The Ethical Investor: Insurers kept busy as Australian regulators start cracking down on ESG greenwashing

Australian regulators ASIC and ACCC are cracking down on greenwashing
What role do insurance companies play in the ESG space?
Stockhead reached out to Hicksons Lawyers’ Partner, Persia Navidi

Australian market regulators are beginning to clamp down on companies that falsely market themselves as being ESG friendly, a practice known as ‘greenwashing’.

In recent months, corporate cop ASIC and competition watchdog ACCC have both signalled that this crackdown will be one of their biggest priorities.

ASIC took its first action against a greenwashing claim in October, fining Tlou Energy (ASX:TOU) $53,000 for making false and misleading statements to the ASX.

Tlou had falsely claimed in 2021 that electricity it produced at the Lesedi power station was carbon-neutral energy.

A week ago, ASIC took its second scalp after slapping the Australian arm of investment giant Vanguard with a $40k fine over disclosure documents.

It was alleged that Vanguard had included companies that sold tobacco in its portfolio, despite claiming that it does not invest in tobacco related companies.

“Greenwashing is not limited to environmental claims, but extends to misleading ethical propositions,” said ASIC Deputy Chair, Sarah Court.

“Entities which seek to promote ethical investing must ensure their statements are accurate and able to be substantiated.”

Meanwhile, gas giant Santos (ASX:STO) is being sued by a shareholder advocacy group, the Australasian Centre for Corporate Responsibility (ACCR), for allegedly making ‘misleading and deceptive’ claims about its carbon emissions and net zero claims.

Growing backlash

ESG issues are indeed becoming a key source of emerging liability for directors and officers.

Company boards find themselves under mounting pressure to justify their ESG commitments amid accusations of widespread greenwashing and empty promises.

There’s a growing backlash by activists and stakeholders which has escalated from corporate criticism to direct legal action against directors.

For insurers, climate exposure claims are no longer limited to fires and storms.

They’re seeing more claims being pursued for misleading and deceptive conduct by directors with regards to their ESG statements.

There are signs that these greenwashing claims will continue in coming years in Australia.

To understand this issue further, Stockhead reached out to Persia Navidi, a partner at Sydney-based Hicksons Lawyers.

Interview with Persia Navidi

Navidi works primarily with insurers in claims arising from directors’ and officers’ policies, and she has a focus on climate and cybersecurity risks.

Key areas in which Navidi assists clients include advising organisations and their insurers on managing risks around climate litigation, and preparing them for increased regulation and disclosure obligations.

*Persia Navidi, Partner at Hicksons Lawyers*

How does insurance intersect with ESG?

“The way that ESG and insurance intersect is very broad,” Navidi told Stockhead.

“Let’s start with climate, or the E aspects in ESG. There’s the physical risk of climate change such as flooding, fire and extreme weather events. So that in itself has an impact on property insurance. There is also the risk of climate-related litigation against companies and directors for “greenwashing”, which could impact directors’ and officers’ insurers.

“Then you’ve got the transition risks of climate change. That’s effectively where we are now as we transition through to a lower carbon economy.

“Regulators have made it very clear that they’re focusing on climate related disclosures and in particular greenwashing, particularly what organisations are doing on that front.

“Community and investor expectations are also shifting, and that impacts companies and directors, which in turns impacts their insurers.

“With any transition, oftentimes there are teething issues and it takes time for organisations to come on board with it. This leads to liability risks as well as the risk of litigation or prosecution.

“The trends that we’re seeing overseas and also here in Australia include an increased focus on what companies are saying, and in particular, whether it’s misleading or deceptive under the Australian Consumer Law or Corporations Law.”

Is there one greenwashing case that sticks out?

“There are countless cases overseas, and we’re seeing them here in Australia as well,” said Navidi.

“One case that has seen a lot of attention is the Santos case.

“The Australasian Centre for Corporate Responsibility commenced proceedings late last year in the Federal Court against Santos, alleging misleading or deceptive conduct in certain statements that were released publicly.

“Their pleadings have been amended a couple of months ago following the receipt of more documents from Santos. More allegations of greenwashing have now been made by the plaintiffs.

“The outcome of this case will be looked at very closely, because in many ways, it’s a bit of a test case here in Australia.

“We’ve had cases of misleading or deceptive conduct by directors before, that’s not new. But this case has a focus on the environment and in particular, greenwashing.

“So this is going to be one to watch.”

What are the biggest challenges foof companies right now?

“I think insurers, board directors and society as a whole have a lot to grapple with at the moment in terms of this ESG topic,” explained Navidi.

“One of the challenges is that the term ESG itself can sometimes lead to confusion.

“It’s been a buzzword phrase for a period of time now. But as we’ve seen, there many aspects to it – there’s the climate related risks, the social aspects, and also risks in how you govern an organisation.

“So I think one of the potential challenges is grouping them all together under one ESG policy.

“Measuring an organisation’s risk also poses a challenge.

“There are a number of companies, tools and technology out there that can give you a rating but there’s no uniformity at the moment.

“So this can be challenging both for companies’ boards as well as insurers if they’re measuring whether a company has a good ESG risk or a bad ESG risk.

“Ironically, companies that have a good ESG rating with all those statements out there are the ones who are oftentimes being targeted.

“A term I’ve heard of recently is ‘greenhushing’, which is used to describe the sentiment where organisations are now hesitant to make ESG statements because of the potential litigation risk.”

Will there be a big shift in ESG regulation, and how would that impact the insurance sector?

“The regulatory environment is definitely changing,” Navidi said.

“ASIC has made it very clear in their communications that they are targeting greenwashing. They’ve released INFO 271 which provides some guidance to organisations on how to avoid greenwashing.

“ASIC made it clear the document is out there because they’re watching. So that in itself is a shift in what regulators are doing.

“The ACCC similarly said they were conducting an extensive sweep to determine whether organisations are engaging in greenwashing.

“So these regulatory shifts are something that will have the potential to impact policyholders as well as their insurers.

But it’s not all doom and gloom, and there are ways that organisations can manage risk by applying best practice.

“They need to be aware of what regulators are doing, start taking stock of what statements they have out there, while making sure they marry up with the action being taken behind the scenes.

“At the end of the day, ESG risk is just another type of risk that insurers manage, and they’ve been doing this forever.