Written by Field Name
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This discussion paper addresses issues in a general context. Nothing in it should be understood as involving the provision of legal or other professional advice to any particular individual, company or circumstance. Anyone seeking such advice should contact an appropriately qualified expert.
“This new briefing makes it abundantly clear that, a company should not declare that it will operate on ‘net zero basis’ or have supply chains that are ‘slavery free’ at some future point unless there is a clear, evidence-based foundation from which it can justify the assertion of such aspirational future intentions.”
Kimberly Randle,
Fair Supply Co-founder and CEO
Executive Summary
• The self-promotion of Environmental Social Governance (ESG) credentials is now a feature of companies of all stripes.
• The public release of ESG-related information typically falls within two broad categories: The first category relates to reporting obligations to meet regulatory or compliance requirements. The second category relates to a company’s assertion of ESG credentials to attract (or, increasingly, retain) business.
• A number of existing criminal offence provisions that potentially apply to deliberate greenwashing in one or both of these categories of ESG-publication.
• ASIC’s investment-based, non-statutory definition of greenwashing describes it as: “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”.
• Companies self-reporting in the ESG space experience this conundrum – finding the balance between contributing toward solutions to these global challenges in a practically meaningful way, without a company being perceived as too readily admitting the negative contributions that its products, operations or supply chains may have made (and may still be making) to the very existence of those problems.
• There has also been a clear shift in the focus of ESG-based-critiques by public interest/civil society groups. For example, a number of recent investigations and published reports into entities’ approach to modern slavery reflect the position that it is now not so much about calling out entities simply for having an inherently high modern slavery risk profile. Rather, criticisms are now far more focused on entities not being ‘real’ (in the sense of seemingly providing less than full and frank disclosure about applicable areas of risk).
• It now appears highly likely that the next phase in the ever- evolving ESG-landscape will include a significant escalation in enforcement action by regulatory bodies. No principled reason seems to exist as to why criminal prosecutions, including in relation to individual directors, will not form the tip-of-the-sword of such a predicted enforcement wave.
• This predicted shift in regulatory focus can readily occur in Australia under present legal regimes relating to criminal offences against both companies and individuals.
PART 1: Introduction
The self-promotion of Environmental Social Governance (ESG) credentials is now a feature of companies of all stripes. It is virtually omnipresent in efforts to attract major investment for financial products and services, as a point of differentiation for superannuation funds, and even in consumer sales of everyday household items. Even the express-service envelope from a major Australian postal carrier that arrived in the letterbox today bore the prominent representation that the carrier “is committed to a sustainable future”.
The public release of ESG-related information typically falls within two broad categories.
1. The first category relates to reporting obligations to meet regulatory or compliance requirements, such as lodging an annual Modern Slavery Statement in accordance with applicable legislation, or voluntarily reporting on carbon emissions to meet preconditions for listing on an international stock exchange.
2. The second category relates to a company’s assertion of ESG credentials to attract (or, increasingly, retain) business. This covers many forms of corporate communication, including company prospectus’, marketing, promotion and public relations campaigns.
This article outlines a number of existing criminal offence provisions that potentially apply to deliberate greenwashing in one or both of these categories of ESG-publication. Despite legitimate calls for the introduction of new offence and civil enforcement provisions to specifically address the concerning trend of greenwashing, these measures are not essential to achieve appropriate enforcement in the current context. A sufficiently robust calendar of criminal offences already exists. The real issue appears to be an increased uptake in the administrative discretion to pursue enforcement through existing legal avenues, including prosecution.
Talk of enforcement by Australian regulators for greenwashing has ramped up significantly in recent times. In June 2022, ASIC published substantive guidelines and has indicated it will be an area of significant focus for the regulatory watchdog moving forward. ASIC’s release joins the already existing guide published by the ACCC. This trend is not unique to Australia. On 15 June 2022, Bloomberg published an online article titled: “The SEC War on Greenwashing Has Begun”. A specific regulatory rule proposed in late May 2022 by the U.S. Federal financial regulator, and touched upon later in this article, is currently in its public comment period.
However, rather than suggesting an imminent crackdown involving a sudden wave of enforcement action (including potential criminal prosecutions), ASIC’s present position in relation to greenwashing remains one whereby it is “still in the process of educating the market rather than enforcing rules.”
PART 2: An overview of some fundamental concepts – ESG and greenwashing
This article does not attempt to provide a comprehensive description of the international regulatory frameworks and broader market forces relating to the current boom in companies self-promoting ESG. Suffice to say, it is an area that is extraordinarily popular and financially valuable. It is, in many respects, still in its infancy.
By definition, ESG is emerging as an area of corporate practice covering a diverse range of issues. Indeed, one asserted difficulty with enforcement action is that ESG is such a broad concept that it completely eschews rigid categorisation that can provide real clarity beyond the three thematic pillars inherent in its name. A Commissioner of the U.S. Security and Exchange Commission has recently described the challenges posed by the rapid evolution of ESG in the following (somewhat tongue-in-cheek) terms:
“Imagine trying to conjure up a definition that not only met the universe of current understanding, but was flexible enough to grow to meet the hour-by- hour expansion of just what makes up E, S, and G”.
ESG generally describes a set of socially desirable factors used to measure company performance beyond traditional indicators of financial performance.
Whilst there is no definitive list of ESG principles currently prescribed by statute or other binding regulation, the following is a non-exhaustive list of some commonly included considerations under each of the three branches:
Environmental
Carbon and other greenhouse gas emissions relating to human-induced climate change; biodiversity impact; habitat destruction (including deforestation, ocean acidification and desertification); waste disposal and management; water and other natural resource consumption.
Social
The promotion and protection of human rights; modern slavery issues; supply chain transparency; labour standards; diversity and equity in the workplace (including at the executive and board levels); community relations; data stewardship and privacy; occupational health and safety in the workplace; social justice issues.
Governance
Effective corporate leadership to achieve positive environmental and social outcomes; anti-bribery and corruption measures; board structure, composition and oversight; executive remuneration; political lobbying and financial contributions.
As is clear from the above summary, several areas that fall within the broad ambit of ESG are already (and have long been) subject to specific legal regulation, including express criminal sanctions for non-compliance. Environmental protection statutes and criminal offences proscribing all forms of bribery (including on an international scale) are common examples.
Beyond these discrete areas (which primarily relate to corporate governance practices and ‘traditional’ areas of environmental concern – such as pollution and approvals), there has been a marked lack of international consensus to date regarding the best approach to ESG disclosure. This has resulted in the emergence of a relatively large number of (voluntary) frameworks for company reporting.
ASIC’s investment-based, non-statutory definition of greenwashing describes it as:
“the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”.
In the discussion relating to proposed regulatory rule changes, the U.S. SEC provides the following description of greenwashing and the context in which it occurs:
The lack of specific disclosure requirements tailored to ESG investing creates the risk that funds and advisers marketing such strategies may exaggerate their ESG practices or the extent to which their investment products or services take into account ESG factors. With respect to environmental and sustainability factors, this practice often is referred to as “greenwashing”.
PART 3: Inherent tensions with companies self-reporting in the ESG space
An open-minded individual who spent a morning reviewing the latest IPCC Reports along with the ever-mounting volume of credible scientific literature on other pressing issues impacting the imminent state of humanity’s future, but who then shifted gears in the afternoon to a random sampling of ESG-related material from any publicly-listed company in any industry would readily be forgiven for thinking that the intervening lunch break involved transportation to a parallel universe.
One will struggle to readily find examples of any company in any setting, fully and frankly admitting its likely role in contributing to such major global problems.
Accordingly, the entire ESG space is marked by a disjunct in reality whereby although the problems might be readily acknowledged by entities in abstract terms, the admission of contributing towards (directly or indirectly) the perpetuation of those problems is incomparably rarer.
This creates an understandable conundrum–finding the balance between contributing toward solutions to these global challenges in a practically meaningful way, without a company being perceived as too readily admitting the negative contributions that its products, operations or supply chains may have made (and may still be making) to the very existence of those problems.
Many companies that are genuinely engaged with these issues are no doubt acutely aware of the tightrope that must be walked between candid and appropriate disclosure of ESG related- concerns, weighed against the real risk of backlash for admitting any kind of potential (even indirect) nexus with some of the global society’s greatest problems.
These contextual issues place clear limits on the extent to which corporate ESG self-reporting will, in practical terms, actively contribute to real solutions to these major global challenges. It is also something that may only get worse as consumer demand for ESG bona fides intensifies (as it almost inevitably appears set to do). Simply put, if it becomes more and more financially damaging for companies to admit any kind of involvement (direct or indirect) in business practices that are antithetical to the goals of ESG, it will become all the more important to ensure that the regulatory environment for enforcement targets those entities that seek to conceal the true position of their activities, and their impact.
There has also been a clear shift in the focus of ESG-based critiques by public interest / civil society groups. For example, a number of recent investigations and published reports into entities’ approach to modern slavery reflect the position that it is now not so much about calling out entities simply for having an inherently high modern slavery risk profile. Rather, criticisms are now far more focused on entities not being ‘real’ (in the sense of seemingly providing less than full and frank disclosure about applicable areas of risk).
This public-interest-based focus is complementary to regulatory bodies utilising the existing enforcement regime, which lends itself not so much to ensuring statutory-mandated outcomes are achieved (which, in any event, are yet to be fully developed), but rather on targeting corporate conduct involving false or materially misleading descriptions about ESG-related issues.
PART 4: Case Study: Criminal liability for false reporting under modern slavery legislation in Australia
Of the ‘newer’ ESG concepts, one of the more regulated areas relates to an entity’s approach to the risks of modern slavery in its supply chains and operations. Australia, the United Kingdom, and California all have legislation that requires companies to report on modern slavery issues. The following discussion focuses on the Australian context.
One of the most frequently cited criticisms of the Australian Modern Slavery Act 2018 (Cth) (the MS Act), is that it is a ‘toothless tiger’. The perceived lack of a sufficiently serious enforcement mechanism, (i.e. the Act’s inbuilt potential to sanction delinquent reporting entities by publicly ‘naming and shaming’ them, as opposed to the inclusion of express criminal offence provision(s)) is a common complaint. Similar charges are levelled at equivalent legislative schemes in other countries, some of which (most notably the UK Act) have even weaker ‘enforcement’ regimes than what exists under the MS Act.
Comparison can also be made to the NSW legislation, which does contain express criminal offence provisions within its statutory framework. However, although finally operational, the NSW Act does not lend itself to apt comparison given its (ultimately extremely curtailed) operation being limited to, in effect, government bodies that exceed the prescribed annual revenue threshold.
Contrary, perhaps, to generally understood notions as to what obligations the MS Act actually places on entities, there is nothing whatsoever in its substantive provisions that require a reporting entity to take any particular substantive step(s) to address (let alone reduce) the risk of modern slavery in its supply chains or operations. It in no way mandates the taking a specific set of due diligence actions, nor does it require entities to demonstrate a certain level of progress over successive reporting periods.
Rather, the key substantive component of the MS Act requires mandatory reporting entities to publish an annual Modern Slavery Statement addressing seven mandatory reporting requirements. From a strictly legal perspective, the Act only requires that an entity provide a complete and accurate description of each of the mandatory reporting requirements.
As an extreme example, a description in an entity’s Modern Slavery Statement that it has not taken any due diligence or remediation actions during the reporting period to address identified modern slavery risks is, strictly speaking, compliant with the literal terms of the Act. Consequently, there is no real enforcement potential for an entity taking a lack of a particular type of substantive mitigatory or remedial action under the Act. Rather, the potential focus within the existing regulatory regime must be on inaccurate and misleading descriptions in Modern Slavery Statements.
This approach to enforcement is entirely consistent with addressing the broader concept of greenwashing. Namely, it proscribes an entity, through the contents of its lodged Modern Slavery Statement(s), from creating a false or misleading impression that it is more actively engaged in modern slavery risk assessment, due diligence and/or remediation activities than it actually is.
Section 137.1 of the Commonwealth Criminal Code (the Code) creates an offence for providing false or misleading information to any Commonwealth entity or official, including through material omission. The maximum penalty is 12 months’ imprisonment.
The full wording of the offence provision is as follows:
“(1) A person commits an offence if:
(a) the person gives information to another person; and (b) the person does so knowing that the information:
(i) is false or misleading; or
(ii) omits any matter or thing without which the information is misleading; and
(c) any of the following subparagraphs applies:
(i) the information is given to a Commonwealth entity;
(ii) the information is given to a person who is exercising powers or performing functions under, or in connection with, a law of the Commonwealth;
(iii) the information is given in compliance or purported compliance with a law of the Commonwealth.”
By its terms, it is clear that an individual or company who lodges a Modern Slavery Statement with the ABF knowing that any material aspect of that Statement is false, or misleading commits an offence in contravention of s.137.1 of the Code. For example, if an entity is aware that a significant modern slavery risk factor in its supply chain is the sourcing of cotton apparel that may be tainted by state-sanctioned forced labour in China, but deliberately omits to disclose the nature and extent of that known risk in its lodged statement, then this appears to squarely fall within the ambit of the offence proscribed under s.137.1 of the Code.
Similarly, as the MS Act has now been in operation for several years, an entity that includes significant commitments in a Modern Slavery Statement to undertake specified, substantive due diligence measures in an upcoming reporting period, but then fails to do so, may also fall afoul of s.137.1 if it does not clearly disclose why such stated future intentions have not come to fruition.
PART 5: Criminal liability for ‘greenwashing’ self-promotion, including ‘general’ fraud and director’s duties offences
Turning to the second (broader) category relating to companies publishing inaccurate ESG-related information for non-regulatory purposes, longstanding offences (and associated civil enforcement provisions) for misleading and deceptive conduct under the Corporations Act 2001 (Cth) and Australian Securities and Investment Commission Act 2001 (Cth)18 are a logical and appropriate mechanism for enforcement in this context. ‘General’ fraud offences relating to obtaining of benefit by deception at both the state and federal levels may also be an appropriate mechanism for the most serious and flagrant misconduct in the area of greenwashing.
An example of the former type of enforcement provision is s.1041E of the Corporations Act 2001 (Cth), which creates the following offence:
“(1) A person must not (whether in this jurisdiction or elsewhere) make a statement, or disseminate information, if:
(a) the statement or information is false in a material particular or is materially misleading; and
(b) the statement or information is likely:
(i) to induce persons in this jurisdiction to apply for financial products; or
(ii) to induce persons in this jurisdiction to dispose of or acquire financial products; or
(iii) to have the effect of increasing, reducing, maintaining or stabilising the price for trading in financial products on a financial market operated in this jurisdiction; and
(c) when the person makes the statement, or disseminates the information:
(i) the person does not care whether the statement or information is true or false; or
(ii) the person knows, or ought reasonably to have known, that the statement or information is false in a material particular or is materially misleading.”
By its terms, this offence provision, including its express inclusion of a potential ‘recklessness’ element can be seen to readily apply to instances of greenwashing where an entity uses ‘fast and loose’ language to assert ESG-credentials in its present and/or future business practices.
Authoritative legal commentary on Climate Change and Directors’ Duties has been provided by one of Australia’s leading commercial silks through a series of published legal opinions co-authored by Noel Hutley SC and Sebastian Hartford Davis in 2016, 2019 and 2021. Whilst their focus is perhaps more directed to issues of civil enforcement and risks of private litigation, the opinions also demonstrate that the existing corporate regulatory framework in Australia also provides ample scope for the potential criminal prosecution of company directors who engage in deliberate greenwashing.
Whilst primary focus to date has been directed at companies’ promoting untenable (or even just unsubstantiated) ‘Net Zero’ commitments, the relevant offence provisions are sufficiently broad to cover any kind of material misrepresentation as to a company’s actual approach to, or level of institutional awareness relating to, the full spectrum of ESG issues.
It is important to appreciate that potential criminal liability for false and misleading representations is not limited to inaccurately describing (including by omission) the past or present risks, steps in mitigation, or other approach to ESG issues that a company has taken, or is taking. Rather, future representations made publicly by companies in relation to ESG related commitments can fall afoul of enforcement provisions if those representations lack a reasonable basis at the time they are made. Simply put, a company should not declare that it will operate on ‘net zero basis’ or have supply chains that are ‘slavery free’ at some future point unless there is a clear, evidence-based foundation from which it can justify the assertion of such aspirational future intentions.
Whilst analysis to date has primarily been directed at the clear and present risks of civil enforcement and/or private litigation, there is nothing in the terms of the relevant offence provisions in the Corporations Act and ASIC Act that diminishes its potential encapsulation of the risk of criminal prosecution, albeit that one might reasonably expect such an approach to be reserved for more serious cases.
In relation to the possible temptation that directors take a ‘bury head in the sand’ approach to the most pressing ESG issues (which might reasonably be said to include climate change, modern slavery risk, and, at least in certain contexts, biodiversity loss), it is pertinent to step briefly beyond the issue of criminal liability and recall that a director has a positive duty to seek out sufficient knowledge so as to properly manage their company.
Hutley SC and Hartford Davis, in their initial opinion more than six years ago, suggested the following position on climate issues, which, in today’s context, is incomparably more pertinent, and of general application to an even wider array of recognised ESG issues:
“Accordingly, directors should consider and, if it seems appropriate, take steps to inform themselves and climate-related risks to their business, when and how those risks might materialise, whether they will impact the business adversely or favourably, whether there is anything to be done to alter the risk, and otherwise to consider how the consequences of the risk can be met. In complex situations requiring specialist knowledge, a director is permitted to and should seek out expert or professional advice pursuant to s 189 of the [Corporations Act 2001 (Cth].”
Whilst there are several other sources of potential criminal liability in relation to various greenwashing practices in certain contexts, one final area worth mentioning is the general criminal laws’ proscription of all kinds of fraudulent conduct. At its core, conduct that involves the obtaining, or attempting to obtain, any kind of financial (or other legal) benefit through conduct that is both dishonest and involves any kind of deception is a serious criminal offence.
For example, under the NSW Crimes Act 1900, the general fraud offence by false or misleading statement is sufficiently broad to cover a whole range of circumstances where individuals engage in deliberate ‘greenwashing’:
192G: Intention to defraud by false or misleading statement
A person who dishonestly makes or publishes, or concurs in making or publishing, any statement (whether or not in writing) that is false or misleading in a material particular with the intention of—
(b) obtaining a financial advantage or causing a financial disadvantage, is guilty of an offence.
Maximum penalty—Imprisonment for 5 years.
A recent case in the NSW Court of Criminal Appeal underscores, at least in a general sense, the potential breadth of application of s.192G of the Crimes Act. In Croke v R, the Court considered the sentences of imprisonment imposed upon an offender (a solicitor) who had been dealt with offences under this provision for a wide range of dishonestly deceptive representations including false statements contained in an email, made during the course of a police interview, in a tax return and statutory declaration.
Unlike other ‘general’ fraud offences, it is important to note that committing an offence under s.192G does not require that any financial advantage actually be obtained, but rather there must only be an intention by the offending individual to obtain such an advantage. This potentially resolves difficulties relating to a prosecuting authority proving a direct nexus between a deliberately false and deceptive ESG-related statement and any associated decision by a ‘victim’ to invest based on that statement. Proof of the representor’s subjective proscribed intention is, in this statutory context, sufficient.
Whilst falling well outside the scope of what might be considered ‘run-of-the-mill’ fraud offences (and likewise with the preceding offence provisions discussed above), there is little doubt that Australian prosecuting authorities are willing to use such general offence provisions to novel and previously unencountered circumstances should other considerations of prosecutorial discretion support such an approach. There is no reason to believe that statements involving deliberate greenwashing, motivated purely by a desire to gain financially, will (or should) be treated any differently.
In terms of the current Australian enforcement landscape, to date there does not appear to have been any criminal prosecutions of any kind for the practice of greenwashing.
Sentencing statistics from the NSW Judicial Commission indicate that the aforementioned offence in relation to s.137.1 of the Commonwealth Criminal Code has been prosecuted, albeit sparingly (and summarily, with an unknown factual context). Criminal prosecutions under the aforementioned misleading and deceptive conduct provisions contained in the Corporations Act and ASIC Act are significantly more prevalent, albeit by no means common.
Private consumer protection litigation commenced by the Australian Centre for Corporate Responsibility against the natural gas giant, Santos Limited, was commenced in the Federal Court of Australia on 25 August 2021. It alleges greenwashing representations of a misleading and deceptive nature in relation to claims of natural gas being a ‘clean’ energy and fuel source. The action likewise challenges Santos’ claim to have a “clear and credible” plan to achieve “net zero” scope 1 and 2 greenhouse gas emissions by 2040. Whilst subject to different (lesser) standards of proof and materially different from a criminal prosecution in many substantive and procedural respects, the case, should it proceed to a final hearing on its merits31, may provide a useful indication as to some of the potential challenges associated with criminal prosecutions for greenwashing of the kind considered in this article.
There are several examples in other countries that currently appear somewhat further down the path of criminal investigations for alleged greenwashing, as touched upon below.
PART 6: Current enforcement actions for companies allegedly engaged in ‘greenwashing’ for business-promotion purposes – an international perspective
At the end of May 2022, Reuters reported that German prosecutors had raided asset manager DWS and the headquarters of Deutsche Bank (DWS’ majority owner) in relation to allegations of misleading investors about “green” investments. Whilst, at the time of writing, publicly released information in relation to the criminal investigation was quite scant, the investigation appears to be focused on an allegation that ESG-factors have, contrary to company representations in DWS prospectuses, completely failed to be taken into account in relation to a large number of DWS’ investments.
There have also been a number of significant developments in this regulatory space in the United States.
In May 2022, BNY Mellon Investment Adviser agreed to pay $1.5 million in penalties to resolve charges that its ESG investment policies for managed mutual funds had been misleading. As with the DWS investigation, the subject greenwashing involved overly-exhaustive statements about ESG credentials. In this case, over a more than three-year period, the company had represented (including by implication) that all investments in the funds had undergone an ESG quality review, when such categorical review had not occurred ‘across the board’.
In terms of current civil enforcement investigations for alleged greenwashing in the US, it has very recently announced that the SEC is investigating Goldman Sachs mutual funds business, with a particular focus of the regulator’s inquiry likely to be into the firm’s four funds that have ‘ESG’ or ‘green energy’ in their names.
Finally, as mentioned above, on 25 May 2022, the United States’ Securities and Exchange Commission (SEC) proposed new statutory rules under the U.S. Investment Advisers Act and Investment Company Act that will require applicable entities to “provide additional information regarding their ESG investment practices”. Currently in its comment period, the nature of this amendment represents a substantial departure from the approach to enforcement that has been the focus of this article due to the proposed imposition of positive ESG reporting requirements on companies.
The SEC provides the following summary of key aspects of the amendment:
“The proposed amendments seek to categorise certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarise their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.”
Interestingly, one of the overarching reasons why an SEC Commissioner has expressed opposition to the proposed US amendments closely echoes the overarching premise of this article:
“...we already have a solution: when we see advisers that do not accurately characterise their ESG practices, we can enforce the laws and rules that already apply. A new rule to address greenwashing, therefore, should not be a high priority”.
This position, it is suggested, rings equally true in the current Australian regulatory landscape.
PART 7: Conclusion
It now appears highly likely that the next phase in the ever- evolving ESG-landscape will include a significant escalation in enforcement action by regulatory bodies. No principled reason seems to exist as to why criminal prosecutions, including in relation to individual directors, will not form the tip-of-the- sword of such a predicted enforcement wave.
This predicted shift in regulatory focus can readily occur in Australia under present legal regimes relating to criminal offences against both companies and individuals. Accordingly, legislative amendment to introduce specific offences is largely superfluous.