Greenwashing and the regulator’s focus – ASIC’s landmark case against Mercer super fund

date

20 August 2024

Background

ASIC commenced proceedings in the Federal Court against superannuation fund, Mercer Superannuation (Australia) Ltd (Mercer), alleging contraventions of sections 12DB and 12DF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) for false or misleading representations in relation to financial services.

The representations related to both information published between November 2021 and March 2023 on Mercer’s website, and online video content relating to seven of its ‘Sustainable Plus’ investment options. These products purported to exclude investments in companies involved in the fossil fuels, gambling and alcohol industries and were marketed to investors who ‘are deeply committed to sustainability’.

Justice Horan found that six of the seven investment options included investments for companies within industries which were represented by Mercer as being excluded.

ASIC and Mercer agreed to resolve the proceedings and jointly sought declarations of contravention together with pecuniary penalties of $11.3 million, adverse publicity orders and costs orders to the sum of $200,000 under both the ASIC Act and Federal Court of Australia Act 1976 (Cth).

Key Takeaways from Mercer

Both within Australia and globally, ESG considerations and “green” credentials have become increasingly important factors for consumers and investors to consider. The increase in demand for these types of products, as well as the possibility that some consumers will look to sacrifice financial returns to pursue “green” options and investment strategies, has incentivised Australian Financial Services Licence (AFSL) holders to supply these types of investments.

Greenwashing practices can reduce investor confidence in ESG claims, the financial services industry generally, and can undermine the efforts of businesses who are genuinely pursuing ESG goals accurately and fairly.

The Court acknowledged the increased focus by regulators, including ASIC and the ACCC, on greenwashing misconduct, and the connection to general deterrence to those in the financial services and superannuation industry. Justice Horan found that the contraventions admitted by Mercer were “serious”, and that it was important to impose pecuniary penalties which would appropriately reflect the nature of the contraventions. This would encourage a clear message for AFSL holders and other participants in the market around the importance of accuracy, compliance and diligence with respect to any of their sustainability claims and publications.

Further, Justice Horan commented on the current statutory framework relied on by regulators for the enforcement of greenwashing claims. In the absence of a specific regulatory regime for greenwashing, ASIC relies chiefly on the prohibitions contained in Subdivision D of Division 2 of Part 2 of the ASIC Act and Part 7.10 of the Corporations Act 2001 (Cth) (Corporations Act) for misleading or deceptive conduct and false or misleading representations. The principles behind these provisions are well established and were applied in a previous case brought by ASIC against Vanguard Investments - Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308.

ASIC’s Enforcement Priority

Greenwashing has remained a key enforcement priority for ASIC since 2023, with Deputy Chair Sarah Court emphasising that ASIC is “taking matters to court and pursuing higher penalties than ever before. In delivering against our priorities this year, we took action against some of Australia’s biggest corporations. And we are not deterred from taking challenging cases where legal outcomes are not guaranteed.”¹

ASIC Chair, Joe Longo, also stated in his keynote speech at the Responsible Investment Association Australasia Conference in May 2024 that "Responsible entities – and other gatekeepers in the financial services sector – have an important role to play in the fight against the kinds of misrepresentations we called out in ASIC’s Information Sheet 271 [on how to avoid greenwashing].”²

Evidently, ASIC is taking a proactive approach and closely monitoring disclosures and statements to ensure they are not misleading consumers and investors. The Mercer decision follows other cases brought by ASIC against Vanguard Investments Australia (Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308) and Active Super (Australian Securities and Investments Commission v LGSS Pty Ltd [2024] FCA 587) for misleading investment screening practices and exposure of members to investments which were claimed to have been excluded.

Implications for the Industry

It is clear that greenwashing and the accuracy of ESG representations made by organisations remains a key focus for the regulators, and therefore a critical area for companies and directors to prioritise from a risk management and compliance perspective.

Claims arising out of misleading “green” representations are likely to continue to proliferate in the Australian market, initially through regulatory actions and then likely in the civil space, particularly as the legislative matrix relevant to this area continues to mature and develop. By way of just one example, the implementation of a mandatory climate disclosure regime would impose significant reporting requirements on more than 6,000 entities under the Corporations Act.³

For the insurance industry, underwriters would be well advised to monitor regulatory and legislative changes in the greenwashing space, to ensure that they adequately price these emerging risks – particularly the significant reputational risks faced by corporations in this space, and the need for such corporations to have robust policies and procedures in place to meet the accuracy and transparency demanded by investors and stakeholders.