GREENWASHING – THE RISKS AND REGULATIONS YOU SHOULD KNOW ABOUT

Greenwashing is a real reputational risk and needs to be on every board’s agenda as regulatory scrutiny intensifies, says Jana Jevcakova, Morrow Sodali's international head of ESG. 

She notes that greenwashing – where companies misrepresent their products or services as environmentally friendly, sustainable or ethical – is clearly on the radar as consumers, investors, lenders and companies in the supply chain increasingly make decisions on ESG grounds.  

Regulators like the Australian Securities and Investments Commission (ASIC) and Australian Competition and Consumer Commission (ACCC) are also cracking down on greenwashing. So far, they’ve taken action against super funds, an investment product, and mining and energy companies.  

In May, ASIC published a short report detailing the 35 interventions it had taken against greenwashing over the nine months to March 2023. The interventions ranged from securing timely corrections and issuing public infringement notices to starting civil penalty proceedings.  

Meanwhile, the ACCC has begun its own investigations with an internet sweep of 247 businesses in October last year and found 57 per cent of these made vague or unclear environmental claims. The biggest culprits were in the cosmetic, clothing and footwear, and food and drink sectors.   

The competition watchdog now has several active investigations underway. It says it will take enforcement action where appropriate and will be asking businesses to substantiate their claims if it has concerns. 

The ACCC says businesses using broad claims like “environmentally friendly”, “green”, or “sustainable” are obliged to back up their claims with reliable scientific reports, transparent supply chain information, reputable third-party certification, or other forms of evidence. 

Jevcakova notes that the regulators are sending out a strong message and she expects their activity in this area to only intensify going forward. 

She says the consequences of being accused of greenwashing are harsh. It’s not just about having to go through legal proceedings, and paying fines and legal fees, but also about the reputational damage that follows. 

“If you are accused of greenwashing and stakeholders lose trust in your reporting on ESG matters, they might start questioning everything else. You could ultimately lose the market’s trust in your products or services and all the statements you put out,” she says.  

“If there is a greenwashing allegation, especially if the company is fined, proxy advisors are very likely to recommend against director re-appointments because they haven’t fulfilled their duties and there’s been a failure of governance at the board level.” 

In June, the International Sustainability Standards Board (ISSB) issued new standards to improve trust and confidence in company disclosures about sustainability. For the first time, these standards create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects. 

Jevcakova warns companies that sustainability and climate reporting is now just like financial reporting. “You need to have the data, metrics and targets, and be able to back it up. Going forward, the International Financial Reporting Standards (IFRS) will enable sustainability data to be auditable. That should already send the message to those who see sustainability as something ‘sitting on the side’ and not linked with the business strategy.” 

Jevcakova says it is very easy for companies to fall into the greenwashing trap.  

“This is especially so if they don't take greenwashing seriously or see ESG as something that just requires some box-ticking, or as marketing material or corporate social responsibility. We completely ditched that a long time ago.  

“Companies need to think about ESG as embedded in the business. All business decisions need to be made with ESG in mind. And when companies do that, it becomes natural for them to report accurately. They are then reporting about what's happening and should be able to back it up with data. They are then not just providing fluff or boilerplate statements.” 

Jevcakova has seen lots of different greenwashing mistakes but says: “ASIC is really going after companies around their greenhouse gas emissions and reduction targets. As an example, some companies state that they have a reduction target of say 40 per cent by 2030 and leave it at that. They haven't done their transition and scenario planning or any calculations. They just issue the statements without any short-term targets or other supporting materials whatsoever. 

“Another example we’ve seen, that ACCC also points out, is incomplete and misleading reporting where for example a manufacturer states that ‘materials used to make this product have been sourced in Australia’. But in fact, only a small portion was sourced in Australia and the rest comes from China. In a way, the manufacturer didn't lie because some materials were sourced in Australia. But it's misleading. You would assume that if it didn't mention any other countries then all the materials came from Australia.” 

Jevcakova also talks about “greenhushing” where companies downplay or stop voluntary disclosure of ESG information. 

“That's even worse than greenwashing. If a company is in possession of information that it considers material, and that could alter how investors are thinking, it is obliged to disclose that information,” she says.  

“Some use the excuse that they didn't want to be subjected to claims of greenwashing before they were absolutely certain that the information provided is ‘bulletproof’. But that can also be construed as greenwashing. There is a certain level of uncertainty across all forward looking statements, and climate scenarios, risks and targets are no different. Not reporting on it properly may be in breach of the continuous disclosure regime.” 

Continuing on the subject of emissions reduction targets, Jevcakova says: “If you have targets for 2030, 2040 or 2050, these are quite far ahead in the future. So, investors really want to know how you're going to get there on a marginal level and what sort of calculations and processes you have gone through to say you can confidently reach those targets.  

“With the climate change specifically, they're also increasingly looking at whether you are going to achieve your targets through offsets. They’re looking at whether you plan to change your operations and technology. They want to know about your emissions intensity and whether you are going to invest in research and development and new technology or are just going to rely on someone else to bring the technology to the market.” 

Jevcakova notes that companies below the ASX 100 are often less skilled at avoiding greenwashing. “They are usually resource-poor, or it's done by someone who already has a full-time job. So, they don’t have the time, or their knowledge is insufficient, or they don’t know exactly where to even start. There’s often also a lack of awareness and a need for education.” 

So where can these companies start learning how to avoid greenwashing? 

Jevcakova says the ACCC has issued draft guidance for businesses making environmental and sustainability claims, which includes eight “good practice” principles companies can follow. 

“The ACCC is still consulting stakeholders on these, but it’s very likely that they will come into effect,” she says. Indeed, consultations close on 15 September 2023. 

Jevcakova adds that Morrow Sodali can help by putting companies through a rigorous assessment and ESG ‘health check’ that identifies potential gaps and missing or incomplete information in their disclosures, but also looks at what they might be doing wrong across processes, strategies, systems and governance and why, and how they could better disclose their activities to the market. “We can assist with providing quality information and tools to help companies navigate in this environment and actually walk them through the whole process,” she says.