26 July 2023
While financial performance has always been at the forefront of corporate executives’ and shareholders’ minds, ESG performance is now a significant aspect for companies. It is expected that the Government will mandate ESG reporting and disclosure as can be seen from other comparable jurisdictions.
‘ESG’ stands for ‘Environmental, Social and Governance’. It represents how the environment, society and corporate governance impact and are impacted by business and the economy. Many companies are starting to report their performance against ESG metrics particularly to demonstrate their sustainability credentials to their stakeholders, particularly customers and investors.
In his speech at the Committee for Economic Development of Australia State of the Nation conference on 13 June 2023, Chair of the Australian Securities and Investments Commission (ASIC), Joe Longo, noted that, ‘ESG is driving the biggest disclosure changes in a generation’. He identified three societal megatrends as being particularly relevant to ESG:
- First, climate change adaptation and the protection of livelihoods, infrastructure, and people’s quality of life as the climate changes.
- Second, the global push to reach net zero, protect biodiversity and use resources more efficiently.
- Third, unlocking the human dimension and elevating diversity, equity and transparency in business, policy, and community decision making.
Many consumers and investors now want companies to ‘do good’ and ‘save the planet’ in addition to providing growing financial returns.
Governments reflect that will by mandating that companies disclose statistics to reflect how much ‘good’ or ‘saving’ they are actually doing, so that investors can make informed decisions when spending their money.1
For some companies, the acronym can be a source of fear as to how their business stacks up. For many others, ESG is seen as an opportunity to spruik environmental or social credentials as a point of difference to drive financial performance.
The use of ESG as a marketing tool has caught the eye of regulators in Australia and around the world.
Greenwashing and Current Enforcement
Enter the practice of ‘greenwashing’: the art of ‘misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical’. Greenwashing is a current focus for ASIC because it can ‘erode investor confidence in the market for sustainability-related products and poses a threat to a fair and efficient financial system’.
On 10 May 2023, ASIC released a report outlining its recent greenwashing regulatory interventions, which totalled 35 between 1 July 2022 and 31 March 2023. It consisted of a mix of corrective disclosure outcomes, issuing of infringement notices and, in one case, the commencement of civil penalty proceedings (against Mercer Superannuation (Australia) Limited).
While the nature and content of ESG obligations is still in flux, it is clear that ASIC will not be overlooking current misconduct because of continuing developments in the area.
The Australian Competition and Consumer Commission (ACCC) has also joined its sister regulator by making greenwashing an enforcement priority.
The term ‘greenhushing’ refers to the practice of adopting a ‘radio-silence’ to ESG performance metrics which misleads by omission. This particularly so in circumstances where a company operates in manner where its impact on the environment is or should be known by the company but it chooses not to make disclosures around its activities and their impact on the environment. For example, if a company knows its operations have significant greenhouse gas emissions but chooses not to disclose its goals, strategy, actions and outcomes around those matters, then that can be greenhushing because its silence would be misleading its stakeholders as to their true impact on the environment.
A report by Swiss consultancy South Pole conducted a survey of 1,200 large companies with net-zero targets across 12 different countries and multiple sectors. Of the self-identified ‘heavy emitters’, the survey found nearly a quarter decided not to publicise their environmental performance beyond what was mandated.
This sort of approach to ESG may be an intentional effort to avoid scrutiny; it may be as a result of facing backlash from previous disclosure, or it may be a form of expectation management. However, as Mr Longo points out, this is another form of greenwashing: ‘silence from firms and failing to engage isn’t the answer’.
For many companies, the problem lies in the fact that even if they have confidence in their ESG goals, they don’t want to brag about them for fear that there is something they may be unknowingly omitting or exaggerating. As Mr Longo observed, the approach being adopted may be along the lines of, ‘we have such a good ESG policy, but we can’t say anything about it because the regulators won’t let us’.
In effect, greenhushing and greenwashing are just two sides of the same coin. On the one hand, a company may be investigated because its published claims just don’t stack up or its stated goals are unachievable. On the other, a company may be investigated for greenhushing on the basis that a company failing to make disclosures may be misleading.
It is crucial for companies to keep abreast of ESG and their obligations to ensure and minimise the risk of litigation from regulators, customers or investors.
- For example, section 299(1)(f) of the Corporations Act 2001 (Cth) mandates that a company’s annual directors’ report must track an entity’s performance against any environmental regulations to which the entity is subject. Listed entities are also required to disclose information that a reasonable person would expect to have a material effect on their share price (Rule 3.1, ASX Listing Rules; Chapter 6CA, Corporations Act 2001 (Cth)), including ESG considerations.
Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.