ASIC’s ‘greenwashing’ crackdown on dubious ESG claims

The corporate watchdog is on the lookout for companies making dubious environmental claims to win over ESG-conscious investors.

ASIC commissioner Cathie Armour.

The corporate watchdog has launched a crackdown on the practice of “greenwashing”, where companies embellish their environmental credentials to court favour with investors focused on the transition to net-zero carbon emissions.

ASIC commissioner Cathie Armour said that the current investor focus on climate change and climate action could provide companies with the incentive to engage in greenwashing, particularly when climate-related disclosures were not yet standardised.

This made it difficult to compare companies, products and environmental impacts.

“For example, it may be problematic or potentially misleading for companies to make representations about achieving carbon neutrality or net zero if those representations are not supported by a reasonable basis,” Ms Armour said in a speech to the Minerals Council of Australia conference.

“We plan to continue to monitor this area, consistent with our statutory mandate.”

The comments come as ASX 200 companies are increasingly setting out plans to move to carbon neutral position, including timelines and measures.

The promises by companies can often influence the allocation of billions of dollars of investments as fund managers look meet environment, social and governance returns.

ASIC’s declared intention to scrutinise greenwashing follows a third legal opinion last April from Noel Hutley SC on climate-related risks faced by directors.

Mr Hutley warned that boards faced liability for misleading or deceptive conduct if they selectively disclosed exposures to climate change or developed transition plans without a credible strategy to achieve them.

Greenwashing is a term which is widely used.

However, Minter Ellison partner and head of climate risk governance Sarah Barker, who was Mr Hutley’s instructing solicitor for all three opinions, said the “bar was set high” for a legal breach based on misleading and deceptive conduct.

“A company could invite scrutiny from ASIC for misleading disclosure if it understates the risks or overstates the robustness of its response,” Ms Barker said.

Directors, she said, were not required to have a complete plan lined up in advance to achieve an emissions reduction target, although a target implied there was a genuine intention to shift the company’s strategy to achieve it.

“If you don’t have that intention, or if you don‘t follow through on the strategy, it renders the company’s statement open to an allegation of greenwashing,” Ms Barker said.

“You can’t make representations about your green credentials if you don’t have the intention to fulfil them.”

Earlier this week, Bank of England governor Andrew Bailey sounded a warning bell about the risks associated with climate-related disclosures which were not yet standardised.

He said barriers to the market’s normal adjustment process could lead to a “climate Minsky moment”, where the value of carbon-intensive assets could fall sharply due to heightened credit concerns for lenders and greater market risk for insurers.

The barriers included poor climate disclosure, the lack of clear sector-level climate policies, a failure by companies to internalise the cost of emissions, and the short time horizon of some investors.

“(They) all contribute to what (renowned climate economist) Nick Stern has described as the greatest market failure the world has ever seen,” Mr Bailey said.

“A sharp shift towards a new equilibrium as a result of recognising the full extent of this market failure could create significant financial losses in a ‘climate Minsky moment’.

“Maintaining monetary and financial stability in light of these risks therefore demands a timely, coherent and co-ordinated policy response from the authorities.”

Ms Armour said last February that ASIC regarded climate as a systemic risk with the potential to significantly impact companies, investors and consumers.

Companies needed to have appropriate governance structures in place to manage the issue, and provide the market with reliable and useful information on their exposure to climate-related risks.

Just before the pandemic struck, ASIC looked at a selection of listed companies to assess how they were managing the issue, and separately wrote to several companies identified as “laggards”.

The laggards included Pancontinental Oil & Gas, the oil and gas production and exploration company Whitebark Energy, oil and gas explorer Strike Energy, coal gasification company Leigh Creek Energy, and Carnarvon Petroleum, according to documents release by ASIC.

ASIC wrote to each company, saying it had received a complaint that the operating and financial reviews in each of their annual reports had failed to sufficiently disclose climate-change risks.

“As you will be aware, an OFR (operating financial review) must contain information that members of the listed company would reasonably require to make an informed assessment of the operations, financial position, business strategies and prospects for future financial years of the company,” the letter said.

“(The disclosure), insofar as it relates to climate change risks, appears inconsistent and out of step with that of its peers, without any clearly discernible explanation as to why this might be the case.”

The regulator noted it had provided high-level guidance to listed companies in 2018 on formulating disclosures in relation to climate-change risks.