No mercy for fossil fools: ASIC pulls no punches on greenwashing conduct

Andrea Beatty, Tom Murdoch and Jack Hobson PIPER ALDERMAN

In response to growing consumer and investor concerns about environmental issues, the demand for “green” financial products and services has significantly increased in recent years. However, this trend is also accompanied by the growing risk of unsavoury conduct by some marketers and producers. An example of such misconduct is the practice of “greenwashing” by corporations. Greenwashing, in relation to investments, refers to the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.

What is greenwashing, and why is it growing alongside green financial investments? What is ASIC doing to prevent greenwashing, and what does the future look like for green financial products?

This article comes from the experts behind the Australian Environment Review, the bulletin that provides updates and analysis on developments in environmental law throughout Australia and internationally. It includes in-depth commentary on government policy and legislation, as well as significant court cases. This is an ideal resource for legislators, policymakers, government officials, environment managers and engineers, water and power authorities, mining and oil companies, waste management companies and authorities, manufacturers and lawyers.

Subscribers to the Australian Environment Review can access the full article HERE.

Introduction

In a landmark first, on 27 February 2023, the Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings in the Federal Court of Australia against Mercer Superannuation (Australia) Ltd (Mercer) for alleged greenwashing conduct. The allegations concerned “false or misleading” representations made by Mercer about the sustainability and features of several of its superannuation investment products. This article examines the essential elements of ASIC’s case against Mercer and patterns in ASIC’s enforcement action to stamp out greenwashing.

When good intentions backfire: the hazards of greenwashing

It is a prevailing sentiment among consumers and investors that they are willing to pay more to obtain environmentally sustainable investments. A 2022 report by the Responsible Investment Association Australasia found that 83% of Australian investors expect their bank account and their super to be invested responsibly and ethically, with almost two-thirds of Australians agreeing that such investments perform better in the long run. While some corporations may genuinely use green advertising to enhance their environmentally conscious image, there are also instances where corporations are exploiting the green trend without undertaking any substantial steps to become truly environmentally sustainable. In a recent Australian Competition and Consumer Commission (ACCC) media release, the ACCC highlighted that of the 247 businesses reviewed during their “internet sweep”, 57% were marked as having made concerning claims about their “green” credentials.

Greenwashing creates two significant challenges for both investors and the financial system as a whole. Firstly, greenwashing may deprive investors of the information they need to make informed decisions about their investments. In some cases, investors may unknowingly support unsustainable practices or industries, which can undermine sustainability efforts. Secondly, as a consequence of misleading green product claims, investors may develop a sceptical view towards genuinely green products. Ultimately, this hesitancy can affect the profit margins of “green” corporations and erode the fairness and efficiency of the financial markets.

ASIC vs Mercer: the greenwashing smackdown

On 27 February 2023, ASIC initiated civil penalty proceedings against Mercer in the Federal Court of Australia. In summary, ASIC alleged that:

• Mercer contravened s 12DB(1)(a) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) by making representations in relation to financial services that were false or misleading and
• Mercer contravened s 12DF(1) of the ASIC Act by engaging in conduct liable to mislead the public in relation to financial services

The basis for ASIC’s allegations is that Mercer engaged in false or misleading conduct by making false statements on its website about the exclusion of investments in carbon-intensive fossil fuels (ie thermal coal), alcohol production and gambling in its “Sustainable Plus” investment options. Furthermore, ASIC claims that Mercer’s statement that the “Sustainable Plus” investment fund was appropriate for individuals who are “deeply committed to sustainability” is false or misleading to the public. According to ASIC’s investigation, the “Sustainable Plus” investment options included stocks related to the following industries:

• 15 entities involved in extracting or selling fossil fuels that are carbon intensive
• 15 entities involved in alcohol production and
• 19 entities involved in gambling

ASIC is seeking that the Federal Court of Australia imposes a pecuniary penalty and issue declarations against Mercer. Moreover, ASIC is seeking an injunction order to prevent Mercer from continuing to make any of the alleged false or misleading statements on their website and to mandate that Mercer publicise any breaches found by the court.

Evolving regulator expectations: ASIC coming in hot

With the growing concern for environmental sustainability in the community and increased expectations from investors, ASIC has firmly asserted their intent to crack down on the practice of greenwashing. In ASIC’s Corporate Plan 2022–26, released on 22 August 2022, ASIC outlined that it will be “taking enforcement action against misconduct, including misleading marketing and greenwashing by entities”. In a similar vein, ASIC Chairman Joseph Longo stated, “If people make outrageous claims about their green credentials and don’t have anything to back them up, that’s not something [ASIC is] going to tolerate”.

In late 2022 and early 2023, ASIC solidified this stance by issuing infringement notices to two entities for purported greenwashing — Diversa Trustees Ltd (Diversa) and Black Mountain Energy (BME). The crux of these infringement notices centred around the entities’ failure to comply with the false or misleading conduct provisions outlined in ss 12DB(1)(a) and 12DF of the ASIC Act.

Diversa

In December 2022, ASIC announced that it had issued an infringement notice to Diversa for alleged greenwashing. ASIC had reasonable grounds to believe that statements made in relation to their “Cruelty-Free Super” (CFS) superannuation product on their website may have been false or misleading. In these statements, Diversa claimed that the CFS product did not invest in companies involved in:

• polluting and carbon-intensive practices
• funding or supporting activities that are harmful to the environment and society and
• weak corporate governance structures

ASIC emphasised that while some of the statements were not entirely false, they were more specific and implemented on a more limited basis than their website made out. Consequently, ASIC had reasonable grounds to believe that these statements may have been false or misleading in contravention of s 12DB(1)(a) of the ASIC Act. ASIC required Diversa to pay $13,320 in infringement notices.

BME

In January 2023, ASIC announced that it had issued three infringement notices to BME in relation to concerns about alleged false or misleading sustainability-related statements made to the Australian Securities Exchange (ASX) between 2021 and 2022. The infringement notices were issued in relation to statements contained in three ASX announcements made by BME which claimed that:

• BME was creating a natural gas development project with “net zero carbon emissions” and
• the greenhouse gas emissions associated with Project Valhalla would be net zero

ASIC was concerned that BME either did not have a reasonable basis to make the representations or that the representations were factually incorrect. ASIC further alleged that the representations were false or misleading as BME had not progressed any specific works or allocated funding to support its “net zero” claims at the time of publishing. In response to this allegation of greenwashing, ASIC required BME to pay a fine of $39,960 on a “no admission” basis.

Key takeaways

It is anticipated that ASIC will continue to scrutinise regulated entities’ claims and commitments related to sustainability and climate issues throughout 2023. To enforce greenwashing, ASIC initially employed infringement notices to achieve some quick and decisive victories. However, the recent enforcement action against Mercer indicates that ASIC is ready to use more stringent measures in its enforcement toolbox. In light of this, regulated entities should:

• thoroughly examine any claims made about their green credentials, products, services, targets and goals
• determine whether these claims are accurate, reasonably based, appropriately qualified and include all relevant information and
• stay current with developments from regulators, particularly ASIC and the ACCC, as this is an ever-changing landscape

Read the environmental protections and the precautionary principle in Victoria’s native forests article HERE.