As the global transition to clean energy sources continues, directors face increasing demands from a variety of stakeholders to establish and promote their company’s “green credentials”. However, as recent litigation both in Australia and abroad demonstrates, this is not without risk. “Greenwashing” is now firmly in the sights of both regulators and well-funded private litigants.
What is greenwashing?
Greenwashing is the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound.
ASIC Chair Cathy Armour recently stated that Greenwashing “poses a threat to a fair and efficient financial system” by “distort[ing] relevant information that a current or prospective investor might require in order to make informed investment decisions driven by ESG considerations.”
However, one should spare a thought for boards, who often face conflicting pressures when it comes to environmental disclosures. On the one hand, investor relations teams urge boards to signal a company’s commitment to environmental causes, which are becoming more central in investment decision making. On the other, legal teams point to the increasing risk that boards will be held legally accountable, in one way or another, for these statements (see our article - Directors duties to disclose climate-related financial risk continues to build momentum).
In an oft-cited opinion commissioned by the Centre for Policy Development, Mr Noel Hutley SC and Mr Sebastian Hartford Davis note that “net zero emissions targets, commitments and strategies have become a critical focal point for assessing board-level climate governance”, as community expectations move from simply identifying and assessing climate-related risks, to taking positive steps to manage and mitigate carbon intensity across supply chains. The increasing prevalence of “net zero” commitments greatly amplifies the risk of Greenwashing, creating a new and novel minefield for directors to navigate.
Market practice: how the top 50 ASX listed companies are responding to their net zero carbon emission commitments
To test the way these conflicting forces are playing out in the market, we have reviewed public announcements by the top 50 ASX-listed companies concerning their net zero carbon emission commitments.
Our research shows that net zero commitments are often vague, prone to misunderstanding, and convey insufficient information to permit stakeholders to make an accurate assessment of the achievability of the company’s net zero ambitions; none of which should be surprising, given the complexity of the issues involved and the rapidly evolving investor landscape.
Of the 50 companies surveyed:
- 34 (68%) have made public commitments to achieve net zero carbon emissions;
- of these, 2050 is the most common deadline for the achievement of net zero, nominated by 20 (40%) of the 50 companies surveyed (the mean year for all companies making net zero commitments being 2043);
- in all but seven cases (14%), offsets are required in order to achieve net zero commitments;
- 11 of the 34 companies making net zero commitments (32%) are reliant on as-yet-unidentified technologies and processes to achieve that commitment – of which eight (73%) are engaged in the extractive industries; and
- in no cases were Scope 3 emissions included in a company’s net zero commitment.
While it is difficult to discern a truly “typical” model for a net zero commitment given the wide disparity in language used, our analysis of the 34 net zero commitments has identified four key components or stages (as depicted in the chart below):
- First, optimisation of existing processes so as to find a means of reducing emissions. An example may be an organisation switching to a paperless environment, or purchasing electricity derived from renewable resources.
- Second, altering existing processes using existing technologies to reduce emissions. An example may be the substitution of electric for diesel vehicles in a mining operation.
- Third, adopting as-yet-unidentified processes or technologies to reduce emissions. An example (the subject of dispute in the Santos case) may be the adopting of carbon capture and storage technologies, which are yet to be proven at scale.
- Fourth, to the extent that the first three components do not deliver a net zero outcome within the desired timeframe, purchasing offsets.
The legal risks – and how to manage them
As the Hutley opinion notes, commitments presented in this way have the potential to convey a number of different representations. However, for present purposes we focus on the implicit representation (for which Hutley SC cites as authority Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, 321  (per French CJ)), that the company’s commitment is based on reasonable grounds. This is a potentially potent source of risk for boards, given the liability regime for misleading and deceptive conduct in the Corporations Act 2001 (Cth) and the Australian Consumer Law.
Section 1041H of the Corporations Act 2001 (Cth) prohibits conduct which is misleading or deceptive, or likely to mislead or deceive, and there are similar provisions in the ASIC Act 2001 (Cth) (s 12DA) and the Australian Consumer Law (s 18).
Importantly, s 769C of the Corporations Act 2001 (Cth) provides that, if a person makes a representation about a future matter, and the person “does not have reasonable grounds for making the representation”, then the representation is “taken to be misleading” (s 12BB of the ASIC Act 2001 (Cth) and s 4 of the Australian Consumer Law are to a similar effect).
Although these provisions do not shift the ultimate onus of proof, a finding that a representation concerns a future matter places an evidential burden on the person who makes the representation, to adduce evidence that there were reasonable grounds for making it (Australian Competition and Consumer Commission v Woolworths Limited  FCA 1039).
Adopting the stylised net zero commitment framework noted above, it can be seen that there are at least four implicit representations that are embedded in the commitment:
- That there is the capacity for optimisation of the company’s existing operations;
- That there are existing technologies which can be plausibly applied to those operations to further reduce emissions over time (usually in the short to medium term);
- That new technologies will emerge (or be proven) that will be able to be applied to existing operations to reduce emissions in a manner which is financially sustainable; and
- At the end of the “commitment period”, there will exist a market for offsets, and that such offsets will be able to be purchased on financially attractive terms.
Hutley SC opines that representations such as these are inherently in the nature of a promise or forecast. While some elements are perhaps better characterised as representations as to the present state of affairs, on an overall level it is very difficult to rebut that view. If so, companies and boards need to ensure they have reasonable grounds before making a net zero commitment.
How would company boards show “reasonable grounds”?
Essentially, what is required is the application of appropriate due diligence by boards to statements setting out the company’s net zero commitment. Given the novelty of the issue, there is no legislative or judicial guidance as to what this may entail, and in our experience, practices vary greatly. However, the typical approach to due diligence investigations in the capital raising context could provide boards with a roadmap for establishing reasonable grounds for net zero commitments.
Typically, this approach, reflected in documents such as the AFMA industry standard Due Diligence Planning Memorandum, involves four phases, being:
- Scoping and review;
- Verification and sign-off; and
- Ongoing due diligence.
With appropriate adaptation, this methodology could be applied to a board’s consideration of a net zero commitment:
- Scoping and review: implement a governance structure (an ESG committee perhaps, in substitution for a due diligence committee) and where necessary, appoint experts to opine on technical matters inherent in the net zero commitment;
- Investigations: receive and interrogate reports and identify key issues either to be resolved or which need to be clearly disclosed in connection with the net zero commitment (for example, risks around the adoption of novel technologies or the potential unavailability of offsets);
- Verification and sign-off: identify material statements in the net zero commitment and reference these back to source materials; and
- Ongoing due diligence: implement a governance process by which the relevance and accuracy of the commitment (essentially, the slope of the curve on the stylised model above) can be tested on a periodic basis (perhaps quarterly, or at least half-yearly, in line with the financial reporting cycle) for its accuracy, and adjusted if necessary.
Documentation of this process (minutes, action items and key issues registers) should be maintained with the same amount of rigor as in the capital raising context.
In taking these steps, not only will the company itself minimise the risk of Greenwashing claims: its directors are more likely to be able to avail themselves of the “business judgment rule” in s 181 of the Corporations Act 2001 (Cth), should their actions in committing the company to a net zero pathway be challenged in the future.
The state of net zero commitments in corporate Australia
Our research shows that “corporate Australia” is only at the early stages of a journey to engage investors, regulators and other stakeholders in a meaningful dialogue on net zero commitments. Operating in an increasingly litigious backdrop, boards will need to adopt new and more robust processes to minimise the prospects of Greenwashing claims, while also meeting community expectations, which continue to outstrip legislative change.