these infringement notices, learning from the missteps of others and avoiding similar pitfalls, even if the underlying principles of disclosure remain unchanged.

It is an open secret that companies are feeling pressure from stakeholders who are redirecting their investments towards companies with high ESG (Environmental, Social & Governance) credentials, putting increased pressure on companies to raise their ESG standards. Every company's approach to sustainability and their ESG objectives will vary, tailored to their unique business operations and priorities.

The message is straightforward – conduct thorough research and due diligence. Unless you can provide solid evidence to support your assertions (ESG related or otherwise), refrain from making them.

Companies’ communication on their ethical and sustainability endeavours should fall within the confines of the Corporations Act and relevant listing rules, such as continuous disclosure requirements.

If they are about future matters, the key metrics, underlying assumptions, and methodology used to establish reasonable grounds will vary depending on the company.

Before forging ahead, companies should pause and assess their current sustainability (or other ESG) strategy, gaining a clear understanding of their current position in this critical journey. In the face of growing stakeholders' demands for companies to disclose their ESG credentials, many businesses may feel compelled to make hasty announcements without thoroughly examining their data or seeking expert guidance where necessary. The key is to avoid succumbing to pressure and instead take a measured and well-informed approach.

The key issues that boards need to consider are:

1. a categorisation of their sustainability (or ESG) representations, classifying them as either aspirational or more of a predictive targeted goal. This distinction will allow them to understand the level or type of relating to their journey or plans communicated to stakeholders and in so doing, to establish if they are aspirational or more of a predictive targeted goal;
2. the distinction as per above will allow further clarity on what steps are to be taken by a company to satisfy existing regulatory requirements for representations not to be construed as false and misleading; and
3. ensure the credibility and robustness of the information by examining key metrics, evaluating the methodology used, clearly articulating the underlying assumptions, and seeking input from a relevant specialist or expert.

Be factually accurate

Companies must recognise the importance of transparency when communicating their ESG goals or commitments. They hold the keys to the facts, and facts should be communicated accurately to reflect the actual circumstances of a company. For instance, if a company has not assessed its carbon emissions or has not done any real work towards its aspirations to reach net zero, any statements about reaching net zero by a certain timeframe will be false and misleading.

Is it an aspirational statement?

Aspirational statements are high-level, such as a company's vision and mission, for e.g. "We aim for our operations to be carbon neutral”, or if the aspiration is fettered with a condition for its viability, “We aim to reach carbon neutrality; for that to be possible, we will need to generate XX MW of solar power”.

Aspirational statements should be clear that they are aspirational in nature (ie., they are not a fait accompli) and that a company has not assessed the feasibility or likelihood of achieving the goal. There should not be any ambiguity as to the current state of affairs. In crafting those statements, companies must also consider that disclaimers are not always sufficient; they should focus the communication on facts and clarity.

The difference between an aspirational statement and a predictive targeted goal is significant.

Targeted goals are well-drawn maps, specific and defined. They chart a course for a future with a destination in sight. They possess an innate level of certainty by indicating a clear path to a particular goal in the short or medium term, ie., it is a forward-looking statement. While forward-looking statements may possess a hint of uncertainty, companies are still expected to have carried out sufficient due diligence and studies to ensure that their targeted goals are well supported. Companies should be transparent and explain the journey in reaching milestones, how a particular goal was defined and any foreseen obstacles, for example, “Our company is focused on producing clean energy, and by the end of 2023, our solar-powered infrastructure will allow us to produce all the electricity that our operations require.”

Blueprint for market confidence – essential elements for establishing reasonable grounds

Critical due diligence

Boards are tasked with ensuring that representations to the market have a reasonable basis. To fulfil this duty, board members must be satisfied that thorough research and in-depth analysis were carried out to support their claims. In our above example, the statement creates the impression that a company has progressed well in its plan; such a representation is expected to be accompanied by reasonable grounds, and things to consider in establishing reasonable grounds are:

• whether construction of the solar power infrastructure is completed or close to completion;
• the method of conversion of solar power to electricity has been tested and is supported by a relevant expert;
• the capacity to fund the project;
• the feasibility of producing all the electricity required for the operations within the expected timeframe; and
• whether required regulatory approval has been assessed and the feasibility of obtaining approval.

Unlocking the power of expertise, bring in the pros at the right moment

A company needs to ensure that no false and misleading information is conveyed by conducting thorough due diligence and disclosing the assumptions underlying its representations.

In establishing reasonable grounds, boards should use experts where required. Understandably, sustainability and the science linked may be novel; in commissioning a report to back up representations, a board should use common sense and ensure that the expert being engaged has the appropriate expertise and competence in the relevant field.

The following ASIC resources provide general guidance on how to approach disclosure related to the above topics:

• on engaging an expert: RG 112 Independence of experts
• content of an expert report: RG 111 Content of expert reports
• on making forward-looking statements: RG 170 Prospective financial information.

Sailing towards sustainability: The path forward for boards of listed companies

It has not been a common ASIC practice to issue infringement notices in relation to announcements made to the ASX. That is changing, and boards should take note, especially if their companies make sustainability-related claims.

Companies are expected to conduct a reasonable level of due diligence prior to making claims; however, if there has been confusion given the emerging and immature nature of the subject matter, companies can take the following steps:

• Under section 12GX of the ASIC Act, an infringement notice can only be provided within 12 months of the contravention (when any unsupported claims were made). That does not preclude ASIC from taking other types of actions; therefore, companies should check their sustainability claims, including whether their ethical strategies are fit for purpose and accurate;
• In light of the use of ASIC's power under section 12GX to issue infringement notices, companies should check their recent investor communications, including announcements to the ASX in the past 12 months;
• Test their assumptions and verify if they can demonstrate reasonable grounds for any forward-looking statements made; and
• If anomalies are detected during a verification process, boards can proactively correct any misinformation by providing supporting information or retracting statements.

Illuminating the path with a green light

With increased pressure to elevate ethical and sustainable practices, companies are under scrutiny from all angles. Regulators are on high alert, keeping a watchful eye on companies claiming to embrace those practices. Stakeholders expect nothing but the highest standards of moral and ethical conduct, and any misstep can result in a devastating boycott. Meanwhile, regulators are waiting to pounce and make an example out of any company that falls short. To stay ahead of the game, it is crucial for companies to be accurate and have reasonable grounds to back up sustainability (or any) claims. Now that the regulators expectations have been firmly established, do not rush to make a grand ESG statement without being fully prepared to demonstrate your commitment.