Greenwashing is the practice of portraying a company or product as being more environmentally and socially friendly than it is.

Sustainability statements, whether incorporated into a disclosure document such as a prospectus, notice of meeting, annual report, or as an announcement, must be based on reasonable grounds at the date the statement is made.

When making a forward-looking statement – that is a statement about the future like a net-zero target – the reasonable grounds, being the data and assumptions underpinning the statement, may also need to be disclosed.

Late last year, ASIC issued a warning to mining and energy firms that ‘net-zero’ statements needed to be based on reasonable grounds to ensure they are not misleading.

In June 2022 the regulator issued a further statement and an information sheet on how to avoid greenwashing for superannuation and managed funds and when promoting sustainability-related products.

The ASX and greenwashing

The ASX has now made it clear that it is on the hunt for greenwashing.

The regulator has warned companies against using market disclosure to make unnecessary or misleading statements that overstate green credentials such as climate and emission reduction achievements.

These statements are often designed to attract ethical investors by over-representing the company’s ESG efforts, targets, or position.

The Australian Institute of Company Directors (AICD), published an article ‘Beware the risk of greenwashing’ off the back of Santos making global headlines as the first company in the world to have legal action taken against them for greenwashing, by one of its own shareholders.

According to the article, Santos’ claim that natural gas is a ‘clean fuel’ is being challenged, along with their claim to have a credible pathway to net zero-emissions by 2040.

Interestingly, an update to this is that the EU has just voted to allow natural gas and nuclear energy to be labelled ‘green investments’

Companies need to be able to credibly support all sustainability statements, including any net zero targets, and before disclosure should ask whether the information is accurate and complete.

When making disclosures you must ensure the supporting evidence is maintained and up to date.

ESG data is dynamic and must be properly recorded, managed, monitored, and in a disclosable form.

Even though sustainability and ESG disclosures may be new to many directors, the rules that govern disclosures are the same.

Public statements around sustainability and climate change are being increasingly scrutinised by a growing number of ‘active’ stakeholders – including in Santos’ case regulators and shareholders but also investors, community, and employees.

The risks are both financial and reputational; losing customers and the growing number of companies looking to support the green economy with ‘sustainable’ alternatives should be considered significant risks.

Activating your sustainability journey

Part of the challenge for many companies is understanding where to start. At BDO, we recommend that companies understand their ESG baseline, which aims to identify non-financial material risks across an organisation. This process includes understanding the carbon footprint of the business, which is essential to understanding how a business can reach net zero.

In brief, the process would be:

• Activate your sustainability program by establishing your ESG baseline in line with a globally recognised framework. From an ‘environment’ perspective, this will include your carbon or greenhouse gas (GHG) footprint.
• Develop a decarbonisation or climate risk strategy that would define the strategic and tactical pathway to net zero.
• Continuous improvement is what stakeholders will want to see. Ensuring the veracity of any report disclosure, companies must demonstrate that sustainability is being incrementally embedded across the organisation via targets or KPIs, and reported and disclosed annually, alongside financial reporting.

Authenticity is key to avoid greenwashing

It’s important to recognise that sustainability and ESG reporting is not marketing. Rather, it is a technical disclosure that reports against a chosen sustainability reporting standard to inform investors, suppliers, and interested parties on a company’s current position on ESG and sustainability strategy and compliance. Companies looking to rebrand into sustainable businesses will need to invest in strategic, measurable steps on their sustainability journeys before it can become a promotional tool.

Contact one of BDO’s sustainability experts to understand how we can help your organisation on your sustainability journey.

This article is a version of one first published at www.bdo.com.au on 14 June 2022.