Greenwashing – Navigating Legal Risk in ESG Disclosure: New Insights from Herbert Smith Freehills

A new report from global law firm Herbert Smith Freehills reveals that while a majority of companies have net zero commitments in place, companies continue to come to grips with the level of additional Environmental, Social, and Governance (ESG) aligned investment and operational steps required to meet these commitments. 

The report, titled Stuck in the Middle, Unlocking ESG Investment in Australia 2024, provides an in-depth analysis of the rapidly changing ESG landscape and its impact on Australian businesses.

The report highlights the difficulties in navigating increasing ESG-related disclosure obligations and detailed, frank stakeholder engagement on ESG commitments, alongside the potential for allegations of greenwashing. Based on a survey conducted by Herbert Smith Freehills, the responses showed that 66% of respondents have net zero commitments in place, although only 32% include value chain scope 3 emissions. 

"Companies issuing forward-looking ESG and climate commitments for decades ahead, to 2050 and beyond, will be grappling with the fact that these are highly dependent on variables including government policy, technological change and economic conditions," says Mark Smyth, Herbert Smith Freehills partner. 

“Australian corporates are looking ahead to a range of incoming disclosure obligations, including climate reporting, which will require a major uplift in the level of mandatory disclosure of climate risk and transition planning. While wrapping their arms around the new disclosure regime, many have mapped or are mapping the system uplifts required. 

“We are on the edge of seismic shift, and appropriately, there will be staged implementation and a modified liability regime. 

“Australia’s incoming climate reporting regime proposes to exclude forward-looking statements on climate matters from being the subject of private litigation action – that is an important recognition of the difficulties in this space, but in practice the modified liability regime will apply quite narrowly – statements in broader investor materials won’t be covered, and it will only be in place for a very limited period of time. 

“No one wants companies to clam up in the climate discussion. We need to avoid the unfortunate consequence that is greenhushing, this will require a regime under which companies can be transparent and authentic.” 

The report underscores the risks of greenwashing, as well as equivalents in relation to social or governance performance. It emphasises the need for consistent company messaging across all platforms and jurisdictions, from formal disclosures in an annual report to social media posts and website articles.

Report findings: 

Net zero commitments – moving from talk to action

• 66% of respondents have net zero commitments in place, although only 32% include value chain (scope 3) emissions

• Of those respondents with net zero commitments, 64% are unsure of the level of additional ESG-aligned investment it will take for their organisations to meet them

Our survey finds that a majority of respondents belong to companies that have net zero commitments in place. They are now embarking on the next phase of work – operationalising these commitments and continuing to test whether they remain on track to deliver them. Of the 66% that have net zero commitments, 81% have allocated responsibility for delivery within the organisation, 68.5% have related policies and processes and 65% have integrated the commitment into business activities. 

‘E’ = more than just climate

• Environment and biodiversity is interconnected with climate change, but extends beyond it 

• 25% of survey respondents say project approval lengths are a barrier to ESG investment

The dominant ‘E’ factor in ESG is expanding beyond climate change. Broader, interconnected environmental issues include impacts on protected flora and fauna, waste and water management, contamination and amenity impacts on communities. These continue to be reputationally significant and highly visible across certain industries.