Investors are seeking a genuine commitment by a company towards action on climate change, and all companies must be aware that they need to avoid what is known as “greenwashing”.
There are an increasing number of possible litigants against companies making representations in this space: regulators, environmental advocacy groups, and class action litigants. In late August 2021, the Australasian Centre for Corporate Responsibility (ACCR) commenced legal action against Santos Limited in the Federal Court of Australia alleging that certain of its “green” claims are misleading and deceptive in breach of the Australian Consumer Law and the Corporations Act.
With companies under the spotlight to adhere to principles of corporate social responsibility and demonstrate a commitment to sustainability, how do companies minimise their risk of such actions?
Santos, an Australian oil and gas producer, is the first Australian listed company to be sued for making “green claims” in an annual report. The ACCR has alleged that Santos made the following misleading and deceptive claims in its 2020 annual report:
- That natural gas is a “clean fuel” and that Santos provides “clean energy”; and
- That Santos has a “clear and credible plan” for “net zero emissions by 2040” based on a method known as “carbon capture storage”, along with fuel efficiency, offsets and switching to renewables.
The ACCR alleges that the “clean fuel” and “clean energy” representations are misleading and deceptive as:
- the extraction of natural gas releases significant quantities of both carbon dioxide and methane;
- the generation of natural gas release material amounts of carbon dioxide;
- both carbon dioxide and methane being greenhouse gases that contribute to harming the environment; and
- that alternative energy sources are available that do not release any material greenhouse gases and yet Santos does not produce or intend to produce them.
Further, the ACCR alleges that the “clear and credible plan” and “net zero emissions” representations are misleading and deceptive as:
- the “clear and credible plan” is based on qualifications and assumptions which are undisclosed, particularly in relation to carbon capture storage, which is an emergent technology;
- Santos has not committed to the net zero roadmap and there are a number of decisions and actions it needs to take before establishing that commitment; and
- Santos is intending to increase its greenhouse gas emissions by expanding production at certain sites.
The ACCR is seeking declarations, injunctions, the publication of a corrective statement to its shareholders in a form drafted by the ACCR, and payment of the ACCR’s legal costs.
Current or Future: The challenge for Santos
The ACCR has challenged Santos, arguing that the various representations made are either “current” representations or further or alternately, that they are “future” representations. A lot hangs on the difference from a legal point of view. At a high level, if claims are “current claims”, the ACCR will have the onus of proving that there is not sufficient substantiation for these claims. If claims are “future” representations, Santos will bear the burden and costs of proving it had a reasonable basis for making the claims.
The law is currently developing on this topic. The Australian Competition and Consumer Commission (ACCC) has been testing this aspect of the law over a number of recent cases. Most recently, the ACCC tested this in Federal Court action against Woolworths. In that case, the ACCC challenged Woolworths’ claim that its picnicware was “biodegradable and compostable” was a future claim and therefore, that Woolworths had the onus of proof to establish it had a reasonable basis for the claim. However, the full Federal Court unanimously upheld the decision of the primary judge in favour of Woolworths that labelling its products in this way did not amount to a representation as to a future matter. The Court held that the claim was “knowable and testable” at the time the representation was made rather than being in the nature of a prediction, promise or forecast.
It will be interesting to see whether the Federal Court makes a similar finding in the ACCR’s action against Santos or distinguishes the case on the basis that parts of Santos’ claim is not knowable or testable at the time that it was made.
Guardrails you can implement to minimise legal risk in this area
When structuring claims regarding carbon emissions, you will need to consider the target market for the claims and how that claim may be perceived by that target market. If you are making claims in an annual report, your target market will be both investors in your company and potential investors as well.
You must assess the claims you intend to make before they are published using the following guardrails:
- Firstly, consider the express claims you are making and ensure that you have factual substantiation that provides the necessary support for them;
- If the express claim you are making is vague and has a number of potential meanings, you must have substantiation for all possible meanings before you can make the claim or else you need to amend the claim so that it is more precise with a meaning that is supportable;
- If a claim is scientific in nature, ensure the substantiation you have is recent, credible and represents the balance of the scientific opinion at the time the claim is made;
- If you are making future claims in the sense of the claims being predictions or forecasts, ensure that you have a reasonable basis for making them;
- If the claim is a forecast or prediction, ensure that it is consistent with your company’s sustainability roadmap;
- Include any carve outs or detail any assumptions that may impact upon achieving any part of the claim you are making;
- Keep records of the substantiation you have for all claims before you make them; and
- Lastly, stand back from all the claims you are make and consider the overall impression (or net impression the target market will take) from the claim you are making.
Please contact a member of the Competition and Antitrust group if you need any advice relating to our claims and setting up appropriate guardrails.
For businesses wanting growth that is more sustainable visit our ‘The Economic, Social and Governance Journey‘ page for practical tips and further insights.