What is Greenwashing?
Greenwashing refers to the practice of using misleading information or data to misrepresent the environmental performance of a company, or to create the illusion of a product or service being more sustainable than it truly is.
Greenwashing is becoming a high priority for the businesses and the regulators in Australia, as evidenced by the increasing number of legally challenged greenwashing cases. This reflects the growing concern surrounding misleading environmental claims by businesses.
This article will examine the financial reporting issues related to greenwashing, including how companies may manipulate or unintentionally misrepresent their environmental efforts in their financial reports. We will further explore the impact of greenwashing on investors and discuss ways to improve transparency and accuracy in sustainability reporting.
Why are we concerned about “greenwashing”?
Greenwashing distorts essential information that investors and other stakeholders may need to make informed decisions. This can undermine investor confidence in sustainability- related markets, influencing decisions grounded in the longer-term sustainability of investments, causing misalignment with environmental and social values.
By providing misleading information relating to sustainability initiatives, practices and/or products, they risk exposing the company’s reputation, and attracting regulatory attention and fines.
Following are some of the common examples of greenwashing: Both the Australian corporate regulator ASIC and the ACCC have publicly announced that addressing greenwashing activities is a key focus of their enforcement efforts.
The Australian Securities and Investments Commission (“ASIC”)
ASIC has placed significant focus on tackling greenwashing activities in the market. This is evident from the escalated level of action taken by ASIC against companies engaged in greenwashing activities. In addition, ASIC has expanded its surveillance and enforcement activities related to greenwashing.
In May 2023, ASIC provided an update to the market regarding its recent greenwashing actions, including a short report detailing the interventions in relation to greenwashing surveillance activities from 1 July 2022 to 31 March 2023. A total of 35 interventions were taken by ASIC in response to greenwashing cases. These interventions encompass activities aimed at identifying potential misleading marketing and instances of greenwashing by various entities.
The key interventions are summarised as below into four major categories, including the details of the related enforcement activities:
It is important to highlight that all the above enforcement actions are publicly disclosed in ASIC media releases, resulting in a substantial damage to the reputation the entities within the industry.
Following the publication of the greenwashing interventions report (Report 783) in May 2023, ASIC has maintained its pursuit of enforcement actions against greenwashing cases. This involves initiating civil penalty proceedings against entities accrued of engaging in misleading practices and misrepresentation of their environmental, social, and governance claims to the markets.
Furthermore, ASIC has released Information Sheet 271 outlining the details of the measurements in preventing greenwashing when offering or promoting sustainability related products. This includes the information addressing greenwashing concerns, outlining the current regulatory setting for communications about sustainability-related products and highlighting the required consideration when offering or promoting sustainability-related products.
The Australian Competition & Consumer Commission (“ACCC”)
The ACCC is actively targeting greenwashing, warning that businesses that provide false and misleading claims on the climate benefits of their products or activities undermine consumer trust and confidence in the market.
ACCC has reviewed 247 company websites across a range of targeted sectors, including energy, vehicles, household products and appliances, food and drink packaging, cosmetics, clothing and footwear. Based on the outcome results, it shows that 57% of businesses were identified for making concerning statements about their environmental credential.
Following an internet sweep that revealed a majority of the companies had made troubling assertions about their environmental credentials, ACCC announced its intention to investigate multiple businesses for possible greenwashing.
Furthermore, the ACCC issued its draft guidance for businesses making environmental and sustainability claims. The guidance – “Environmental and Sustainability Claims” outlines the good practices principles for business in helping them comply with their obligations under the Australian Consumer Law.
Where the regulators detect any potentially misleading disclosures in the market, they take appropriate regulatory action to address the matter. The intervention can vary from securing timely corrections to issuing public infringement notices, or even commencing civil penalty proceedings.
How can we prevent greenwashing?
To prevent greenwashing in reporting, it is important for entities to establish an effective internal control system and processes to measure sustainability indicators. This includes an action plan to accurately capture and report the information to stakeholders. It would ensure transparency and integrity in a company’s sustainability reporting practices in providing a more accurate and credible image for the sustainability efforts to the market.
The International Ethical Standards Board for Accountants (IESBA) is an independent global standard-setting board at the forefront of ethics standard-setting for professional accountants. IESBA has identified the following factors that could contribute to prevent greenwashing, which are:
- The integrity of the reporting framework, if any, and the company’s compliance with the framework
- Availability and quality of corporate sustainability data
- Integration and connectivity between the financial and non-financial sustainability information.
- Understanding of the control environment, especially of the information technology systems.
- An adequate control environment, including governance and oversight arrangements that have kept pace with internal and external developments.
- Incentives and opportunities (e.g., financial, or reputational) to promote more sustainability-aligned products, or to promote the business as being aligned to sustainability goals and trends.
Given the factors discussed above, an effective internal control process and control environment are crucial infrastructure for a company to prevent greenwashing in reporting.
In practice, entities can also implement specific measures to reduce the potential for greenwashing claims. This could begin by internally promoting ESG education and raising awareness about the risks associated with greenwashing; and further establish the ESG governance to integrate the risk management procedures and controls.
Consequently, addressing the threats posted by greenwashing in reporting would have a positive impact on the overall corporate governance and accountability in the market. By promoting transparency and accuracy in sustainability reporting, companies would be held accountable for their environmental initiatives and actual sustainability efforts.
Future Goal – Moving toward sustainability reporting.
There is a growing demand from investors for the implementation of sustainability reporting requirements regulation, particularly from the younger demographic group. In Australia, the government is discussing implementing mandatory climate-related financial disclosure requirements.
In accordance with the climate-related financial disclosure’s second consultation paper issued by the Treasury, the proposed timeline of the climate-related reporting requirements would be applicable in 2024 – 2025 for large business (the first phase of reporting requirements). Smaller entities would be phased in over the following three years.
The proposed requirements would be phased in over three years, with full application of the mandatory reporting for all group of reporting entities from the 2027 – 2028 reporting year onwards. The second consultation paper was released in June 2023. At present, the submission has been closed and the consultation is in the review process.
ESG, stands for “Environment, Social and Governance”. It is a framework that is used to evaluate the sustainability and ethical impact of an organisation and to capture and disclose all the non-financial risks and opportunities, both qualitatively and quantitatively.
The recent publication of the newly introduced IFRS Sustainability Disclosure Standards – IFRS S1 and IFRS S2 marks a significant milestone in achieving the need for investor-focused substantiality reporting. These standards provide a framework to standardise the reporting requirements, aiming to promote more substantial and consistent reporting practices.
- IFRS S1 provides guidance on identifying sustainability-related risks and opportunities, and the relevant disclosures in relation to sustainability related risks and opportunities.
- IFRS S2 covers climate-related disclosures that are centred around the consideration of governance, strategy, and risk management of their business.
IFRS S1 and IFRS S2 are becoming effective for annual reporting periods commencing on or after 1 January 2024, with the option for early adoption permitted. Equivalent Standards have not yet been issued in Australia but are expected soon. The introduction of these standards indicates that the climate-related financial reporting might soon become a mandatory reporting requirement for Australian entities.
For more detailed information about sustainability matters, please visit here – Why acting now is important: What does IFRS S1 and S2 mean for you?
GET IN TOUCH
For further information about the sustainability reporting requirements, please contact your local RSM adviser.