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ESG Litigation Series: More than simply a box-ticking exercise – the ESG litigation risk involved in the making of net-zero statements and targets

As companies rapidly transition en masse towards sustainability, the need to demonstrate environmental, social and governance (ESG) performance has led to the recent proliferation of ‘climate-related claims’ in the form of publicised net-zero statements and targets, some of which may be false or misleading.

Companies must be mindful that any commitment towards making net-zero statements and targets is more than simply a box-ticking exercise. They involve statements in relation to future matters, which must be based on reasonable grounds. Where there are no reasonable grounds to underpin a net-zero statement and target, recent trends suggest companies run the real risk of facing ESG litigation.

The origin of ‘net zero’

‘Net zero’ often appears in commitments from governments and companies to combat climate change. The term describes a state where the greenhouse gas that is emitted into the atmosphere is counterbalanced and reduced as close to zero as possible, with any residual emissions balanced by permanent removals from the atmosphere1. In simple terms, you take out for what you put in.

Net zero is not necessarily a new concept, but it gained international recognition from the adoption of the Paris Agreement: a treaty between countries pledging a collective commitment to ‘[h]olding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursing efforts to limit the temperature increase to 1.5°C above pre-industrial levels…’.2 Net zero is important because it is a state of balance that is instrumental to achieving the Paris Agreement, and otherwise tackling climate change.

Net-zero statements and targets: why is it an issue?

Whilst there appears to be an increasing sophistication in the understanding as to the meaning of net zero (that is, how companies are expected to achieve it, and processes to scrutinise progress towards these targets), there also appears to be a corresponding increase in misrepresentation and misleading conduct around the use of the term.

The practice of misrepresenting or misleading a company’s net-zero pledges is a common form of greenwashing.

The effect of such pledges distorts the information that the public may reasonably require to make an economic decision. Misleading pledges may erode confidence in net-zero pledges more broadly, undermining genuine action towards achieving global net-zero.

Some recent examples of unreasonable net-zero pledges, statements and targets are discussed below.

Unreasonable net-zero statements and target

ACCR v Santos Ltd (NSD858/2021)

The Australasian Centre for Corporate Responsibility (ACCR), a shareholder advocacy non-government organisation, commenced proceedings against Santos Ltd (Santos) in relation to claims that Santos engaged in misleading or deceptive conduct under the Australian Consumer Law and the Corporations Act 2001 (Cth) in respect of representations contained in several publicly available documents to the effect that:

  1. Santos has a clear and credible pathway to achieve ‘net zero’ Scope 1 and 2 greenhouse gas emissions by 2040;
  2. Santos is a producer of ‘clean energy’, and that natural gas is a ‘clean fuel’;
  3. Santos has a clear and credible pathway to reduce its Scope 1 and 2 emissions 26-30% by 2030 (from its 2019-20 financial year baseline); and
  4. Blue Hydrogen, produced from natural gas with carbon capture and storage, is ‘clean’ and has ‘zero emissions’.

Further, the ACCR allege that Santos failed to disclose its intention to pursue further growth and exploration opportunities beyond 2025 which would in effect increase greenhouse gas emissions. This undisclosed growth target was not accounted for nor addressed in its net-zero roadmap and undermined the grounds for Santos to assert a clear and credible pathway.

Proceedings in the Federal Court remain ongoing, with the ACCR asking the Federal Court to:

  1. make declarations that Santos has engaged in misleading or deceptive conduct, or conduct that is likely to mislead or deceive;
  2. grant an injunction prohibiting Santos from engaging in the same misleading or deceptive conduct in the future; and
  3. grant an injunction requiring Santos to issue a corrective statement regarding the environmental impacts of its operations.

HESTA

On 4 August 2022, in an open letter to the Trustee of HESTA, the Environmental Defenders Office (EDO) put HESTA on notice as to the concerns shared by two clients, as members of HESTA, as to HESTA’s management of its members’ funds by continuing to invest in gas companies, namely Woodside and Santos.

In particular, EDO alleged that the Trustee of HESTA and its directors were in breach of obligations arising out of how the Trustee is managing the climate risks to the fund, including for instance:

  1. adequately interrogating the net-zero claims and emissions reduction representations made by companies in which member funds are invested in; and
  2. failing to divest funds from Woodside and Santos despite knowing that the gas companies were expanding gas production in a manner that was inconsistent with the goals of the Paris Agreement and net zero emissions by 2050 pathway.

Moreover, the EDO argue that HESTA may be engaging in misleading or deceptive conduct by making representations which convey, amongst other things, that:

  1. HESTA is a leader on climate action and investment in clean energy;
  2. HESTA’s corporate and investment strategy are aligned with the Paris Agreement;
  3. HESTA is reducing its portfolio emissions and aims to reach net zero by 2050; and

in the circumstances where:

  1. HESTA’s investment decisions are in line with the United Nations Sustainable Development Goal 13 (Climate Action) and Goal 7 (Affordable and Clean Energy),
  2. HESTA continues to invest in Woodside and Santos, which are major contributors to global warming;
  3. neither Santos nor Woodside’s net zero pathway involves a Paris-aligned reduction in scope 3 emissions in circumstances where scope 3 emissions amount to over 85% of these companies’ total emissions.

The EDO wrote a similar open letter to the Trustees of UniSuper alleging that the Trustees of UniSuper and its directors may be in breach for similarly continuing to invest members’ funds in oil and gas companies, namely Santos.

Black Mountain Energy Ltd

Black Mountain Energy Limited (BME) is a small cap energy and resources company that runs Project Valhalla – a natural gas development in Canning Basin, Western Australia. Earlier this year, ASIC issued three infringement notices totalling $39,960 against BME in relation to false or misleading sustainability statements which were published within BME’s ASX announcements in December 2021, May 2022 and September 2022, and which made representations that:

  • BME was creating natural gas development project with ‘net-zero carbon emissions’; and
  • the greenhouse gas emissions associated with Project Valhalla would be net-zero.

ASIC claimed, amongst other things, that the representations were false and misleading because:

  1. BME had not progressed any specific works related to its net-zero aim and had not allocated funding for such works;
  2. BME had not progressed any specific works and not developed a detailed plan regarding how it would design Project Valhalla to minimise or eliminate carbon dioxide emissions or attain net zero carbon emissions;
  3. BME’s net zero emissions target would only apply if BME was able to progress to production and was not intended to apply in relation to any exploratory or development activities;
  4. BME had not undertaken and specific modelling of carbon dioxides emissions likely to be generated from the production of gas from Project Valhalla; and
  5. BME had no reasonable grounds for making the representations regarding net-zero carbon emissions from Project Valhalla.

ASIC Corrective Disclosure Outcomes

In early May, ASIC released a report which outlined ASIC regulatory interventions made between 1 July 2022 and 31 March 2023 in relation to greenwashing concerns.

ASIC’s report identified net-zero statements and targets, and claims of decarbonisation, that did not appear to have a reasonable basis, or were factually incorrect. ASIC recognised the making of representations across a range of disclosures, including prospectuses, websites and market announcements.

In response, corrective disclosure outcomes were made against companies, including:

  • the removal of a target to achieve net zero emissions by 2050 from a company prospectus on the basis the company could not substantiate how the targets would be achieved;
  • the issue of a corrective market announcement addressing previous statements made by a company about its commitment to maintain zero carbon emission footprint to provide further detail such as the remit of the statement, the steps taken to date and expected timeframes; and
  • the removal of inconsistent ESG related information about the benefits and emission reductions associated with using the company’s technology for mining found within the website and the prospectus.

How companies can make trustworthy net-zero statements and targets

Businesses should tread carefully when making environment and sustainability claims, or else they may face corrective measures, legal proceedings, penalties or fines.

The ACCC has released draft guidance for businesses seeking to do the right thing, which sets out eight principles for trustworthy environmental and sustainability claims:

  1. make accurate and truthful claims;
  2. have evidence to back up your claims;
  3. don’t leave out or hide important information;
  4. explain any conditions or qualifications on your claims;
  5. avoid broad and unqualified claims;
  6. use clear and easy-to-understand language;
  7. visual elements should not give the wrong impression; and
  8. be direct and open about your sustainability transition.

Following these principles is not only the right thing to do, but the prudent thing to do in order to reduce the risk of facing ESG litigation.

Footnotes

  1. High-Level Expert Group on the Net Zero Emissions Commitments of Non- State Entities, Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cites and Regions, Report (November 2022)
  2. Paris Agreement, opened for signature 22 April 2016, [2016] ATS 24 (entered into force 4 November 2016) art 2(1)(a) 

Dalitso Banda

Principal

Shemali Samaraweera

Principal Associate

Reid Thornett

Solicitor

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.

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