ESG actions a wake-up call on greenwashing

Recent court actions have marked a watershed moment in Australian corporate regulators’ stands against greenwashing and misleading environmental, social and governance (ESG) claims.

At a hearing on 8 March, Vanguard Investments Australia admitted to the Federal Court that its conduct was liable to mislead the public and that it had made false or misleading representations regarding its Vanguard Ethically Conscious Global Aggregate Bond Index Fund.

The Federal Court’s Justice O’Bryan ruled that Vanguard had contravened the ASIC Act numerous times by making misrepresentations about the screening processes applied to the fund, which were marketed as rigorous initiatives to weed out unethical investments.

The court found Vanguard made misleading claims across a range of public communications, including:

• 12 different product disclosure statements issued for the fund
• A media release promoting the ethical investing capability
• Statements published on Vanguard’s official website
• A Finance News Network interview video on YouTube
• A presentation at a Finance News Network Fund Manager Event, which was subsequently published online

What this Australian-first ruling makes clear is that companies can no longer make empty promises or exaggerated environmental and social commitments without proper substantiation.

In finding that Vanguard misled investors about a fund that held securities that most would not consider to be “ethically conscious”, the court has put all organisations on notice that Australia’s corporate regulators have little tolerance for greenwashing and will come down hard on offenders.

Following the Vanguard verdict, the Australian Competition and Consumer Commission launched proceedings in the Federal Court against Clorox Australia, which manufactures kitchen and garbage bags under the GLAD brand.

The ACCC alleges that plastic bags marketed by Clorox between June 2021 and November 2022 as containing 50 per cent recycled plastic collected from an ocean or sea did not meet that threshold.

Instead, the ACCC alleges the bags were partly made up of plastic sourced from Indonesian communities located up to 50 kilometres away from the nearest shoreline.

The ACCC is seeking declarations, penalties, injunctions, an order to implement a compliance program, corrective notices, costs and other orders.

The timing of the court actions could not be more pertinent, with proposed legislation in Australia expected to introduce new standards requiring the nation’s biggest companies to back-up sustainability claims with rigorous data and assurance processes from 1 January 2025.

By 2027, all companies with revenue exceeding $50 million, assets on hand of $25 million and 100 or more employees will be subject to mandatory reporting about their climate-related risks and opportunities.

And while the legislation has thresholds relating to company size, it is expected that smaller organisations will also be impacted, sooner than many might expect.

Other countries are likely to follow suit with increased ESG disclosure rules and enforcement given the global focus on climate change and social responsibility.

This pivotal case should serve as a clarion call for companies to treat ESG as an imperative accounting standard, not an exercise in creative marketing.

Consumers, investors, employees and the broader public are too savvy to be fooled by spurious eco-friendly platitudes.

They expect full transparency and comprehensive, verifiable actions that prove an authentic commitment to doing business more sustainably and ethically.

Here are some key takeaways for organisations:

1. Stand by your claims with hard evidence

Vanguard’s undoing was failing to apply its stated ethical screens across all investments in the fund as advertised. Companies must ensure they can back up any ESG assertions or promotional statements with solid data and processes. No more greenwashing spin.

2. Review all public communications for compliance

In addition to investment documents, the ruling covered Vanguard’s media releases, website and media statements as misleading. This means a wholesale review of all external communications including reports, marketing, advertising, and social media to identify and remedy any similar infractions.

3. Implement robust policies, training and governance

Having strong ESG policies, thorough employee training on these policies, and effective governance oversight are essential to mitigate risks. These should be treated as seriously as any other compliance requirements given the growing legal liabilities.

4. Go beyond minimum reporting requirements
   Simply checking the compliance boxes is no longer enough in this era of ESG scrutiny. Companies need to strive for best practice in holistic ESG integration, continuous improvement and authentic purpose-driven strategies.

5. View this as an opportunity for positive transformation

Rather than an ominous threat, smart organisations should embrace the Vanguard decision as a catalyst for real, lasting reforms. By getting ESG right through accountability and action, companies can enhance their reputation, relevance and resilience for long-term success.

By holding themselves to a higher standard of transparency, ethics and impact, companies can become part of the solution to the world’s most pressing challenges.

In doing so, they will earn the trust and loyalty of increasingly ESG-savvy investors, consumers, employees and communities. Authenticity builds resilience.

The choice is clear: remain mired in legacy mindsets that undervalue ESG or embrace this moment to transform business into a force for good.

The path ahead is daunting, but essential for long-term viability.

The Vanguard case has sounded the call for an ESG reckoning – and those who fail to evolve risk being headquartered in irrelevance.

To read more about greenwashing and authentically addressing ESG principles, see our whitepaper, Avoiding the pitfalls of greenwashing.