A High Price for False Sustainability

In the recent decision of Australian Securities and Investments Commission v Mercer Superannuation (Australia) Limited 2024 [FCA] 850, the Federal Court of Australia issued a landmark decision on greenwashing marketing tactics used in the financial services industry.

The defendant, Mercer Superannuation (Australia) Limited (Mercer), made a series of online statements (both in text and video form) as to the environmental, social and corporate governance (ESG) credibility of their subsidiary’s “Sustainable Options” investment packages.

 The statements claimed that the Sustainable Options did, and would continue to, exclude a member’s assets from being invested in companies involved in or deriving profit from:

·         the sale and production of alcohol;

·         gambling; and

·         the extraction or sale of carbon intensive fossil fuels.

These claims were made in absolute terms without any qualifications.

In reality, however, Mercer’s policies permitted investment in such companies, even when members had speficially chosen one of the Sustainable Options. Moreover, six of the seven Sustainable Options had in fact invested in such companies.

 It was determined that the Sustainable Options had exposure of up to:

·         15 companies involved in the extraction or sale of carbon intensive fossil fuels;

·         15 companies involved in the production of alcohol; and

·         19 companies involved in gambling.

The regulator, the Australian Securities and Investments Commission (ASIC), brought proceedings against Mercer for contravening s 12DF(1) of the Australian Securities and Investments Commission Act. ASIC alleged that the online statements had amounted to Mercer engaging in conduct in trade or commerce that was liable to mislead the public as to the nature and characteristics of their financial services. Mercer admitted to this failing and the parties filed a joint statement of agreed facts and admissions and joint submissions on liability and releif.

Technically, every time a consumer viewed one of the representations made by Mercer, this was a separate contravention of the Act. Therefore, Mercer had contravened thousands of times, although the exact number was hard to ascertain. His Honour Justice Horan explained that in situations such as this, multiple contraventions can be grouped into a single course of conduct.

ASIC and Mercer agreed to group the contraventions by time period. This was held to be appropriate in this case, but his Honour noted that type of grouping may differ from case to case because for contraventions to be a single course of conduct they must involve the “same criminality”. The Court may also choose to group the contraventions in a different way than proposed by the parties.

When determining penalty, the following points were considered:

·         The size of Mercer was relevant because the amount required to achieve deterrence is greater for a company with significant resources.

·         The remedial action already taken by Mercer, such disclosing to their members that some of the Sustainable Options may have some exposure to the supposedly excluded companies.

·         Mercer’s cooperation with the regulator.

 The biggest concern for his Honour, however, was that any penalty imposed needed to deter both Mercer and other financial service providers from engaging in similar conduct. The pecunariy penalty needed to be high enough to make greenwashing practices an economically unjustifiable cost of doing business.

 Ultimately, the following penalty was imposed on Mercer:

·         A pecuniary penalty of $11.3 million;

·         An adverse publicity order to be published on Mercer’s website; and

·         An order to pay ASIC’s costs of the proceedings, to the sum of $200,000.

 Although the pecuniary penalty was much lower than the statutory maximum for a single contravention, his Honour considered this amount was not insubstantial relative to Mercer’s net assets during the relevant period. The amount was enough to achieve deterrence whilst not being unreasonable when considering the principle of totality.

 The adverse publicity order was held to be a relatively inexpensive way of ensuring any current or prospective investors were given notice of the contravening conduct. It also meant any false impressions made could be corrected. His Honour went further, indicating that such order would also bring the proceedings to the attention of the public.

 Although the penalty imposed in this case was the one the parties had agreed on themselves, it is important to note that this will not always be the case. The Court has the ability to impose a different penalty if it thinks necessary.

Relevance to New Zealand

This case is a helpful reminder that ESG claims made by companies in any industry should be expressed in accurate terms in order to avoid breaching misrepresentation laws. Claims that are absolute can give rise to liability if exceptions or qualifications are not explicitly stated.

Companies should have adequate processes in place to prevent publication of marketing and promotional material that is false and misleading. Similar processes should exist to monitor all marketing mateiral and promptly removing anything when misleading or false information is identified. Failure to do this could result in a high pecuniary penalty.

The law contravened in this case is also not disimilar from provisions of New Zealand’s Fair Trading Act 1986 (the FTA). Section 9 of the FTA places a general prohibiton on any person in trade from engaging in conduct that is, or is likely to, mislead or decieve. Section 11 is more specific, and prohibits any person in trade from enaging in conduct liable to mislead the public about the nature or characteristics of services. Although not specific to financial services like the Australian Act, these provisions would still capture the misleading representations made by Mercer in this case.

This similarity means that, although not binding on the New Zealand courts, the approach taken in ASIC v Mercer would make a highly persuasive argument for any greenwashing proceedings brought by regulators under the New Zealand FTA.

The FTA goes further though. Section 12A prohibits any one in trade from making an unsubstanitated representation. It does not matter whether the representation is in fact false or misleading. Rather, the purpose of this provision is to ensure that when a company makes a claim, they must have credible evidence to support it.

ASIC v Mercer involved the rare situation where Mercer had done the complete opposite of the claims they had made. Mercer had invested in the exact companies it said the Sustainable Packages would not. A more common greenwashing example would be where a company casually makes “green” claims to market their goods or services, without doing further research to ensure what they are claiming is true.

Section 12A of the FTA puts an onus on companies to do this further research. To avoid liability under s 12A, claims must be substantiated. Liability falls on whether the company has done their due diligence before making the claim, and not merely if the claim turns out to be misleading.

Having this provision means regulators can look seriously at companies who casually throw around ESG claims as a marketing ploy, thereby reducing the ability for greenwashing in New Zealand.

Article written by Maia Childs and Tim Bain.

For assistance with Environmental Law please contact Emma Ferrier and/or Stephanie Bishop