The Federal Court has ordered Mercer Superannuation (Australia) Limited (Mercer) liable for pecuniary penalties totalling $11.3 million, for misleading consumers about the nature and characteristics of financial services that it offered through seven different "Sustainable Plus" investment options (Sustainable Plus Investment Options).
This landmark case is the first greenwashing case that the Australian Securities and Investments Commission (ASIC) has brought before the Federal Court and is the highest pecuniary penalty ordered by a court for greenwashing. It also emphasises the importance of ensuring that accurate environmental, social and governance (ESG) claims are made, given the regulatory scrutiny that such claims are likely to attract.
Background
Over four different periods between 12 November 2021 and 1 March 2023, Mercer made various representations on its website and in a video (published on its website, Vimeo and YouTube) that its Sustainable Plus Investment Options excluded investments in companies involved in, or deriving profit from (excluded industries):
- the production and sale of alcohol
- gambling
- the extraction or sale of carbon intensive fossil fuels.
However, these representations were misleading because six out of seven of the Sustainable Plus Investment Options invested in the excluded industries, and Mercer's investment policies also permitted such investments.
Judgment
Mercer admitted to contravening sections 12DB(1)(a) and 12DF(1) of the Australian Securities and Investments Commission Act 2001 (ASIC Act) by making representations that were false or misleading and were liable to mislead the public in relation to financial services.
Mercer agreed to resolve the proceedings with ASIC by way of jointly sought declarations and an agreed penalty, adverse publicity orders and costs orders.
In summary, the Court held that:
- Mercer's conduct amounted to "greenwashing", which involves making false or misleading environmental or sustainability claims to make a company appear more environmentally friendly, sustainable or ethical and induce consumers to purchase its products or services, or invest in a company
- the contraventions admitted by Mercer were serious, and they arose from its failure to implement adequate systems to ensure that these ESG-related claims about its Sustainable Plus Investment Options were not false or misleading, despite the fact that Mercer had access to regular reports from which it was able to determine whether the Sustainable Plus Investment Options were invested in companies involved in, or deriving profit from, the excluded industries
- the ESG claims made by Mercer were absolute and unqualified, such that any exposure to the excluded industries made those claims misleading.
The Court was asked to determine the pecuniary penalty that Mercer be ordered to pay. The maximum penalty for a single contravention of sections 12DB(1)(a) and 12DF(1) of the ASIC Act is between $20.5 million and $22.4 million. However, the parties jointly submitted that Mercer should be ordered to pay a pecuniary penalty of $11.3 million.
The Court agreed to the proposed pecuniary penalty of $11.3 million on the basis that:
- it was within the acceptable range and was appropriate
- whilst it is well below the statutory maximum, the penalty was substantial and not immaterial, relative to Mercer's net assets and profits
- the penalty was also mitigated by Mercer's cooperation during the proceedings, and the remedial and corrective action taken by Mercer to prevent future contraventions
- the penalty will provide a deterrent to Mercer and any other financial service providers against engaging in similar conduct in the future.
In summary, Mercer was ordered to:
- pay a pecuniary penalty of $11.3 million
- publish an adverse publicity notice on the sustainable investments page of its website alerting consumers of the "contravening conduct"
- cover ASIC's costs for the proceeding, in the agreed sum of $200,000.
Why businesses need to watch out for greenwashing
In making the above findings, the Court provided some useful commentary on greenwashing and why it is important for businesses to ensure that these matters are properly addressed:
- "Greenwashing practices have the potential to reduce consumer confidence in environmental, social and corporate governance (ESG) claims, which undermines the efforts of businesses that are pursuing ESG goals accurately and fairly. In addition to harming consumers by depriving them of information relevant to making choices in accordance with environmental, social and ethical values or objectives, false or misleading ESG claims may confer unfair competitive advantages on companies in marketing their financial products and services"
- "Greenwashing has been identified as a key regulatory and enforcement priority by regulators, including ASIC and the Australian Competition and Consumer Commission. The Senate Standing Committee on Environment and Communications is currently conducting an inquiry into greenwashing, with its report due by 20 November 2024"
- "There has been a substantial increase in recent years in demand for investment products focused on ESG considerations, both in Australia and globally. A significant and increasing number of Australian consumers take into account 'green' claims and credentials and ESG considerations when making investment decisions, and some are willing to sacrifice returns on their investment in order to pursue an investment strategy that emphasises or prioritises ESG considerations. Such ESG considerations are not limited to carbon intensive fossil fuels, and include exposure to gambling and alcohol companies."
- "Because of this growing demand, there is a strong incentive for AFSL (Australian Financial Services Licence) holders to supply investment products that focus on ESG considerations, and to promote the ways in which their investment products emphasise ESG considerations."
How to avoid making greenwashing claims
Our article "Greenwashing unsustainable following ASIC and ACCC enforcement action: How your business can stay off the regulators' radar" sets out practical tips for companies and businesses to stay off the regulators' radar and avoid making greenwashing claims.
Some of these tips include:
- ensuring that ESG claims are clear and specific, avoid using vague language (such as "green") to describe products or services and be wary of which standards businesses rely upon to substantiate their environmental claims
- ensuring that ESG claims are properly substantiated with documented evidence and that they maintain adequate records of this evidence if the regulator ever comes knocking
- being transparent by publishing information about the types of materials used and how they are sourced, product durability and repairability, energy use and emissions, water usage and pollution, as well as relevant labour, environmental, social or ethical standards or considerations
- collaborating with reputable third-party certification bodies. However, if businesses do obtain certification, they should still be careful not to misrepresent the certification's meaning or significance.
Key takeaways from the Mercer decision
- Greenwashing has been identified as a key regulatory and enforcement priority by regulators including ASIC and the Australian Competition and Consumer Commission and there is likely to be a rise in ESG-related investigations.
- The Mercer case is a landmark ruling for ASIC and sets a strong precedent for the financial services industry, demonstrating ASIC's commitment to addressing greenwashing behaviour.
- This case highlights the critical need for companies to ensure that any ESG-related claims are accurate to avoid the risk of misleading consumers.
The judgment can be viewed here: Australian Securities and Investments Commission v Mercer Superannuation (Australia) Limited [2024] FCA 850
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.