From greenwashing to greenhushing: Regulatory scrutiny dampens climate ambition

The fashion industry is among the sectors a report found had engaged in greenhushing.

South Pole's latest annual Net Zero Report released earlier this year surveyed more than 1,400 companies across 12 countries and 14 sectors and found greenhushing across nearly every major sector around the world, from fashion to technology and retail.

Of all those surveyed, more than half (58%) of those that struggled to communicate their climate plans vowed to reduce their external communications. Yet nearly half (46%) were pursuing net zero to meet customer demands and improve risk management across their supply chains (39%). 

South Pole said the data “suggests that most companies are struggling so much to adapt to new regulations and compliance schemes, and that they are no longer communicating their climate strategies and goals with confidence”.

Fear of scrutiny by investors from more than half of environmental services and oil and gas businesses was cited as another reason for greenhushing.

In a landmark case for the Australian Securities and Investments Commission (ASIC), the Federal Court ordered Mercer Superannuation to pay a $11.3 million penalty over allegations it misled investors about the sustainability of its investments. Other funds and companies have been caught out for overstating their green credentials in marketing documents. For some companies, this means pulling back environmental commitments, especially as regulators increase expectations of how companies achieve their targets.

Mandatory climate-related financial disclosure legislation that passed the Senate last month and the House of Representatives on 9 September aims to standardise reporting practices and boost transparency among large companies. The new rules that require large companies to report on their climate-related risks and opportunities is likely to promote greater accountability and accelerate Australia's progress towards its climate goals.

Greenwashing trumps greenhushing in significance

The Senate Standing Committee on Environment and Communications held an inquiry into greenwashing that focused on the environmental and sustainability claims made by companies. It covered industries including energy, vehicles, household products and appliances, food and drink packaging, cosmetics, clothing and footwear, with a report now due on 20 November 2024.

Keegan Robertson from the School of Accounting, Economics and Finance at Curtin University says in his submission to the Senate Greenwashing inquiry that “greenwashing is a much more significant issue than greenhushing”.

“Despite misleading and deceptive conduct being illegal for many decades, investigations continue to reach the same conclusion, that most businesses are doing it,” he says. “Suggesting that regulators stepping in to address this illegal behaviour is an overreach is problematic. In my opinion, they have not yet done enough.” 

A report, produced by the UN's High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities and released at COP27, gave guidelines on how businesses should operate, and how countries should be tackling these issues. Accelerating regulation was one of the key recommendations.

Robertson cautions “it’s important not to entangle the reduction of false messaging with reduced messaging about real actions being taken”.

Any significant decline in messaging is more “plausibly being driven by confusion over what constitutes correct and sufficient pro-environmental action and communication of those actions”.

Mandatory climate reporting for large businesses was a positive step, but there are concerns that a proposed three-year grace period for disclosure-related litigation “will simply permit further greenwashing”.

“In any case, mandatory disclosures would help to limit the impact of greenhushing, as consumers, investors, and regulators will be necessarily provided with information about corporate activities,” he says.

“The scope of the proposed business reporting requirements does, however, present an additional challenge to transparency as it would not cover government entities, not-for-profits, or small businesses. The risk that large businesses may continue greenwashing activities through the channels of exempt entities, such as through an affiliated non-profit entity also raises questions.”

Clear “standardised, evidence-based requirements and robust enforcements” would help us to achieve Australia’s net zero ambitions. “Clear regulations, building robust enforcement, and balancing penalties for non-compliance with rewards for best practice are the necessary steps to steer sustainability actions in Australia,” he says. 

Small business need to align with sustainability disclosures from large clients

Steve Morgan, ESG Principal at investment agency Automic Group, has found most companies he has worked with are committed to transparent reporting and favoured “progress over perfection when it comes to sustainability performance”.

He says problems arise from a lack of confidence in approach to disclosure or the “work behind the data does not support the conviction at board level in an environment with increasing regulatory activity”.

“The introduction of mandatory sustainability reporting standards provides clarity which supports action, but also establishes a clear standard of reporting, which is for many companies a step up, especially with regards to assurance,” he says. “It’s a big shift in corporate reporting, so we expect some ebbs and flows between now and when sustainability reporting becomes business as usual.”

What does this mean for small business navigating a supply chain under greater regulatory scrutiny? 

“It’s a big shift for small businesses, particularly those in industries with high sustainability risks,” Morgan says.

“Customer expectations are shifting to customer requirements, and we are seeing sustainability commitment and performance form an increasing part of procurement, tender and purchase decisions.

“So small businesses need to understand the sustainability agendas of their customers and be prepared to align and contribute to those to ensure continuity of business.”

Understanding greenwashing

Greenwashing refers to claims related to sustainability that are “false, misleading, or have no reasonable basis”, according to the Australian Competition and Consumer Commision (ACCC). Law firm Norton Rose Fulbright says greenwashing can contravene Australian consumer law prohibitions against:

• Misleading or deceptive conduct (section 18);
• False or misleading representations about goods or services (section 29); and
• Misleading conduct about the nature of goods (section 33) or services (section 34).

The ACCC updated its guidance on greenwashing as part of a broader push by regulators across the globe to also develop guidance on sustainability disclosure. Last year, the ACCC identified misleading environmental and sustainability marketing claims during an internet sweep, finding 57% of the 247 businesses made concerning claims.

Jennifer Balding, ASIC's senior manager of investigation and enforcement, previously cautioned greenwashing "erodes the trust in the market and it can lead to the misallocation of capital".

In March, ASIC won its first greenwashing civil penalty action against Vanguard Investments Australia after the Federal Court determined it had contravened the law by failing to adequately screen out certain investments against ESG criteria.

Future looking statements require reasonable grounds for representation

ASIC has said greenwashing can trigger the general prohibitions against misleading and deceptive conduct in the Corporations Act and ASIC Act. Norton Rose Fulbright warns future-looking statements “may be deemed misleading if there are no reasonable grounds for the representation”.

Under the Corporations Act, product disclosure statements must explain the “extent to which labour standards or environmental, social or ethical considerations are taken into account in selecting, retaining or realising an investment”.

Sustainability-related representations must consider:

• Is your product true to the label?
• Have you used vague terminology?
• Are your headline claims potentially misleading?
• Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?
• Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications?
• Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?
• Have you explained how you use metrics related to sustainability?
• Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?
• Is it easy for investors to locate and access relevant information?

ASIC requires careful explanation of terminology used in product statements in a push against vague phrases that are open to interpretation. “All expressions of opinion in relation to these sustainability issues need to be supported by reasonable grounds,” Norton Rose Fulbright (NRF) says.

Sustainability targets require detail such as what they are, when they will be achieved, how they will be measured and underlying assumptions. NRF advised a “health check on sustainability disclosures in case any uplift is needed”.

ASIC to take a pragmatic approach to enforcement

ASIC has encouraged companies to put in place systems, processes and governance practices required to meet the upcoming climate reporting requirements that are before parliament.

The regulator reinforced its commitment to take a pragmatic approach to monitoring and enforcing the new regime and will develop and issue guidance to help entities meet their new obligations. It will work with the government and other financial regulators to support the implementation of the regime to help companies meet their new obligations. 

ASIC will invite consultation on its upcoming guidance.

ACCC establishes internal taskforce focused on sustainability

Meanwhile, the ACCC established a new internal taskforce focused on sustainability that will “build…expertise, inform and coordinate [the ACCC’s] efforts across the agency”. It developed eight principles for “trustworthy environmental and sustainability claims” to help establish what constitutes greenwashing. They include:

• Make accurate and truthful claims
• Have evidence to back up your claims
• Don’t 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
• Be direct and open about your sustainability transition.

The maximum penalty for making false or misleading representations in the promotion of goods or services is the greater of $50 million, three times the value from the breach, or (if the value cannot be determined) 30 per cent of the company’s turnover during the period of breach. In addition to the financial penalties, serious reputational damage is a major risk.