In reality, they were investing in 15 companies involved in the extraction or sale of fossil fuels, including BHP Group and Whitehaven Coal; 15 alcohol companies, including Budweiser Brewing Company and Heineken; and 19 gambling companies, including Las Vegas casino owner Caesar’s Entertainment and Tabcorp.
This divergence between Mercer’s claims and reality prompted the Australian Securities and Investments Commission (ASIC) to launch court action alleging greenwashing against the investment company.
It’s likely to be the first of many court actions in Australia against greenwashing, whereby a company makes an exaggerated, false or unprovable claim about its environmental or social credentials.
Regulators are growing increasingly concerned about the practice and have put it at the top of their “to do” list for 2023. Greenwashing is also at the top of the Australian Consumer and Competition’s list for 2023.
There are several downsides to greenwashing.
The first and most obvious is that consumers don’t get what they’re told they’re getting, be it a green investment product or something like a car promoting sustainable features.
There is also the competitive element. In an era where companies are increasingly seeking sales and investment based on their environmental credentials, it is unfair for a company to get a leg up over its competitors based on false claims. In fact, quite a few of the public referrals ASIC receives in relation to greenwashing come from companies dobbing in their competitors.
It also risks distorting the allocation of capital. Investors are increasingly looking to back companies with low carbon emissions, or at least a credible plan to work towards net zero. And in future, disclosing their carbon footprint and what they’re doing to reduce it will be the minimum standard when companies are seeking loans, investment or insurance.
ASIC argues greenwashing erodes investor confidence in the market for sustainability-related financial products and corporate strategies. It also corrodes fair and efficient markets.
At the same time as ASIC is warning against greenwashing, regulators and standards setters around the world are working on plans for companies to comprehensively disclose their carbon emissions and their plans to transition operations to low or zero carbon.
Efforts by the International Sustainability Standards Board (think environmental accounting standards setters) and the Australian Treasury will ultimately require Australian companies to report all of their carbon emissions.
That will be comparatively simple when it comes to Scope 1 and Scope 2 emissions. Scope 1 emissions are those a company produces from its own factories or vehicles. Scope 2 emissions are produced from the electricity the companies use.
The difficulty will arise with Scope 3 emissions. These are emissions generated by its customers and its suppliers. For instance, if a company bought steel to use to construct bridges, it would need to know the emissions profile of that steel.
Scope 3 emissions are a major part of a company’s greenhouse footprint. Research from not-for-profit UK climate group Carbon Trust shows that for most companies, Scope 3 emissions represent between 65 and 95 per cent of a company’s broader carbon impact.
Gathering information for Scope 3 emissions risks becoming a very unwieldy process, particularly for companies with hundreds, thousands or tens of thousands of suppliers and customers, although, fortunately, it’s likely they’ll only need data from the largest. And there will be questions about the robustness of the data supplied if the customers or suppliers are in countries which don’t have the same robust corporate and accounting rules as Australia.
Nonetheless, the new reporting requirements will play an important role in helping the global economy towards net zero.
Once companies start reporting their Scope 3 emissions, investors will put more focus on them and start taking them into account in their decisions about where to allocate capital. In turn, this will push companies to put pressure on suppliers to reduce their emissions. Those suppliers who don’t will find themselves losing customers.
With the introduction of the new disclosure requirements in the next couple of years and regulators’ focus on greenwashing, executives and directors will have to ensure they disclose enough information to the market while making sure data is accurate and verifiable. In the case of forward-looking statements about their net zero plans, they’ll have to ensure information is realistic and based on credible assumptions.
All of this is possible, but it will require a lot more care and diligence than the way corporates have traditionally exercised.
And instead of the marketing department casually throwing around words such as green, sustainable or environmental, it will be the company’s accountants and lawyers who decide if and when they can be used.
