Greenwashing hits court room

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This article was written by Edwina Kwan, Erin Eckhoff and Sati Nagra. 

Greenwashing hits court room

It has been foreshadowed[1] that companies and boards who make disclosure on climate targets face potential liability for misleading and deceptive conduct (and other breaches of law including breaches of directors' duties) if they do not have reasonable grounds to support the express and implied representations contained in disclosures on climate change commitments.      

Greenwashing is a term used to describe the practice of companies selling products, which includes promoting investments, by stating that they have certain green credentials when in fact they do not.  It can also be used in the context of describing emissions targets which companies set when they do not have a reasonable ability to meet them. 

ASIC Commissioner, Cathie Armour, has described greenwashing as "the potential for funds to overrepresent the extent to which their practices are environmentally friendly, sustainable or ethical…or overstating green credentials that are not sufficiently reflected in their operations.…Misrepresentation of [financial] products poses a threat to a fair and efficient financial system…Addressing this threat will improve governance and accountability in the market."

The potential for greenwashing as a legal basis against corporations has gained traction following the case in the recent Dutch court decision of Royal Dutch Shell which we have written about separately here.  In that landmark judgment, the Hague District Court ordered Royal Dutch Shell (Shell) to drastically reduce its carbon dioxide emissions by 45% (compared to 2019 levels) by 2030. The reduction applies throughout Shell's global energy portfolio and across Scope 1, 2 and 3 emissions - covering emissions from Shell's own operations, its suppliers and customers. Shell was ordered to implement this reduction target with immediate effect, irrespective of any appeal. This class action was brought against Shell by environmental groups and supported by over 17,000 individuals.

Notably, Shell had already committed to net-zero emissions by 2050. The Hague District Court considered those plans as inadequate, noting the significance of Shell's contribution to global emissions. The ruling marks that the largest greenhouse gas emitters are expected to bear a commensurately greater burden in taking action, irrespective of how challenging that might be for business models established upon carbon heavy industry.

The Santos greenwashing case will no doubt garner international attention. It is the first greenwashing case to challenge a company's net zero emissions target for being misleading (rather than merely inadequate as was the case with Shell). The lawsuit is being brought by the Australasian Centre for Corporate Responsibility (ACCR) who claims that Santos refers to natural gas as a "clean fuel" and it provides "clean energy" and that these statements are misleading and deceptive, according to its press release.   The press release further states that "[Santos'] annual report fails to disclose that the extraction, processing and use of natural gas releases significant quantities of carbon dioxide and methane into the atmosphere, gases which are key contributors to climate change and global warming."

The case against Santos is part of a global and Australian trend of climate change litigation and increased regulator attention, as we have previously observed. 

Listed companies and boards are increasingly expected to report (albeit voluntarily) on climate change targets. The increasing pressure to make ambitious net zero commitments augments the risk of greenwashing and ultimately litigation for setting targets that cannot be met, as well as setting targets without the intention of ever meeting them.   As litigation risks continue to rise, investors will inevitably scrutinise corporate targets and actions – and will want to see evidence of how those targets are likely to be met.   

Steps that companies can take to minimise exposure to greenwashing risks include developing a net zero strategy that reflects the operational strategy of that company. The assumptions underlying the net zero strategy should be explained and be reasonable. Relevant decision-making should be properly documented, input from qualified advisors secured where needed, and adequate resources committed to meet relevant targets. When there are updates or setbacks to meeting those targets, that should be disclosed. When drafting net zero commitments, particular care should be taken around commitments around scope or timing, with legal assistance sought early and as necessary.

[1] Mr Noel Hutley SC and Mr Sebastian Hartford Davis, Climate Change and Directors' Duties: Further Supplementary Memorandum of Opinion (23 April 2021)

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