- Businesses are being legally challenged over net zero claims and climate action plans.
- The conduct and mindset of those involved in sustainability-related reporting must be anchored in ethical values.
- The International Ethical Standards Board for Accountants (IESBA) have identified factors that could contribute to greenwashing.
As climate travels through the business and investor community as an emerging risk to consider, there has also been a rapid growth in the number of companies making commitments to ‘net zero’ greenhouse gas emissions.
This move has triggered concerns among regulators about the risk of greenwashing, the practice of misrepresenting the extent to which a product or strategy is environmentally friendly, sustainable, or ethical.
Global headlines are being dominated by legal challenges against greenwashing and claims of net zero emissions and climate action plans. One of Australia’s largest oil and gas companies Santos is currently facing a ‘first of its kind’ legal case launched by the Australasian Centre for Corporate Responsibility which challenges the veracity of their claims and target to achieve net zero carbon emissions by 2040.
What regulators are focusing on
The Australian Securities and Investments Commission’s (ASIC) deputy chair Karen Chester said transparency and trust would be paramount to maintain investor confidence as the market for these products continues to develop and grow.
In October 2022, ASIC took its first action for greenwashing against listed energy company Tlou Energy Limited (Tlou). ASIC issued four infringement notices (total of $53,280) over concerns about alleged false or misleading sustainability statements made to the ASX in October 2021.
In November 2022, ASIC reminded company directors to ensure material business risks are adequately disclosed in annual reports. As a result of ASIC's ongoing financial reporting surveillance program, five listed entities were required to provide disclosure of material business risks in response to ASIC concerns.
"ASIC reminds company directors about the importance of a high-quality OFR, as it helps to inform the decision-making of investors by disclosing material risks that may affect the achievement of a listed entity’s strategies and prospects," ASIC Commissioner Sean Hughes.
An ASIC information sheet, How to avoid greenwashing when offering or promoting sustainability-related products (INFO 271) based on a review of superannuation and investment products outlines the key areas for businesses and directors to watch out for.
Similarly, in March 2022, New Zealand’s Financial Markets Authority (FMA) chief executive Samantha Barrass told the market that targeting greenwashing was a priority for the year.
The FMA has recently released their review on the uptake of the recommendations from their 2020 publication, Disclosure framework for integrated financial products. The review observed a ‘blurring of the line’ between financial and non-financial factors.
A report by the International Organization of Securities Commissions (IOSCO) highlighted greenwashing as a recurring challenge to investor protection. They found multiple and diverse sustainability frameworks and standards, and the lack of common definitions of sustainable activities can lead to issuers or asset managers ‘cherry-picking’ which initiatives to use.
Our own research with the University of Melbourne and University of Queensland found variations in how entities report climate-related risks and discuss the impacts in statutory financial statements. There was also a significant difference in the approach global entities had taken to report on climate-related risks in comparison to Australia and New Zealand entities.
How to prevent inadvertently greenwashing
The conduct and mindset of those involved in sustainability-related reporting must be anchored in ethical values, including acting with integrity and professional competence and due care.
Entities should have in place well-functioning systems, processes, and internal controls to accurately collect and report the sustainability information.
The International Ethical Standards Board for Accountants (IESBA) have identified the following factors that could contribute to greenwashing:
• The integrity of the reporting framework, if any, and the company's compliance with the framework.
• Availability and quality of corporate sustainability data.
• Lack of integration and connectivity between the financial and non-financial sustainability information.
• Lack of understanding of the control environment, especially of the information technology systems.
• An inadequate control environment, including governance and oversight arrangements that have not kept pace with the internal and external developments.
• Incentives and opportunities (e.g. financial or reputational) to promote more sustainability-aligned products, or to promote the business as being aligned to sustainability goals and trends.
• Lack of regulation or regulation that is only at the nascent stage of development.
Directors also in the spotlight
A supplementary legal opinion released in Australia in 2021 recognised that the increasing prevalence of net zero commitments amplified the risk of greenwashing. This builds on the 2016 and 2019 landmark opinions on company director’s duties to consider, disclose and respond to climate-related risks.
The supplementary legal opinion states: “Companies making net zero commitments require ‘reasonable grounds’ to support the express and implied representations contained within a net zero commitment. Moreover, reasonable grounds are required at the time of making a net zero commitment. That is, companies wishing to commit to net zero must have a reasonable basis now for believing that they can achieve that commitment.”
Refresher on your obligations
The Code of Ethics (APES 110/PES 1/NZICA Code; paragraph R111.2) requires members to avoid being knowingly associated with information that they believe contains a materially false or misleading statement or information provided recklessly, or omits or obscures required information where such omission or obscurity would be misleading.
ASA/ISA (NZ) 720 The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements requires the auditor to read the other (financial or non-financial) information and consider whether there is a material inconsistency between the other information and the financial statements or the auditor’s knowledge obtained in the audit.
This increased focus on climate risks is only set to grow with New Zealand’s mandatory climate-related disclosures regime commencing for certain entities from 1 January 2023 and the International Sustainability Standards Board (ISSB) releasing final standards by the end of 2022.
Resources from the FMA and ASIC help identify potential greenwashing claims or disclosures and the steps you can take to raise the alarm.
ASIC – INFO 271
How to avoid greenwashing when offering or promoting sustainability-related products.Find out more
ASIC - What is "greenwashing" and what are its potential threats?
An ASIC review addressing the threat of “greenwashing” aims to improve governance and accountability in the market.Find out about greenwashing
FMA – expectations for green investment products
FMA releases guidance on financial products that incorporate non-financial factors.View FMA media release
Ethics considerations in sustainability reporting
An IESBA publication spotlights key provisions in the Code that apply in preparing and presenting sustainability information.Read the publication