Explainer: Greenwashing risks and how to avoid them

The Federal Court found that the company, Vanguard Australia, had made misleading claims about environment, social and governance (ESG) exclusionary screens.

More recently, in early June, the Federal Court found Active Super’s trustee has mislead consumers regarding the super fund’s ESG credentials. ASIC has at least one other similar underway, and has issued 17 infringement notices, worth more than $230,000 in total.

It is clear that the regulators won’t allow Australian companies to get away with greenwashing.

Here, we delve into what greenwashing involves, the risks it present for SMEs and how accountants can help their clients avoid it.

What is greenwashing?

ASIC defines greenwashing as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”.

“This can be as simple as using specific imagery and language, all the way through to making false claims,” says Caterina Sullivan, founder, Strategic Sustainability Consultants.

In ASIC v Vanguard, the Federal Court held that Vanguard had made a misleading claim about its Vanguard Ethically Conscious Global Aggregate Bond Index Fund.

Vanguard led investors to believe the Index Fund excluded companies active in relevant industries, including fossil fuels. However, many were not screened against ESG criteria.

“As ASIC’s first greenwashing court outcome, the case […] sends a strong message to companies making sustainable investment claims that they need to reflect the true position,” says Sarah Court, deputy chair, ASIC. 

How does Australian law prohibit greenwashing? 

There are no specific anti-greenwashing laws in Australia.

“[Instead, greenwashing] falls under existing legislation – it is captured for consumer goods and services by the laws governing misleading and deceptive conduct in the Australian Consumer Law and, for financial products, their equivalents in the ASIC Act,” says Nicole Mead, Senior Associate, DMAW Lawyers.

These laws have been in place for decades. However, this year, the regulators have decided to use them to crack down on greenwashing.

“Both the ACCC and ASIC have identified greenwashing and sustainability-related issues as an enforcement priority for the year,” says Mead.

“We’ve seen them ramp up, first with infringement notices and enforceable undertakings, and now, we’re seeing court proceedings as well.”

On April 18, the ACCC announced it had commenced proceedings against Clorox, the creator of GLAD-branded bags, in the Federal Court. 

The ACCC alleges that Clorox, in representing that GLAD Kitchen Tidy and Garbage Bags were made up of 50% ‘ocean plastic’ collected from the sea, misled consumers, as the plastic was collected from Indonesian communities up to 50 kilometres inland.

What are the risks of greenwashing for SMEs?

Legally, the main risk of greenwashing for an SME is facing a claim for misleading or deceptive conduct from the regulators – as the Vanguard and Clorox cases demonstrate. 

In addition, directors should be aware that greenwashing could comprise a breach of their duties.

“A director has an obligation to act in the best interests of the company,” says Mead.

“ASIC and ACCC aren’t using that angle at the moment; but, it’s plausible that, if you’re allowing or encouraging your business to make statements that comprise greenwashing, you could be liable for a breach of directors’ duties.”

Beyond the law, greenwashing poses risks to reputation, trust and competitive advantage.

“If a customer base believes a claim to be disingenuous, the loss of trust in the brand has the potential to be financially devastating,” says Sullivan.

“Over the next few years, we’re expecting to see many sustainability practices, such as recycling and flexibility, shift from giving organisations competitive advantage to putting them merely on an equal playing field. 

“Organisations that engage in greenwashing may lose their [position], as all their policies and practices may come into question.”

Further, small businesses that engage with big businesses may risk breaching, or losing, their contracts.

“If the big business has made public claims around sustainability, including mandatory climate disclosures [to roll out from 1 January 2025], that includes their supply chain,” says ESG Strategy founder Lee Stewart. 

How can SMEs avoid greenwashing?

For SMEs and their accountants worried about greenwashing, Mead recommends that SMEs start with the regulators’ formal guidance. ASIC’s is here, and the ACCC’s is here.

The ACCC sets out eight ‘principles for trustworthy environmental claims’. These are: 

• Make accurate and truthful claims;
• Have evidence to back up your claims;
• Do not hide or omit important information;
• Explain any conditions or qualifications on your claims;
• Avoid broad and unqualified claims;
• Use clear and easy to understand language;
• Visual elements should not give the wrong impression; and
• Be direct and open about your environmental sustainability transition.

“[The guides give] helpful insights into the regulators’ thinking and expectations,” says Mead.

“They also contain examples that put into context what the guiding principles mean.”

Next, it is important to apply the principles across the business, at all times.

“I’m encouraging all our clients to keep a very broad ESG lens across all their business discussions – when they’re assessing risks, assessing opportunities, making decisions,” says Mead. 

“Getting into that habit will help with avoiding inadvertent mistakes.”

To cement such a habit, the development of strategies, policies and plans is crucial.

“You need a sustainability strategy that’s linked to your corporate strategy,” says Stewart.

“Say you want to make a net-zero claim, what’s your roadmap? What are you doing in the next five years? Have you validated [your plan] with a third party? How many times has the board discussed sustainability? Who is responsible for the target if you don’t meet it? What investment are you making? All this adds credibility.”

Having a strategy can also help businesses to maintain honesty and transparency.

“Consumers understand that not every organisation will be 100% economically, socially and environmentally sustainable,” says Sullivan.

“Sustainability requires a step-by-step approach. By being upfront about areas for improvement, an organisation can bring their customers, team and stakeholders on a journey with them.” 

How can accountants and finance teams help?

Accountants can play an important role in preventing greenwashing because they have so much information at their fingertips.

“[They] can assist by verifying claims with data,” says Sullivan.

“If an organisation is claiming they are carbon-neutral, there should be data to prove it.”

A degree of scepticism is needed, adds Stewart.

“If a client is putting out a claim – that a product is ‘eco-friendly’ or ‘socially sustainable’ – an accountant should sit back and ask questions, ‘What does that actually mean? What is your proof? Do you have a third-party validation for that claim?’ Put yourself in the shoes of a regulator or activist. 

“If you don’t have the information publicly available to answer, then you’re a prime target for [an allegation of] greenwashing.”

This requires being educated about regulatory requirements, which might include engaging experts.

“Working closely with sustainability consultants is crucial to understanding best practices and integrating genuine measures into financial planning and reporting,” says Sullivan.

“Collaboration can provide valuable insights and help ensure that sustainability efforts are both effective and accurately represented.”