The ACCC is the latest regulator to take aim at “greenwashing”, a term encompassing an array of actions that overstate or misrepresent the “green” credentials of a company or product.

In a speech delivered to the Committee for Economic Development of Australia, outgoing ACCC Chairman Mr Rod Sims noted that the Commission’s focus would go beyond consumer goods, taking a closer look at claims made in the manufacturing and energy sectors relating to the carbon neutrality of production processes.  Mr Sims stated that the ACCC would be working closely with other regulators, particularly ASIC, to identify the most appropriate regulator to deal with issues given the overlap in the regulatory frameworks.  

This position aligns with global regulatory collaboration efforts, with the International Organization of Securities Commissions (IOSCO) working to develop IFRS International Sustainability Standards Board (ISSB) Exposure Drafts of proposed climate and general sustainability disclosure requirements in 2022.  The ISSB intends to deliver a comprehensive global baseline of sustainability related disclosure standards in the near term.

Notably, the U.S. Securities and Exchange Commission (SEC) has recently released proposed rule changes to enhance and standardise climate-related disclosure for investors.  The rule changes would require companies to include certain climate-related disclosures in their registration statements and periodic reports, including information about material climate-related risks and certain climate-related financial statement metrics (such as scope 1 and 2 greenhouse gas emissions) in a note to their audited financial statements.  This represents a significant move towards standardisation in what is still the largest and most important capital market in the world.

Why greater clarity is needed

Given the nascent and dynamic nature of the “E” component in ESG, the development of globally accepted, universally acceptable disclosure standards is a mammoth task, yet one for which there is increasing consumer and investor demand. 

Boards too are seeking greater clarity and certainty around climate and general sustainability obligations, as they face increasing pressures (both internal and external) when it comes to environmental disclosure (see our article - "Net zero commitments": the latest minefield for directors).  

We believe that the role of Australian regulators is to maintain confidence in the markets and provide some level of guidance for industry, investors and consumers alike. While there is an existing regulatory framework for climate-related disclosure, it remains a patchwork of requirements without uniform principles or standards to guide either the preparers or users of information.  

Current regulatory framework

The Clean Energy Regulator (CER), ASIC, ASX, APRA and the ACCC each play a critical role in regulating market behaviour in the climate and general sustainability matters in their own domains. Still, there is as yet no standardised model of reporting for non-financial ESG matters.

The National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) provides a framework for the disclosure of greenhouse gas emissions and energy production and consumption, but only for facilities and corporate groups that exceed specified reporting thresholds.

Australian companies have specific disclosure and reporting obligations under the Corporations Act 2001 (Cth) (the Corporations Act) and a general duty to not be misleading or deceptive.

ASX-listed entities have the additional overlay of continuous disclosure obligations and are also encouraged to report material exposure to environmental, social and governance risks under Recommendation 7.4 of the ASX Corporate Governance Council's Principles and Recommendations.  There is no positive obligation on ASX-listed entities to account for ESG matters. However, the "if not, why not” disclosure requirement in Recommendation 7.4 allows the market to assess the credibility of listed entity's policies (or lack thereof) for dealing with climate-related risks, both physical and transitional.

The ACCC, under the Australian Consumer Law (ACL), regulates environmental and sustainability claims on products and services which are misleading or deceptive through proper disclosure to consumers. 

APRA has also released Prudential Practice Guide CPG 229 Climate Change Financial Risks (CPG 229), which sets out APRA’s expectations regarding management of financial risks of climate change (see our article - APRA attention to climate risks hots up).

In each of the ASIC and APRA guidance documents, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are referred to as best practice, but, unlike other jurisdictions such as the UK and New Zealand, adherence to the TCFD framework is not mandatory.

Catching up to market sentiment

Today, investors and consumers are increasingly redirecting capital and consumption away from businesses perceived as having poor ESG credentials.  This is most obvious in the environmental domain, where fossil-fuel and other carbon emitting projects are struggling to attract investment.  A recent survey found that 88% of international investor respondents and 75% of international non-investor respondents expect companies to provide clear and appropriately detailed disclosure of climate change governance, strategy, risk mitigation efforts and targets.

While most environmental issues under the ESG umbrella are factual, measurable and reportable, boards and management of Australian companies often face problems in deciphering the legal framework in which they must operate, given measurement and reporting obligations are not standardised. 

The increasing pressure on businesses to become “green” and disclose more information regarding their environmental impact may prompt them to make aspirational ESG claims or other vague statements that result in genuine confusion when users of that information attempt to assess the business through an ESG lens.

The ACCC, ASX and ASIC all seek to address similar market concerns by improving disclosure so that end-users (i.e. consumers or investors) can confidently rely on claims made in the market.  Standards are vital in providing certainty around regulators’ expectations and enhancing business and consumer confidence.

Of course, the science behind disclosure and reporting is complex, particularly for environmental matters.  What is objectively reasonable involves an assessment of criteria such as the key metrics and assumptions used, the science behind the claims and technology utilised, which requires expert technical knowledge.  This level of detailed information is seldom disclosed to the regulators, other industry participants, investors and consumers.  

When the science gets sophisticated, expert scientific input becomes essential, extending beyond the remit of regulatory bodies’ expertise.

A potential global solution with a local touch?

One means to provide greater confidence to the market, and the participants within it regarding climate-related disclosure could involve the establishment of a representative body of cross-disciplinary experts to build on baseline standards provided by the ISSB to assist regulators in setting Australian standards.

This body could operate in a manner similar to the Australian Joint Ore Reserves Committee (JORC) which was established in 1971 and published several reports containing recommendations on the classification and public reporting of ore reserves prior to the release of the first edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (known as the “JORC Code”) in 1989.

Similarly, a body supported by input from experts in their respective fields (including climate scientists, engineers or accountants) could make recommendations to regulators regarding uniform standards for climate-related disclosure made by entities operating in the public domain.  

To continue the JORC analogy, an ESG-style JORC Table 1 disclosure could complement climate and sustainability claims made by listed entities by setting out the key parameters and methods relied upon to arrive at their estimate of the relevant metric.

What approach can boards take in the meantime?

Consumer and investor expectations will continue to drive companies to be more sophisticated in their approach to ESG-related disclosure. The reality is that these market forces will almost certainly pre-empt attempts by regulators to develop standardised frameworks and recommendations for disclosure, meaning boards will need to be proactive in developing their approach within the guide rails provided by existing regulation. 

The Santos case in Australia and the recent case against Shell directors in the UK is a testament that directors may be pursued for breaches of their director's duties.

In our experience, practices vary greatly.  However, ASIC Regulatory Guide 170, which relates to the preparation and presentation of forward-looking financial information, is a good starting point in helping boards satisfy themselves that the company's disclosures or product claims have reasonable grounds.

ASIC suggests companies should be asking themselves three key questions:

  1. Is there a relevant factual foundation for the claim to ensure that the information behind those claims is not artificial?
  2. Is the claim supported by verifiable information, or is it based only on hypothetical assumptions?
  3. Are all material assumptions, including implied assumptions, objectively reasonable?

If boards assess these matters through a typical due diligence approach, engaging and relying upon independent industry experts to the extent required, they are more likely to be able to establish “reasonable grounds” for their ESG claims.  For further information on establishing reasonable grounds, please refer to our article on Net Zero Commitments.