As pressure grows to achieve net zero by 2050, organisations need to know how regulators are investigating and enforcing ‘greenwashing’. It’s also imperative to understand how the next generation of sustainability reporting standards are being developed, and what they’ll mean.
In October 2022, ASIC took its first formal enforcement action for greenwashing and issued penalties against ASX-listed Tlou Energy Limited (Tlou).
In the same month, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) published its fifth annual status report (TCFD Status Report), which confirms the usefulness of climate reporting to investors and stresses that more urgent progress is needed to improve transparency on the actual and potential impact of climate change on companies.
Global sustainability standards are not standing still, either. The International Sustainability Standards Board (ISSB) is continuing to develop its draft standards, and the Task Force on Nature-related Financial Disclosures (TNFD) consulting on the third version of its draft nature-related disclosure framework, which is expected to be finalised in September 2023.
Australia has also moved two steps closer to mandatory climate disclosures, with Treasury currently consulting on key considerations for the design and implementation of the Government’s commitment to standardised, internationally-aligned requirements for climate disclosures in Australia, as well as draft legislation to empower the Australian Accounting Standards Board (AASB) to deliver sustainability standards.
ASIC has commenced enforcement action for greenwashing
Two recent ASIC actions against alleged greenwashing confirm it is a current ASIC enforcement priority.
Tlou
On 27 October 2022, ASIC announced that it had taken its first action for greenwashing against listed energy company Tlou.
Tlou was required to pay a total of $53,280 under four infringement notices issued by ASIC over concerns about alleged false or misleading sustainability-related claims made to the ASX in October 2021. The infringement notices were issued in relation to statements and images contained in two ASX announcements made by Tlou which claimed that:
- electricity produced by Tlou would be carbon neutral
- Tlou had environmental approval and the capability to generate certain quantities of electricity from solar power
- Tlou’s gas-to-power project would be ‘low emissions’ and
- Tlou was equally concerned with producing ‘clean energy’ through the use of renewable sources as it was with developing its gas-to-power project.
ASIC was concerned that Tlou either did not have a reasonable basis to make the representations, or that the representations were factually incorrect.
ASIC confirmed in the Tlou announcement that it was currently investigating a number of listed entities, super funds and managed funds in relation to their green credential claims.
Vanguard
On 2 December 2022, ASIC announced that it had issued three infringement notices to investment manager Vanguard Investments Australia Ltd (Vanguard) for alleged greenwashing. ASIC was concerned about product disclosure statements that claimed to prevent investment in companies involved in significant tobacco sales, where the screen applied by the funds excluded manufacturers of cigarettes and other tobacco products, but not companies involved in the sale of tobacco products. Vanguard was required to pay $39,960 under the infringement notices.
In the announcement, ASIC also remined readers about its published information sheet on how to avoid greenwashing when offering or promoting sustainability-related products or otherwise making sustainability-related claims.
TCFD Status Report
While the TCFD is encouraged by companies’ progress in disclosing climate-related financial information in line with the TCFD recommendations and the increased support of regulators in developing laws, rules and standards on disclosure, it remains concerned that not enough companies are disclosing ‘decision-useful’ climate-related financial information. It says the lack of useful disclosure may prevent investors, lenders and insurance underwriters from accurately assessing and pricing climate-related risks.
Of particular note in this year’s TCFD Status Report are the case studies relating to board oversight of climate-related issues. Key takeaways from the case studies include:
- the effective management of climate-related issues generally requires the engagement of a wide range of stakeholders from across the company. Defining key roles and responsibilities early in the process is important when engaging multiple functions;
- companies should consider leveraging public disclosures of peers and other types of companies when developing and enhancing their climate-related financial disclosures; and
- companies in jurisdictions where climate-related financial disclosures may or will become mandatory should begin preparing as early as possible and disclosing available information.
Movement towards mandatory disclosures for Australia
The ISSB’s consultation on its two exposure draft standards ended in July 2022. Since then, the ISSB met in November 2022 to redeliberate the proposals received during the consultation period on each exposure draft. At this meeting, the ISSB made a number of tentative decisions, the key decisions being:
- in relation to climate-related disclosures, companies would be required to assess their climate resilience using a method of climate-related scenario analysis that aligns with the company’s circumstances; and
- in relation to sustainability-related disclosures, amending the draft standard to allow companies to consider the Climate Disclosure Standards Board’s Framework in identifying both sustainability-related risks and opportunities and in preparing disclosures about those risks and opportunities.
Australia’s Council of Financial Regulators (CFR), the coordinating body for Australia’s main financial regulatory agencies – APRA, ASIC, Treasury and the RBA – provided a joint comment letter on the ISSB’s standards, expressing broad support for them. The letter also included some specific areas the CFR considers may benefit from further consideration as the ISSB finalises the standards, including transitional and phasing arrangements, application to smaller entities, the need for clear and consistent definitions and guidance and whether field testing of industry-based disclosures may assist.
In the meantime, Treasury is currently consulting on:
- a consultation paper released on 12 December 2022 seeking views on:
- key considerations for the design and implementation of requirements for disclosure of climate-related financial risks and opportunities in Australia; and
- changes to ensure the financial reporting framework is fit for purpose to support climate disclosures.
- draft legislation released on 28 November seeking to empower the AASB to make sustainability standards and the Auditing and Assurance Standards Board to make auditing and assurance standards for sustainability purposes. This would allow the AASB to make non-binding sustainability reporting requirements aligned with the standards under development by the ISSB.
The deadline for submissions is 17 February 2023, and 16 December 2022, respectively.
Movement towards nature / biodiversity disclosures continues
In November 2022, the TNFD released the third version of its draft nature-related risk management and disclosure framework. The latest draft:
- expands upon existing disclosure requirements by incorporating dependencies and impacts on nature alongside risks and opportunities for the entity; and
- includes draft guidance on target-setting developed with the Science Based Targets Network and draft disclosure guidance for financial institutions.
The TNFD expects to release a final draft of the framework in March 2023 and to release its final recommendations in September 2023.
The release is a helpful reminder for directors to ensure they’re considering emerging risks, including nature-related risks, and have appropriate governance frameworks in place for identifying and managing material emerging risks.
