Whole of Environment Report #3 Greenwashing is an older problem than it seems, even if it’s taken on a new significance for business and government in recent years. Sustainability is big business, and serious financial and reputational penalties are now at stake. Baker McKenzie’s environment team examines the risks in this third instalment of our WOE series.
The Basil Fawltys of the world used to think it would be easy to swindle their guests. All it took in the 1980s was a sign next to a couple of neatly folded bath towels inviting guests to “save the planet” – or sentiments to that effect – by reusing the towels.
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If only it were that simple. The planet remained much the same irrespective of whether guests reused the towels, but profit margins were always healthier when towels were reused more often than they were rewashed. Guests could still go to bed feeling good about themselves.
By the end of the decade, the game was up (in the conspiracy-busting Mr Fawlty vernacular), and a trend that had earlier been called “eco-pornography” was instead christened “greenwashing” by a New York ecologist. Four decades later and it remains the case that you can know it when you see it.
The biggest difference now is that regulators, courts, (and perhaps more significantly) shareholders, investors, the media, and everyday consumers can too. The consequence is that if directors, executives, and their teams don’t know it when they see it, they could find themselves somewhere between Scylla and Charybdis – professionally embarrassed, offering apologies, mounting costly defences, or paying heavy fines that could’ve been avoided with the benefit of better advice. It’s no time to be asleep at the wheel.
Throughout 2023 Australia’s corporate watchdog, the Australian Securities and Investments Commission (ASIC), launched three sets of greenwashing penalty proceedings in a shot across the bows of the financial services industry. The penalties that can be imposed in these matters run well into the millions. Although the Federal Court has not yet handed down judgment in any of these proceedings, the likely penalty in at least one case is rumoured to exceed $10 million.
Obviously, the potential for penalties of this magnitude can add significant financial and reputational costs to the price of marketing sustainability credentials over zealously. Any penalty serves as a deterrent to others tempting the same fate, which should motivate business to be alert to the greenwashing risk, even if not alarmed.
Two of ASIC’s greenwashing cases are scheduled for full liability hearings in the first quarter of 2024. If judgments are ultimately handed down, then we’ll have more guidance on what constitutes greenwashing under Australian law and what penalties (if any) the court considers appropriate. There’s also a federal Senate Inquiry into greenwashing underway, with a public hearing and a report on the Inquiry’s findings both due before the end of FY24.
Like many corporate buzzwords, greenwashing can be kicked around with other ideas in meetings, at watercoolers, and in thinktanks without much reflection about what’s actually going on.
What’s on the label matters
It’s best understood as a species of false, misleading or deceptive conduct that arises from sustainability-related statements and representations. It falls foul of prohibitions against conduct of this kind under legislation such as the Corporations Act 2001 (Cth), just as “Made in France” might if it weren’t true. ASIC itself defines greenwashing as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable, or ethical.
In addition to the moral imperative, the corporate appetite for touting green credentials appears to derive from the desirability of these or similar virtues in the eyes of investors and consumers. The data indicates that a sheen of green in whole of environment (WOE) terms can influence investment patterns, lifestyle choices, and ballot papers on election day. Capitalising on the appeal of greener offerings therefore makes business sense.
Marketing forces might also mean it’s tempting to downplay greenhouse gas emissions, fossil fuel dependencies or adverse impacts on nature in order to attract more or better business.
Whether in energy generation, manufacturing, construction, agriculture, food, fashion, or transport, a product’s sustainability claims probably have more appeal today than yesterday. It’s just that the grass really has to be greener if you say it is. At least there should be reasonable grounds for saying it is so that claims can be backed up.
Both ASIC and our competition regulator, the Australian Consumer and Competition Commission (ACCC), have said that calling out greenwashing is a priority for them. As you’d expect, each regulator is approaching the issue with different interests in mind. Generally, ASIC is focused on the financial services sector while the ACCC looks at potential wrongdoing in the provision of other goods and services to consumers.
The preservation of public trust in the legitimacy of sustainability representations is fundamental to the value and desirability of offerings that are, in fact, greener than their competitors. The companies behind these offerings are typically investing more money in finding sustainable solutions, ensuring ethical supply chains, and delivering circular economies.
They deserve to differentiate themselves and attract market capital on that basis. As ocker as it sounds, we think a fair go dictates that companies who are genuinely greener should be entitled to enjoy public confidence in the veracity of their offerings. They’re equally entitled to expect that competitors can’t make the same claims if they’re not true.
Any green pantomime undermines this public confidence. It follows that a company’s marketing strategy and the desire for good optics can’t reasonably lead you to put the cart before a horse that’s disguised as a unicorn.
Without telling marketeers how to do their job, this probably means that some puff needs to be taken out of the puffery (to commandeer a favourite reference of our colleague, former JP Morgan executive and financial services veteran, Alan Darwin).
It means clearer communication and less vague terminology or overstated promises. It also means avoiding statements (or images) that could be merely aspirational or worse, a sham.
The risk is bigger than you think
To think this only creates a risk for a few companies is a mistake. Last year the ACCC published its findings about the prevalence of greenwashing across a broad spectrum of businesses by way of an internet sweep. More than half the businesses were found to have made what the ACCC called “concerning claims”.
The most common were vague and unqualified claims while other green assertions were said to be made without evidence to back them up. Many businesses were also found to exaggerate some benefits or omit relevant information (such as necessary qualifiers). We’ll see if any litigation follows the ACCC’s ongoing investigations.
Regulatory actions like ASIC’s 2023 court cases form part of an enforcement trend that includes hundreds of thousands of dollars in fines already handed out, with more expected this year.
The ASIC actions should be conceptualised as just one arm of the varied contests that comprise “climate change litigation” in Australia.
According to an article published in December 2023 by Sydney academic Dr Mark Hamilton in the Environmental and Planning Law Journal, only about 9 per cent of cases that should be characterised as climate change litigation in this country are corporate law-based actions like these.
In upcoming columns, we’ll discuss the 90 per cent of cases that make up the vast majority of climate change litigation matters in the past three decades.
According to multiple sources, the primary subjects of those cases are compliance with environment and planning legislation (under state and federal regimes) and challenges to executive decision-making under that legislation. Based on our experience acting in climate change litigation over the years, we’ll explore the pressure points for business and the interplay between the more subtle legal and commercial trends we’ve observed.
Advancing our clients’ interests requires diurnal foresight. Whether in running litigation on WOE matters or advising on various opportunities arising in the Australian market, it’s about avoiding surprise. This means predicting how risks like greenwashing intersect with other evolutions in law, for instance the incoming mandatory climate-related disclosure obligations and the new nature repair market we explored in our last column.
Greenhushing is not a good choice
In the galaxy of intersecting legal forces directed at the betterment of WOE, staying quiet about sustainability accomplishments and ambitions in an effort to avoid accusations of greenwashing or other inadequacy – a practice dubbed greenhushing – isn’t a viable corporate answer. A silence can be deafening and scrutiny cuts both ways.
With so many eyes wide open, it’s not as simple as advising a client not to suggest that they can “save the planet” one towel at a time. If someone orders a Waldorf salad, don’t say you think you’ve just run out of Waldorfs and try to give them a green salad instead. The greenwashing game’s up, and to quote one of Mr Fawlty’s best lines, it’s “nothing you can’t be sued for”.
Samuel Allam, Tanja Mikulic and Anna Vella, Baker McKenzie
