July 2023: Heightened greenwashing regulatory intervention increases class action risk

As the global focus on sustainability intensifies, Australian companies are facing growing scrutiny and pressure to enhance their environmental, social, and governance (ESG) practices. This heightened attention has not only come from regulators like ASIC, but also from private activism seeking to hold companies accountable to their sustainability commitments and credentials. The continued rise of greenwashing intervention combined with the dynamic and evolving nature of climate change risks pose significant challenges for companies operating in Australia. ?For illustration purposes only:

• in 2021, the shareholder advocacy group Australian Centre for Corporate Responsibility commenced Court proceedings against Santos for declaratory and injunctive relief for breaches of misleading and deceptive conduct provisions within the Corporations Act and the Australian Consumer Law. The case is ongoing and the parties will return to Court on 6 October 2023 for further directions;
• since the release of ASIC's greenwashing guidance (INFO 271) in June 2022, ASIC has intervened on 35 occasions for alleged greenwashing practices, including commencing its first Court proceeding earlier this year. ?In a report published last month, ASIC noted it anticipates undertaking further enforcement action against entities in this space; and
• in 2023, two shareholders successfully obtained Court orders to inspect a bank's internal documents in order to verify the accuracy of its climate commitments.

Furthermore, as reported by MinterEllison last month, as part of the transition to net-zero by 2050, the Federal Government is currently seeking feedback on the implementation of an Australian climate risk disclosure framework, which includes proposed mandatory climate reporting standards. In addition, the Federal government is developing a sustainable finance strategy, which will include, amongst other things, further initiatives to reduce greenwashing and strengthen ESG labelling.

Heightened scrutiny from regulators (as can be predicted from, among other things, the development of a mandatory climate risk disclosure framework) and private activism increases the litigation risk for companies that fall short of their sustainability commitments or engage in deceptive practices. ?This includes potential class action risk. ?Examples of this trend already occurring include: ?

• in the United States, two investor class actions were commenced against Oatly and Danimer by shareholders who allegedly suffered loss and damage by paying "artificially inflated" prices for the defendant's shares based on the defendant’s misleading statements about sustainability; and
• closer to home, several class actions were commenced against Volkswagen in Australia, Canada and the US following the US Environment Protection Agency's announcement that it was investigating Volkswagen for selling diesel engines which allegedly polluted up to 40 times more than emission standards permitted, and what Volkswagen represented.

Although no shareholder class action has yet been commenced in Australia for alleged greenwashing practices, we expect these types of claims in the near future. While shareholder class actions arise out of many different circumstances, one such circumstance may be where an ASX-listed company's share price significantly declines following the announcement of a regulatory investigation.?We have already seen instances in Australia where this has occurred in the context of anti-money laundering.?For example, following AUSTRAC's announcement in 2019 that it had commenced civil proceedings against Westpac for alleged breaches of Australia's anti-money laundering laws, Westpac's share price declined approximately 7%.?Shortly after, a shareholder class action was commenced against Westpac. In 2017, a shareholder class action was commenced against CBA based on a similar fact pattern. ?

Of course, it does not necessarily follow that a class action will inevitably follow the announcement of a regulatory investigation:

• if the announcement is followed by a share price decline, any potential proponent of legal proceedings will need to be confident it can meet the requisite materiality, causation and loss thresholds to mount an action; and
• if the announcement is not followed by a share price decline, then plaintiffs will face the inevitable challenge in establishing causation and loss – specifically, claimants may not be able to demonstrate they suffered compensable loss that was caused by, and directly attributable to, the company's alleged greenwashing practices in circumstances where the share price has not moved or the claimants' financial position has not changed.?

As corporate Australia increasingly turns its attention to greenwashing practices, company directors continue to play a critical role. ?Directors can safeguard their companies from greenwashing allegations and help mitigate against litigation risk by continuing to: (a) familiarise themselves with the evolving industry guidelines and practices; (b) implement appropriate due diligence processes; (c) ensure that their ESG claims can be substantiated; and (d) communicate transparently with stakeholders.