Net zero commitments Increasing expectations and liabilities for Greenwashing
26 October 2021
26 October 2021
Listed companies have been feeling the heat from investors this AGM season, with growing numbers of shareholders demanding that companies set emissions reduction targets and take action in line with the Paris Agreement. Industry agnostic environmental and Corporate Social Responsibility groups such as Market Forces and the Australasian Centre for Corporate Responsibility (ACCR) have seen their ESG activism and proposed climate change related resolutions met with growing support from shareholders.
A major ASX listed company saw a majority of its shareholders vote in favour of a resolution proposed by a shareholder advocacy group at its 2021 AGM, demanding that companies commit to emissions reductions targets in alignment with the Paris Agreement. Similarly, the Board of a major Australian Bank reportedly faced pressure from vocal shareholder activists at its AGM, calling for an end to fossil fuel lending, despite existing net zero by 2050 commitments.
As more companies heed investor sentiment and announce net zero pledges, regulators are watching closely, cracking down on companies making sustainability claims where it is believed those claims may be unfounded and misleading. The Australian Securities and Investments Commission (ASIC) has indicated that it is live to the issue of greenwashing and its effect on markets.1 In September, ASIC announced its intervention in an initial public offering which resulted in the removal of certain net zero statements in fundraising documents.2
This follows the trend that we are witnessing globally, of regulators increasingly monitoring company action and statements in relation to climate change risks. In the United Kingdom in 2019, the Prudential Regulation Authority used the UK's Senior Managers and Certification Regime to focus bank boards on climate risk by requiring each UK bank to allocate responsibility for oversight of climate risk to an individual senior manager.
The UK Competition and Markets Authority (CMA) has also recently published a Green Claims Code, aimed at providing guidance to businesses on their consumer protection obligations in relation to environmental claims. The CMA intends to carry out a compliance review of misleading green claims in 2022 backed by the threat of enforcement against businesses whose statements are believed to be misleading.
On 18 October 2021, the UK Treasury released a further update on the Sustainability Disclosure Requirements (SDRs), which it intends to introduce following public consultation. The SDRs will require companies to disclose the climate change impact of their activities, in an effort to ensure consumers and investors have all the information they need to make investment decisions that drive a positive environmental impact. 'Companies' sustainability claims and commitments will be reviewed to ensure they can be clearly justified, in order to combat 'greenwashing'.3
Although Australia does not yet have any express legal requirement for sustainability reporting, Australian companies are subject to a range of financial and non-financial information disclosure obligations under the Corporations Act 2001 and the ASX Listing Rules. Additionally, the Task Force on Climate-Related Financial Disclosures has developed a framework for climate related financial disclosures, which has received broad support from Australian financial regulators. In light of mounting pressure from investors and the global trend towards mandating sustainability reporting, we anticipate that Australia may follow other countries in introducing mandatory sustainability disclosure obligations in the not-too-distant future.
'Greenwashing' is the term used to describe situations where disclosures, statements or commitments are made to give the impression that the company or certain procedures, policies or products are environmentally friendly or sustainable when this impression may be misleading or untrue.
Shareholder advocacy group, the ACCR has indicated its willingness to pursue companies that it perceives may have engaged in misleading or deceptive conduct in relation to statements contained in public documents, such as Annual Reports. Recent actions taken by the group suggests that it may take legal action against companies that make net zero commitments but fail to disclose the qualifications to which these commitments relate, or where the commitments may be misleading in the context of broader operations.
Renewed interest from shareholder advocacy groups and regulators demonstrates the need for companies to exercise caution when making public statements and disclosures to the market, to minimise the risk of reputational damage, unwanted public scrutiny and litigation.
The Australian Securities and Investments Commission Act 2001, Corporations Act 2001 and Australian Consumer Law each contain prohibitions relating to engaging in conduct that is misleading and deceptive and on the making of false or misleading representations.
When making representations as to future matters, such as 'net-zero' targets or commitments, companies must ensure that there are objectively reasonable grounds for making those representations. If there are no reasonable bases or objective facts to found the making of 'net zero' or climate change commitments at the time they are made, these representations should not be made.
Liability for corporations can result in the imposition of hefty penalties for each offence. Under the Australian Consumer Law, for example, the penalty for a corporation making false or misleading representations is the greater of $10 million, three times the value of the benefit received, or if that cannot be determined, 10% of annual turnover in preceding 12 months.
Directors may be found personally liable for 'greenwashing' or for failing to discharge their duties with care and diligence.
In their most recent 2021 Opinion on Climate Change and Directors' Duties, Australian barristers Mr Hutley SC and Mr Hartford-Davis suggest that a director's duty of care and diligence requires that they consider and disclose climate change risks, analyse the impact of these risks on the business and, in some cases, take positive steps to address them.4
Additionally, Counsel is of the opinion that ASIC may use "stepping stone" liability to hold directors liable for offences of their company in circumstances where the risk of harm was foreseeable and directors facilitated or failed to prevent the contravention. Accordingly, directors may find themselves personally liable for misleading and deceptive conduct where their company did not have reasonable grounds for making a net-zero or climate change related representation to the market and the directors failed to prevent this from being made.
There are a number of activities directors can undertake, which may mitigate the risks associated with the growing calls for increased Board accountability in relation to climate change. A clear risk management focus and approach will also enhance the sustainability of the company in the long-term to the benefit of all stakeholders.
Any statements made around climate change strategy should be confirmed against the company's objectives, value drivers, existing data, strategies, targets, timeframes and decision criteria. A clear climate change plan should be integrated into the company's current or future business plan, including building new business lines to take advantage of decarbonisation opportunities beyond the core business. Directors should ensure the company completes a risk assessment across the business' physical and transition risks as part of the plan to have an embedded risk management approach.
Directors should understand the regulatory and legal compliance requirements in relation to the company's climate change strategy. This requires completing an assessment of the plan against existing legal and contractual obligations, relevant regimes, regulations, reporting standards, disclosure requirements and impending rule changes. The outcome of this assessment should then be linked to the risk and control environment, with the Board ensuring there is appropriate governance, monitoring and reporting in place.
Having robust governance across the ecosystem will be key to transparency in processes, procedures, committees, reporting, communication and having a consistent decision making framework. Managing these risks includes managing culture, setting the tone by the Board and senior management and having a clear understanding of accountability versus responsibility. A final step in the risk management process is to leverage the appropriate remuneration and consequence management aspects to ensure success.
Whilst companies are feeling the heat from investors and making climate conscious commitments, it is clear that directors must ensure that there are objective facts or circumstances at the time to substantiate these claims. Failure to do so may expose the company and directors to legal and regulatory action, and reputational damage. Taking the above steps may go a long way towards mitigating these risks.
Authors: Rob Hanley, Partner (Legal Governance Advisory); Maxine Viertmann, Lawyer (Legal Governance Advisory); Elena Lambros, Partner (Ashurst Risk Advisory); Will Chalk, Partner (Ashurst, London); Eleanor Reeves, Partner (Ashurst, London)
The services provided by the Ashurst Risk Advisory practice do not constitute legal services or legal advice, and are not provided by Australian legal practitioners. The laws and regulations which govern the provision of legal services in the relevant jurisdiction do not apply to the provision of non-legal services.