Greenwashing update: ASIC comes out of the wash on top

Companies must ensure they are able to live up to their sustainability and ethical claims, or include clear qualifications in their statements, as ASIC intensifies its crackdown on greenwashing. This enforcement focus by ASIC was highlighted in the recent case ASIC v LGSS Pty Ltd [2024] FCA 587 (ASIC v Active Super) decided on 5 June 2024. The Federal Court found that Active Super had contravened the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) for misleading conduct and misrepresentations to the market as an ethical and responsible superannuation fund.

The prominence of Environmental, Social and Governance (ESG) policies and principles for companies has surged recently, reflecting the increased importance of ESG to investors. This has led to an increase in claims and marketing around companies’ ethics and sustainability. Consequently, ASIC appears to be cracking down on companies that are allegedly “greenwashing” by making ESG-related statements that could mislead a reasonable person to believing a company is sustainable and ethical, when the reality is markedly different.

In part two of our greenwashing series, we consider the implications of the ASIC v Active Super decision and provide some insights into how businesses promoting their products or services through an ESG lens can avoid being labelled a “greenwasher”. Part one of our series is available here: Greenwashing: ASIC’s move from rinse to spin cycle?

Greenwashing legislation

Whilst ASIC v Active Super is only the second greenwashing case ASIC has successfully prosecuted (the first being ASIC v Vanguard Investments Australia Ltd [2024] FCA 308 decided in March 2024), ASIC is not relying on new legislation. ASIC’s concerns stem from existing legislative sources, namely the Corporations Act 2001 (Cth) and the ASIC Act. In ASIC v Active Super, ASIC relied on well-established principles pertaining to misleading and deceptive conduct under ss 12DB(1)(a) and 12DF(1) of the ASIC Act. This case provides valuable insight as to what may constitute misleading and deceptive conduct in the context of the greenwashing of financial product investments. In the decision, Justice O’Callaghan relied on a definition of greenwashing which;

“…pertains to the misleading and deceptive disclosures employed by financial institutions to entice environmentally conscious investors into purchasing financial products that in reality, fall short of meeting the expected Environmental, Social and Governance (ESG) or green credentials.”¹

Overview of ASIC v Active Super

Facts

ASIC alleged that between 1 February 2021 and 30 June 2023 (relevant period), Active Super misrepresented to its current and potential customers that it did not make or hold investments in certain high ESG-risk investment types. In reality, Active Super held these investments both directly and indirectly. The laundry list of investment types included those generating revenue from gambling (Gambling Representations), tobacco (Tobacco Representations), oil tar sands (Oil Tar Sands Representations), or entities earning more than 33% of their revenue from coal mining (Coal Mining Representations). Additionally, Active Super stated it would divest its Russian investments following Russia's invasion of Ukraine (Russia Representations). These alleged misrepresentations were found in Active Super’s Sustainable and Responsibility Investment Policy (SRI Policy), annual impact report, product disclosure statements, website and social media, and statements made by its CEO.

Active Super denied all allegations, arguing that²:

• none of the representations ASIC relied on were conveyed;
• the representations, if made, were not made in “trade or commerce”;
• it did not engage in conduct contrary to the representations if made; and
• the representations, if made, were about future matters and Active Super had a reasonable basis for making them.

Outcomes

Justice O’Callaghan found that ASIC was entitled to make declarations regarding Active Super’s contraventions of the ASIC Act in most categories, as we outline below.³

• Gambling Representations: These were deemed a contravention, despite Active Super’s claims that they were “guiding principles”. The use of unequivocal language such as “not invest”, “No Way”, and ”eliminate” without mentioning qualifications found in the SRI Policy was considered misleading. Justice O’Callaghan found that, when reading the SRI Policy as a whole, it was “…farfetched and no ordinary reasonable consumer would ever have imagined…” that Active Super was only promising “…to use its best endeavours not to invest in gambling.”⁴
• Oil Tar Sands Representations: Save for one excepted representation, these were also deemed a breach. Like the Gambling Representations, Active Super used unequivocal statements such as “eliminate investments in oil tar sands” without qualification. Justice O’Callaghan held that such statements would mislead reasonable consumers into believing there were no investments in companies deriving revenue from oil tar sands.⁵
• Coal Mining Representations: The SRI Policy stated that Active Super “…would not actively invest in companies that derive 33.3% or more of their revenue from coal mining.”⁶ In the proceedings, Active Super’s response was that if it found out it held a contravening investment it would divest the asset, that it was not always possible to avoid a pooled fund investing in restricted companies, and that it would aim to offset any exposure from indirect investment in restricted companies. Again, his Honour determined these to be “threadbare submissions”⁷ that “fly in the face of the unequivocal statements”.⁸ Despite these submissions, according to the Court there was clear evidence of direct investment in coal mining companies during the relevant period.
• Russia Representations: Barring one exception, these were also a contravention. Despite Active Super's claims that the statements only implied an intention to not invest in Russian investments in the future, Active Super’s statements suggested to a reasonable person that it no longer had any exposure to Russian investments.
• Tobacco Representations: Justice O’Callaghan did not consider these to be misleading, as a reasonable person would not classify a company deriving 1.5% to 11% of its revenue from tobacco supply packaging as a “tobacco company”.

How to avoid being labelled a ‘Greenwasher’

Reasonable person test – what would the customer think?

The test for determining whether a statement is a misrepresentation is what a reasonable consumer (one who is unlikely to mix their reds and whites) would understand it to mean. Companies cannot justify statements using parameters and classifications created by third-party providers without specific references.

In ASIC v Active Super, Active Super made statements to the effect that it did not invest in tobacco manufacturing. When ASIC contended that Active Super’s investments in tobacco packaging made these statements a misrepresentation, Active Super relied on a research company’s classification systems which excluded packaging companies from the definition of tobacco manufacturing. Justice O’Callaghan stated that the reliance placed on the research company’s definitions by both ASIC and Super Active was misplaced. As such “[t]he relevant question is not how [the research company] has defined a tobacco company or manufacturer, but what an ordinary reasonable consumer would understand those terms to mean as they appear in the tobacco statements relied upon by ASIC.”⁹

Unequivocal and absolute language – make sure you back up your claims

Companies should avoid using absolute and unequivocal language in statements about their green and ethical standards unless they can fully support those claims. Without qualifications, such statements will be held as commitments rather than “guiding principles”.

In the proceedings, as part of its self-promotion as an ethical and green company, Active Super used such phrases like “not invest”, “No Way” and “eliminate”. It was found that no reasonable person would construe these representations as “guiding principles” when such unequivocal language was used.¹⁰ Keeping with our washing theme, this is the equivalent of describing a knit with a 95% polyester 5% cashmere blend as “cashmere” – it is unlikely to pass the pub test (and will certainly be misleading or deceptive).

Consistent qualifications – customers are not expected to go looking

If ESG statements made to consumers lack clear qualifications, consumers are not expected to search for these qualifications in other documents. The statements will be taken at face value.

In ASIC v Active Super, Active Super argued that its Gambling Representations should be understood in their relevant context which included the terms of the SRI Policy which supposedly appeared prominently on Active Super’s website.¹¹  However Justice O’Callaghan disagreed, saying if a consumer was told there was “No Way” that the company would invest in tobacco or gambling with no qualifying footnote or asterisk, the consumer would have no reason to search around for some investment policy that might qualify such statements.¹²

Future statements

Companies cannot avoid liability by claiming their ESG statements are about future matters. There must be reasonable grounds for making such claims to avoid breaching the ASIC Act.

In the proceedings, Active Super argued that its statements only indicated a future intent to divest from certain investments. However, Justice O’Callaghan held, agreeing with submissions made by ASIC’s counsel, that Active Super did not address why such statements were made or the reasoning or basis for making them.¹³ Rather, it appeared a deliberate choice to remain silent as to what steps would be taken in the future was made, which his Honour held was insufficient to meet the requirements of the ASIC Act.¹⁴

¹ Australian Securities and Investment Commission v LGSS Pty Ltd [2024] FCA 587 (ASIC v Active Super) [1].
² ASIC v Active Super [4].
³ ASIC v Active Super [237].
⁴ ASIC v Active Super [121].
⁵ ASIC v Active Super [211].
⁶ ASIC v Active Super [214]
⁷ ASIC v Active Super [220].
⁸ ASIC v Active Super [219-220].
⁹ ASIC v Active Super [180]
¹⁰ ASIC v Active Super [112].
¹¹ ASIC v Active Super [89], [92].
¹² ASIC v Active Super [116-17].
¹³ ASIC v Active Super [231-32].
¹⁴ ASIC v Active Super [231-32].