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A guide for boards: ESG governance and reporting
A guide for Boards: ESG governance and reporting

Greenwashing and bluewashing risks

by Emily Turnbull and Julia Clemente  ·  26 March 2024

Combating blue and greenwashing: ensuring valid ESG credentials and commitments

Australia is considered one of the highest-risk jurisdictions for greenwashing enforcement. Greenwashing (and, increasingly, bluewashing) is an enforcement priority for ASIC and the ACCC, both of which are taking action to address misleading or deceptive representations in relation to ESG matters, including environmental and human rights credentials. Third-party groups are also active in this space (see our Insight for further details of ASIC's FY24 priorities).

As companies face increasing stakeholder pressure regarding various ESG matters, they must ensure their representations, commitments and targets are credible, evidence based and transparent. Organisations that engage in greenwashing and bluewashing could face significant consequences through regulatory enforcement action, including pecuniary penalties and adverse publicity orders, while there can also be reputational damage and other ramifications (see our Insight for further details of how to mitigate greenwashing risks). Boards play a critical role in determining the strategic direction of ESG matters, and this includes ensuring the accurate and reasonably based articulation of ESG credentials and commitments by their organisation.

Boards play a critical role in determining the strategic direction of ESG matters, and this includes ensuring the accurate and reasonably based articulation of ESG credentials and commitments by their organisation.

Is the organisation appropriately managing greenwashing risks?

Boards should confirm their company's disclosures accurately reflect their actual ESG practices. High-risk disclosures, which should be a focus, include those containing:

  • representation as to future matters (such as net zero and other sustainability targets)–this includes forward-looking statements made for the purposes of the proposed mandatory climate-related financial reporting regime;
  • the use of 'green' and 'blue' terminology and labelling (such as 'clean', 'green', 'sustainable' and 'carbon neutral'); and
  • for financial services providers, representations as to active investment and ownership strategies, and ESG-focused investment screens.

Questions that boards should be asking management include:

  • What governance processes and practices do we have in place to ensure that representations, including website and other public-facing statements in relation to ESG matters, such as 'sustainable' investment products and services, are regularly reviewed and updated to make sure they are accurate and consistent with the organisation's ESG strategy?
  • What is the suite of ESG-related laws and standards that should inform our policies and procedures and against which we should be reporting?
  • What governance structures do we have in place to ensure an integrated approach to ESG representations across business units, including that communications, legal, risk and/or compliance, and ESG teams are working together to establish that internal signoffs are robust and effective?
  • What legal review and verification measures should we take regarding high-risk disclosures, from both a greenwashing and bluewashing perspective?
  • Are we ready for the proposed mandatory climate-related financial reporting regime and sustainable finance strategy (including the sustainable finance taxonomy)? Consider conducting a gap analysis and review of external assurance requirements (see further details of this in both the Mandatory Climate-related financial reporting section and refer to our Insight).

What is next for boards?

  • To date, greenwashing enforcement action (from ASIC, in particular) has focused largely on representations made by financial services providers in relation to ESG-related financial products, including the application of investment screens. Going forward, we expect to see increased regulatory scrutiny of sustainability targets and use of ESG terminology, including the use of vague terms and inaccurate labelling regarding sustainability-related products and services including beyond the financial services sector.
  • Across financial services, representations as to ESG-focused active ownership and investment strategies are increasingly a focus of criticism from third-party activists on the basis that they may not reflect a company's actual management or investment practices. Regulators are under pressure to follow suit with enforcement action.
  • ASIC has described the proposed mandatory climate-related financial reporting regime and sustainable finance strategy (including the sustainable finance taxonomy) as the potential 'antidote to greenwashing'. Nevertheless, the regulator has made clear it will continue to investigate and take enforcement action against greenwashing where necessary.
  • As ASIC and the ACCC become more conversant in bluewashing issues, we also expect to see more enforcement activity around statements regarding social impacts such as company engagement with First Nations people. This is already a growing area of third party activism.
  • In this context, particularly where high-risk representations are involved, boards should consider:
    • as noted above, whether governance processes, practices and structures are robust and fit for purpose to manage these risks;
    • how they can utilise the company's enterprise risk management process to identify and verify high-risk disclosures;
    • whether legal review and verification is needed for high-risk disclosures across externally facing representations (eg websites and issued documents such as product disclosure statements) to ensure accuracy, a reasonable basis and consistency; and
    • what external assurance arrangements are in place (if any) and whether these require uplift.

What are the risks to be aware of?

  • Representations as to future matters (such as net zero and other sustainability targets) that are not based on reasonable grounds may be deemed to be misleading or deceptive under applicable legislation such as the Corporations Act. For example, indications that a reasonable basis may exist for net zero and other sustainability targets include:
    • internal approvals of the relevant target;
    • a sufficiently detailed and documented plan, informed by appropriate standards and/or guidelines and that does not rely on unrealistic pathways;
    • evidence of appropriate resourcing to implement the relevant target or plan; and
    • implementation of governance arrangements to facilitate a trajectory towards the relevant target or plan, including to monitor and report progress and milestones.
  • Investors and consumers may attach significance and subjective meanings to terms like 'ethical investing' and 'responsible investing'. A key risk when promoting these types of credentials is that of overreaching. Always consider how customers and investors will understand broad claims, including whether the impression created is accurate, whether there are reasonable grounds for the claim, and whether these can be substantiated if an inquiry is received in response to from a regulators' inquiries.
  • Organisations can get caught out where third-party providers are involved in implementing ESG-focused measures (eg, investment screens and active ownership strategies). Always ensure you have adequate oversight of these providers' practices and procedures, so you can make certain they are fit for purpose and are accurately reflected in any externally facing representations.
  • Greenwashing and bluewashing risks may also arise where public commitments to, and reporting against, soft law standards (such as the UN Principles for Responsible Investment or UN Guiding Principles on Business and Human Rights) are inconsistent with business practices. Always ensure your practices reflect the impression created by your organisation's commitments and reporting.
  • Importantly, greenhushing is also viewed as a form of greenwashing, having been described by ASIC as saying, in effect, 'we have a strong ESG policy but cannot say anything about it because "those restrictive regulators won't let us"'.2 As such, making 'higher-level' ESG-focused disclosures will not protect organisations from engaging in greenwashing and can, in fact, increase the risks.

Footnotes

  1. Karen Chester, Deputy Chair, ASIC, Responding to Climate Disruption Plenary Session, ASIC Annual Forum, 21 November 2023.

  2. Joe Longo, Chair, ASIC, AFR ESG Summit, 5 June 2023.