As regulators target greenwashing, SMEs must take notice

Regulators are turning up the pressure against greenwashing in cases that have largely targeted the top end of corporate Australia, but small and medium enterprises (SME) need to pay attention as this groundswell will soon be lapping at their doorsteps.

The rise in popularity of Environmental, Social, and Governance (ESG) reporting has brought about a significant shift in the way companies approach their non-financial disclosures. However, with this increased focus on ESG reporting comes the risk of companies providing misleading or false information.

This not only undermines the purpose of ESG reporting but can also have serious legal and reputational consequences for companies. The problem of greenwashing is clearly widespread, with a sweep of 247 companies  investigated by the Australian Competition and Consumer Commission (ACCC) finding more than half exaggerated their environmental claims.

The Australian Securities and Investments Commission (ASIC) has taken a proactive approach in addressing this issue, emphasising the importance of clear and accurate reporting by companies.

The regulator states that ESG disclosures must be based on reliable and verifiable data, and that companies must disclose any assumptions or limitations in their reporting.

To make this more concrete, ASIC has issued guidance for companies on their ESG disclosures, including their policies and practices relating to climate change, social issues, and governance. The watchdog has also highlighted the importance of businesses having robust internal controls and processes in place to ensure accurate reporting and external assurance of ESG information by an independent third party.

Moreover, ASIC has shown its willingness to take enforcement action against companies that provide misleading information in their ESG reporting.  Most recently, ASIC is acting against Mercer Pension Fund based on claims it has allegedly misled and exaggerated information to members about the sustainability of its business investment options.

Whilst more up-to-date figures are yet to be published, ASIC’s enforcement update for July to December 2020 showed a 64 per cent increase in civil penalty proceedings.

In October last year, ASIC took its first action for ‘greenwashing’ against listed energy company Tlou Energy, which paid a total of $53,280 in order to comply with four infringement notices issued the previous year after it allegedly made false or misleading statements regarding their sustainability credentials to the ASX.

Tlou had claimed that its production of electricity would be carbon neutral, that it had the approval and capacity to generate a percentage of their electricity from solar power, and that its gas-to-power project would be ‘low emissions’. Overall, Tlou’s commitment to delivering ‘clean energy’ through renewable sources was not as strong as the company claimed it was in relation to its commitment to gap-to-power project.

In a separate incident, last year Australia's Environmental Protection Authority (EPA) fined Cleanaway Waste Management (ASX: CWY) more than $600,000 in the Land and Environment Court for two water pollution offences related to the Mongolo River in NSW. The case highlights the importance of accurate and reliable ESG reporting, and the risks and repercussions that companies face if they provide misleading and inaccurate information in this area.

Though clearly targeting large corporations, the trend towards clarity and accuracy in ESG reporting will have an impact throughout the business-to-business landscape and have an impact on Small and Medium Enterprises (SME), especially those who operate as suppliers of corporations and government entities.

The reality is that the social and environmental impact of a large corporation is mainly found in its supply chain, with roughly 80 per cent of greenhouse emissions being produced by a company's suppliers, according to a McKinsey report. This means that smaller entities have a key role to play in ensuring large corporations reach their ESG reporting targets.

The pull towards greater transparency is evidenced in the rise in ESG credentials and those who work towards them. The concern for having the right ESG credentials is evident in rise of companies SMEs applying for certifications such as B-Corp. Further, AI Platforms like Givvable are increasingly being used by large corporations to track the credentials of their suppliers with a view to setting targets for business continuity and the license to operate.

As smaller companies gravitate towards a greener, rights-based, and transparent mode of operating, it is important that they understand what is important to their corporate clients in terms of ESG reporting, and arm themselves to ensure agility, resilience and preferences.

Key actions include developing the right governance framework with a robust policy portfolio and awareness training program that informs business strategy, the sourcing of goods and services, the use of energy, and the management of water and waste.

Smaller companies would also do well to understand their business ecosystem and how they fit within the business landscape of the future. Whilst the realm of ESG reporting is a complex and in many ways still emerging throughout all sectors, by starting today and taking credible and concrete steps, smaller companies will position themselves as the preferred suppliers of tomorrow.

In summary, the focus on ESG issues continues to grow, and companies that provide accurate, clear and reliable information in their ESG disclosures are likely to be seen as more trustworthy and responsible by investors and other stakeholders. Companies that are transparent and take the necessary steps in this regard can reduce the risk of legal ramifications and reputational risks but also enhance their overall credibility and reputation.